Why Content Will Stay Free

There are those who believe that the era of free content is over and we are entering a new age of paid media.  They are surely wrong.

The fact is, that when these people say “free” they really mean “ad financed,” (which is how we’ve gotten most of our content for decades).  The simple economical reality is that consumers are worth more to advertisers than content is to consumers and that works against paid models ever becoming dominant.

Not only is this historically true, it’s a trend that’s likely to continue.

The Big Con

There is a fairy tale that in the “good ole days” righteous people paid for their content while today crazy kids with eroded values expect it for free.  Poor mogul types like Rupert Murdoch got sucked in for a while, but the free ride is over and it’s time to pay up…or so the story goes.

In actuality, people generally haven’t been paying for content, but distribution – and even that is highly subsidized.  In print media, readers are actually being paid (albient in paper, ink and transport) to read magazines and newspapers (in most countries).

The idea that lots of smart people at large, profitable institutions around the world somehow got tricked into giving content away on the web is relatively absurd. In truth, for many media companies, simply not losing money on distribution is a big win.

(And Rupert Murchoch isn’t so poor, his newspaper division alone had $466 million in 2009 operating income, so he’s got no reason to whine. )

Things Get Cheaper on the Web

As Chris Anderson pointed out in his book Free, when marginal costs go to zero, prices are sure to follow.  The web lowers not only distribution costs, but lots of other transaction costs too; including marketing costs, production costs, etc.  Many of these costs have gone to zero or dropped drastically.

Given that historically consumers have not paid for content but distribution, why should they be any more likely to pay for it now?  Put another way, the basic problem is that if you plan to exploit a paid model you will most likely have to compete with someone who will give it away in order to get more ad revenues.

It just unreasonable to believe that while the web is making everything else cheaper the price of content should go up. Nevertheless, that’s what many pundits are arguing. (Oh, yeah…they mean their content!)

It’s Tough to Make Money with a Paid Model

Another factor to consider is that it is very difficult to make money in paid media.  So difficult, in fact, that almost everything we read, watch or listen to is ad supported.

There are some exceptions of course.  Scientific journals and other very specialized content are able to charge high rates for content.  HBO is another exception as is, in part, The Wall Street Journal (long before Murdoch bought it).  Cable TV is another example, but regulated markets often warp economics so it’s not a particularly good one.

However, truly paid content remains an amazingly small part of the media landscape: digital or otherwise.

There are some very good reasons for this.  Firstly, most content is fairly common – Pulitzer prize and Oscar winning work is exceedingly rare.  Secondly, much of media consumption is passive.  We like to surf, but we won’t pay.    Thirdly, and perhaps most important, while I won’t pay to surf average content an advertiser will happily pay for me.

Until somebody can give me a good reason why these factors will change in the future, I’m betting that free content will continue to dominate media.

Apps and Mobile Won’t Matter

There are some people that think that apps and mobile will mean that the tide has finally turned.  In this narrative, the whole idea of “information wants to be free” is just a consequence of the fact that the emergence of digital media coincidently happened where a lot of hippie types live.

Some serious people are advocating this view, but again I don’t find the argument compelling because it omits the whole “walled garden” period characterized by AOL.  As Gerry Levin will undoubtedly attest, that model was a disaster.  The walls didn’t just fall down, they were blown apart.  Now we are to expect that they will rematerialize before our eyes?

While many are sampling paid media apps on the iPad, it is far from clear that they will be a true path to payment (there doesn’t seem to be any shortage of free apps on my iPhone).  Just because the technology changes doesn’t mean economics do.

Moreover, mobile represents a powerful new advertising channel as proximimity targeting will probably truly be the next Big Thing (with a financial impact far surpassing social media).  Again, with increasing avenues for ad support direct costs to the consumer are not likely to go up.

People Don’t Avoid Ads

Another oft cited reason given for a future trend toward paid content is the dubious notion that people have ads shoved down their throat.  According to this story, once technology enables them to avoid ads, they will do it in droves.  Poof!  The ad driven model will be toast.

Once more, I really don’t see where people get this stuff.  This technology already exists and has for a quite a while (it has long been possible to block banners and DVR’s are old news).  Nevertheless, the impact has been minimal.  Even when people have the ability to timeshift and block banners, they usually don’t (about 20% even watch ads on DVR’s).

For all of the hoopla, timeshifting remains only about 6% of viewing in both the US and the UK despite DVR penetration in the mid-30’s.  As for digital, the major source of downward pressure on prices is an excess of ad inventory, not it’s absence.

The reason isn’t all that hard to fathom.  Most of our media activity is fairly casual.  We want basic information and entertainment.  To opt out means to choose and that takes time and energy.  The issue has a lot less to do with financial motivations than it has to do with usability and convenience.

The Real Trend is Toward Diversity

As I’ve written before, the real media trend is toward diversity.  This goes for finances as well as for channels and audiences.

The choice between paid and free is a false one. The increasingly digitized media environment is multiplying revenue streams, not reducing them.  It is highly unlikely that this will somehow eliminate free content.  In fact, more options to finance content most probably will lessen the likelihood of consumers paying for it directly,

Furthermore, ad supported media are doing much better lately (and even during the crises, most of the huge red ink reported was due to impairment charges rather than operating losses).

The truth is that some firms have a hard time making money online because their efforts have been so poor.  There are a variety of ways to increase revenues in digital media, but they have to be executed competently and, in many cases, incumbent media companies have dropped the ball.  No amount of handwringing will change that simple fact.

So the real path to profitability is not to scold consumers who have been “gettting a free ride,” but to stop whining and start competing.

–         Greg