Friday, March 5, 2010

Why Ira Glass and Rupert Murdoch agree

Recently, Ira Glass encouraged membership to public radio stations by asking existing members to "out" friends who listen to public radio but are not members.  After identifying these free-riders, Ira called them on-air to ask them to pledge.  Of course, the "out-ed" non-member quickly signed up.  After all, who wants to be publicly chastised by Ira Glass on the radio?

After talking to one such victim who was a graduate student, Ira reported that the person told him off-air that, "as a member of the YouTube generation, I just don't expect to have to pay."   Ira commented that things like public radio take considerable sums of money to operate, and therefore, people should not expect such a good thing to be free.

I was struck by this sentiment - "I just don't expect to have to pay".  After nearly a decade and a half of online businesses that give away products for free, a whole generation of online users simply don't think about having to pay for things that they use.  Of course, the business argument is that advertising dollars will pay for the "free" usage of the service.  However, as I described previously, most businesses do not generate enough advertising revenue to cover their operating cost.  Advertisers want massive collections of targeted people.  They don't care about your 500,000 monthly unique users who generate 5 million page views per month.  (Because at a $1 CPM, your 5M page views is $5,000 - which is not enough to warrant any discussion within a $20M ad budget.)  But I don't want to beat a dead horse. 

What really struck me in Ira Glass' piece was the clear concise expression of a general feeling that permeates so many people.  Thanks to the VC-fueled, pie-in-the-sky businesses of the past decade, we now have a whole generation of users who not only do not pay for things online, they don't expect to pay.  It's as if the business community purposefully trained consumers to do the exact wrong thing (not pay).  Moreover, they were so successful that people now don't even consider that that behavior (not paying) is completely antithetical to long term sustainable business (for the majority of businesses).

In fact, some luminaries like Chris Anderson even trumpet not paying as the future of business.  I definitely think that there are many benefits to the model that Anderson proposes.  Freemium is a great way to attract users and build a business.  But, I think that there's an fundamental challenge that is not being addressed in that concept. 

When the potential user base expects to never pay for the service, how can you create sustainability?  Anderson's argument is that people will pay for things that bring them value.  So, businesses need to provide a "free taste" for consumers in order to allow consumers to decide if they really like it.  Kind of like a test drive.  But, how are businesses to respond when users expect that the test drive isn't just a "test"?  In fact, the YouTube generation expects that the "test" just keeps going on and on.  There's no point at which you must pay for the service or product.

Rupert Murdoch, the gregarious owner of various media outlets, has been complaining for a while that people are not willing to pay for news online.  Even last year, he was agitating to find new ways to monetize his online news empire.  To my knowledge, he has not yet been successful in actually charging for his content, but he's working on it.  Just like many public radio listeners, most online news consumers expect that the online news is free.  Who needs to pay when you can get the Reuters or AP article at no charge from Google, or NY Times, or some local newspaper online?  But if no one pays, then how can those reporters continue to draw salary?  Just Ira Glass' public radio challenge, Rupert bemoans the problem of expectations of free service.

What I find amazing is that so few people are publicly talking about this problem.  As someone who works online, I think we have a serious long-term problem to tackle.  We need to educate the YouTube generation that valuable products and services cost money.  Occasionally, that cost will be defrayed by advertisers, but more often than not, the consumer needs to pay.  It took a decade to create this expectation of everything for free.  It might take a decade or more to reverse it.  But, the more people talk about it, the faster it will happen.  And the more times disparate voices like Ira Glass and Rupert Murdoch agree (on anything), the more carefully we should consider how to run our businesses and how we should behave as online consumers.

Tuesday, February 9, 2010

Subscriptions as the future of online business models

Recently, Dave McClure posted an entry about Subscriptions as the future of online business.  I couldn't agree with Dave's sentiment more.  He asserts that "The default startup business model from 2000-2009 was based on growth (aka acquisition) and CPM- or CPC-advertising".  There's no doubt that there's a lot of money to be made in the advertising model.

But, here's the rub.  Advertising based businesses always require a truckload of traffic.    CPC (AdSense) is not a big money-maker for most businesses.  The number of clicks are usually proportional to the number of page views.  CTR is usually pretty low - like a few percentage points.  And the money you get from each click tends to be pretty low.  So, sure you might get a couple hundred bucks each month for some decent traffic.  But, that's not a huge money-maker.

So, what about CPM revenue?  Well, advertisers don't care about the vast majority of sites.  Think of it from their perspective.  Imagine that your site gets 1 million pageviews per month, have 1 ad on each page, and you charge $3 CPM.      So, your 1M pageviews are 1000 "m"s.  For a single advertiser to buy ALL ads on your site for the month is $3000.  Most ad campaigns will have at least $50,000 if not more than $100k to distribute.  So, if I'm looking to spend $100k, why the hell do I care about your site which gives me just 3% of my total for 100% of your traffic?  Moreover, in all likelihood, your site's pages aren't all good.  Only some are really worth the $3 CPM.  So, not only does it take me (the advertiser) time to negotiate the deal, but I fulfill only 3% of my total and I get at least some slop ad positions/pages.  That's not a really good deal for me.  Also, you (the entrepreneur) have worked super hard to get 1M pageviews per month.  And your business reward is a mere $3000.

Even if all your traffic is organic (that is, you didn't buy any traffic), you made just $3k!  That's not really a great amount of revenue.  How many businesses can make their business model work with just $3000 per month?  In my experience, there are very few models that work at that revenue model.

Clearly, the trick to making the ad model work is lots of traffic.  If you have 100M pageviews per month, then you are more of a player.  But how many sites have 100M pvs/month?  Not many.  And, what's worse, how many small startup ideas will reach that volume of traffic any time soon?

The harsh reality is that almost none will.

I'm not saying that advertising based businesses don't work.  There are, and always will be, successful ad-supported models.  But, the world isn't big enough for lots and lots of those businesses.  Advertisers need volume.  Volume will always be aggregated towards the bigger sites, the ones whose traffic is in the "head" of the curve.

So, what's to be done?  Well, look to other business models.  There are only a few core business models available online that are focused on business-to-consumer businesses.

  • Make revenue from ads (so the advertiser pays you)
  • Make revenue from subscriptions/commerce (so the customer pays you)
That's about it.  When you're selling to consumers, either the consumer is paying you or someone else is subsidizing the consumer's experience (i.e., the advertiser).  We've tried for about a decade to build super-massive businesses based on ad-revenue.  There have been some successes.  There have been a lot more failures.  

Subscription and commerce based businesses require far fewer users to make the models work.  Seems pretty logical that the better bet is on subscription based models rather than ad-based models.  If you look at the economics of the small subscription based business, it looks a helluva lot more attractive and realistic.

That's not to say that there aren't challenges for subscription businesses.  There are plenty.  The big difference is that you don't need 500,000 people to like/hate you.  You need just 5,000 to like you.