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Dorian Benkoil senior consultant at Teeming Media. An award-winning journalist and editor, he was a foreign correspondent for AP and Newsweek, and international and managing editor for ABCNews.com. At ABC News he moved to the business side, handling sales integration and business development, before joining Fairchild Publications as General Manager for their Internet division, becoming editorial director for mediabistro.com, then a consultant for Teeming Media in New York. He graduates this year with an MBA from Baruch's Zicklin school of business. Learn more about him at Benkoil.com or his blog - MediaFlect.com.

Robert Cauthorn is a journalist, former vice president of digital media at the San Francisco Chronicle, and was the third recipient of the Newspaper Association of America's prestigious Digital Pioneer Award. He launched one of the first five newspapers web sites in the world and is generally considered to have delivered the first profitable newspaper web site in 1995. Cauthorn has been in the middle of the transition from old media to new and is recognized as frank-talking critic when he believes newspapers stray for their mission. In mid-2004 he became the president of CityTools, LLC a new media startup based in San Francisco.

Ben Compaine has divided his career between the academic world and private business. He was a journalist when manual typewriters were considered state of the art, but also led the conversion of his college newspaper to cold type. He has started and managed weekly newspapers. His dissertation at Temple University in 1977 was about the changing technologies that were going to unsettle the landscape of the staid and low profit newspaper industry. Since then he has focused his research and consulting on examining the forces and trends at work in the information industries. Among his most well-known works (and the name of his blog) is "Who Owns the Media?".

Vin Crosbie has been called "the Practical Futurist" by Folio, the trade journal of the American magazine industry. Editor & Publisher magazine, the trade journal of the American newspaper industry, devoted the Overview chapter of executive research report Digital Delivery of News: A How-to Guide for Publishers to his work. His speech to the National Association of Broadcasters annual conference was one of 24 orations selected by a team of speech professors for publication in the reference book Representative American Speeches 2004-2005. He has keynoted the Seybold Publishing Strategies conference in 2000; co-chaired and co-moderated last year's annual Beyond the Printed Word the digital publishing conference in Vienna; and regularly speaks at most major online news media conferences. He is currently in residence as adjunct professor of visual and interactive communications and senior consultant on executive education in new media at Syracuse University's S.I. Newhouse School of Public Communications, and meanwhile is managing partner of the media consulting firm of Digital Deliverance LLC in Greenwich, Connecticut.
About this blog
Two forces have shattered the news media. Technology is the first. Although media technology is undergoing its greatest change since the day in 1440 when Johannes Gutenberg first inked type, for more than ten years now the news industry has mistaken new technologies merely as electronic ways to distribute otherwise printed or analog products. Estrangement is the second. The news media has lost touch with people's needs and interests during the past 30 years, as demonstrated by rapidly declining readerships of newspapers and audiences of broadcast news. How we rebuild news media appropriate to the 21st Century from the growing rubble of this industry is the subject of this group weblog.
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July 15, 2009

Network externalities means different business model solutions for old media and new

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Posted by Ben Compaine

The difference between the business model needs of the legacy media and the new Web based media has t do with network externalities. This economic concept holds that the value of the services increases exponentially with the number of users of the service. Think telephone networks, fax, Facebook. In all these cases the value is in other users. For the traditional media there are few if any network affects. The value of the content of the Boston Globe to be is neither increased nor decreased for me as circulation does down—or up. Twitter, on the other hand, becomes more valuable as more users can get access to posts or me to the potential posts or more and more other users.

I’ll come back to this at the end.
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The construct of network externalities struck me while reading coverage of the annual media conference sponsored by small investment bank Allen & Co. for 27 years usually generates news just because of who attends: the top executives of the big media companies, the young stars of the Internet challengers, investment bankers, some politicians, academics and a few outliers, like a sports star. Though the sessions are closed to the media, there are enough leaks to keep the scribes busy,

Most years the gist of the news is about who might be acquiring or merging with whom. This year, in the midst of an economic slump that puts the kabash on merger activity, much of the chatter was about business models. Media companies that for decades—or centuries—thought they knew where their revenue was coming from are in a quandary about where they might be getting their next dollars or Euros.

Thus the latest theme is the insistence-- from New Corp’s Rupert Murdoch, IAC’s Barry Diller, Liberty Media’s John Malone, Disney’s Robert Iger, among others -- that the free content gravy trend must end. Consumers are going to have to learn to pay for content online as they do in print or via cable, for music and movies. The legacy media have been struggling with the online model for years now—so far with limited success to show for their all their studies, experiments and worries.

But for me, the more fascinating discussion was the one of the business model for the new guys, like Twitter and YouTube. Diller reportedly told one session that he did not see how Twitter could make any money, despite its growing visibility. It has something north of 4.5 million accounts, but only a small fraction actually post anything.

What business model might work for Twitter? It has been highly successful in attracting users and in generating “buzz.” But so far it does not have a business model. It is operating on $55 million of venture capital.

A report on the Allen & Co conference, says that apparently some of the smartest media and Web executives could not come up with a model that would work to generate revenue without undercutting the network externalities that have been so crucial to Twitter's adoption.

Barry Diller, a media industry veteran, commented "I think it's a great service. I just don't think it's a natural advertising medium." John Malone, a cable industry pioneer and savvy media investor, voiced a similar view. Twitter would be hard-pressed to sell advertising on its messaging service without alienating users. He added that Twitter's best bet is to simply get people so addicted to the service that they might eventually pay fees. Malone claimed that Warren Buffet, one of the most successful investors, was thinking along the same lines, applying that model to YouTube, another media property that is wildly successful as measured by use, but still quite unprofitable. Buffett told Malone he would pay $5 a month to continue using it (that’s easy to say for the second wealthiest man in the world).

So here we have publishers and programmers and cable operators not only worried about their tried, if not quite true, business models in the face of declining circulation or viewership, unable even to see a healthy financial outcome for the new players that are growing exponentially, at the same time they achieve millions of users. Can it be that bleak?

Maybe that is why the latest round of investment at Facebook valued that money-sink at “only” $6.5 billion, down from the implied $15 billion by Microsoft’s investment in 2007.

So, finally, back to network externalities. The reason why a subscriber fee as a revenue source is a dangerous road for Facebook, MySpace, Twitter, or YouTube and the like is that any sort of charge, even a nominal one, is likely to lop off a substantial portion of its user base. This is the "Penny Gap.” – the experience that getting a user to go from free to any sort of payment, even a penny, is, in the online world, harder than getting a paying subscriber to pay more.That is, going from free to one cent a month would see a larger drop off in users that a service charging $1 riaisng its price to $2. The Penny Gap effect sets the network externality model in reverse. As some users drop off, the service becomes less useful to the remaining users, they are less enamored with it and drop and so it spirals down. Thus, services that thrive on network externalities need to proceed very cautiously—as their founders and managers presumably understand.

The folks who run the Web sites of legacy media, whether the online sites of the newspapers or newer sites like Hulu, do not have this issue. The value to me of my local newpaper—or its Web site—does not depend on the increase or decrease in the numbner of subscribers (except indirectly in the form of maybe more or less content as it generate more or less revenue).

The Penny Gap issue remains. Though media execs are calling for an end to free content as a way to save their franchises, so far no one has been willing to make the move, as they fear it will have a greater impact on the ad revenue than user fees will bring in. When The New York Times abandoned its subscriber Times Select pay tier, it made the decision that it could make more from advertising to large numbers than from a combination of subscriber revenue and lower advertising dollars.

The lesson is that the legacy media folks are going to have to solve their business model problem with a different solution than the one that might be best for new content Web sites like Twitter.

Comments (1) + TrackBacks (0) | Category: Online | Revenue models | Strategy


COMMENTS

1. Ross Bradley on July 15, 2009 9:50 PM writes...

Some nice "food for thought" but what's your answer to the problem? I do have what I feel is the "solution" and feel it's becoming so much more "evident" every day ....You may even find the time to catch my own (unqualified) "thoughts" (and maybe the answers) in my recent posts made, today.

http://www.sharecafe.com.au/board_postview.asp?a=PVS&postID=487540&boardID=2117&sym=LOK

And my "Newspapers, Google and the Future..", over on Seeking Alpha, here:

http://seekingalpha.com/instablog/36191-lookingconfident/13763-newspapers-google-and-the-future

Cheers!

LC

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