Where the money isn’t

In a perceptive post on the emerging economics of web media, particularly written web media, Scott Karp observes, “Long tail economics means that companies can make a lot of money off the tail, but it doesn’t mean that the tail itself can make any money.” There are exceptions to this rule, of course. The nature of targeted online ads, which pay by the click rather than the impression, means that some subject areas will be much more lucrative than others. If you have an informative blog on, say, a particular kind of drug therapy or a particular vacation destination, you may be able to make a decent amount of money with a modest readership. That’s because, first, advertising keywords related to pharmaceuticals or travel tend to be bid up to high levels, so each click is worth much more than an average click, and, second, people seeking information on drug therapies or vacation spots have a greater than average likelihood to click on relevant ads – the blog, in this case, serves more as a gateway, often to some kind of commercial transaction, than a destination. Traffic, in other words, is only one indicator of a site’s economic prospects; also important are the subject matter (which determines ad keywords) and the motivations of visitors (which determines clickthrough rates).

But in general terms, Karp’s right – and his point is a critical one for thinking about the future of publishing and other media. Although the internet certainly enlarges the pool of media offerings, by radically driving down the cost of production and distribution, and thus extends the long tail, that doesn’t mean it will allow the smaller guys (or even the larger ones) to make more money – or any money, for that matter. The problem – assuming you think of it as a problem, which I do – lies, I think, in the basic economic model that is emerging for online media. Which is this: provide free access to the content, and make your money through advertising and, in particular, click-based advertising. With a few important exceptions, the paid-subscription model doesn’t work. By democratizing the production and distribution of media, the internet ensures that an overabundance of supply and the resulting competition will drive the price of most content down to its marginal production cost, which is zero.

At the same time, vast, automated ad-placement services, like Google’s AdWords, make the ad market extremely liquid. Most ads become precision-priced at a fairly low per-click level. This means that, with the exceptions I’ve already noted, only the sites with vast scale can hope to make real money. A small, specialized magazine with 6,000 regular readers can at least hope to swing a profit through a combination of subscription fees and ad revenues. The abundance of the internet means that once that same magazine moves online, its old profit model is dead – and the new one is probably much less attractive.

The enforcers of the new model are the search-based ad-placement services, mainly, at the moment, Google and Yahoo. Their business comes down to scale – in particular, the overall scale of internet use. To expand the scale of use, they want to ensure that there’s as much content as possible available on the internet for free. Think about it. Every piece of content – indeed, every service – on the internet is simply a complement to these companies’ ad placement business (and the underlying search business). It’s thus in their interest to drive the price of those complements down as far as possible, preferably to zero. Subscription pricing, and any other barrier to the free availability of online content and services, is anathema to them because it necessarily constrains the use of the internet. I am not criticizing these companies. I am simply pointing out that they are very powerful presences on the internet and that their core business turns all other web businesses into, in their view, complements that should be free. For Google and Yahoo, the so-called “gift economy” is indeed a gift.

There’s an obvious exception to this rule: If Google or Yahoo can rope off a particular service or chunk of content and charge a subscription fee for it that exceeds the money they’d make through advertising alone, then they’ll rope it off. But this only applies to services they control, and it hasn’t been particularly successful up until now even for them, because they compete so fiercely between themselves. Google would find it very difficult to charge a fee for a service that Yahoo gives away for free, and vice versa.

The business of much online media hinges on tiny transactions. Tiny transactions are only interesting, economically, when you can aggregate huge quantities of them. Otherwise, they’re peanuts.

10 thoughts on “Where the money isn’t

  1. Chris Anderson

    Nick,

    I largely agree–the main business opportunity in the Long Tail right now is in aggregating niches and driving attention to them. But I think you’re taking too narrow a view on the opportunity for those niche creators themselves.

    It’s not just about direct revenues. Sure, Google Adsense on the average blog will generate risible returns, and the average band on MySpace probably won’t sell enough CDs to pay back their recording costs, much less quit their day jobs. But the ability to monitize such microcelebrity can be significant elsewhere. A blog is a great personal branding vehicle, leading to anything from job offers to consulting gigs. And most band’s MySpace pages are intended to bring fans to live shows, which are the market most bands care most about.

    When you look at the non-monetary economy of reputation, the Long Tail looks a lot more inviting for its inhabitants.

    Best,

    Chris

  2. Scott Karp

    With all due respect to Chris, it’s rather disappointing to see this old saw about the “economy of reputation” trotted out to counter the monopoly theory of long tail economics. Despite many success stories of “anything from job offers to consulting gigs,” I’d wager that upwards of 99% of the long tail will never see any quantifiable upside for their participation. Remember, there are 40 MILLION bloggers cranking out free content and even more people cranking out free content on MySpace and other “social” sites. The percentage of long tail individuals who see a meaningful “reputation” return is probably the same as the percentage of long tail companies that get bought by Google or Yahoo.

    If given the choice between a meaningful share of Google’s revenue or a “consulting gig,” which would you choose?

  3. Nick Carr

    I’m a little skeptical about the economy of reputation, too. I think Chris is certainly right that distributing your creations online (more or less for free) can help promote other products or services, whether consulting or gigs. But that leaves out a large swathe of content/media/creative work that doesn’t lend itself to the promotion of other products and services.

    I also wonder about something else. If web economics push media down an economic path that ends in creative goods being produced mainly for one of two ulterior marketing motives – either to maximize targeted ad revenues (by catering to lucrative keywords) or to promote other things that the producer is selling – then I’d be pretty nervous about what we’re going to end up with. I realize that a great deal of creative work has always been geared to selling other stuff – and there’s nothing wrong with that – but if even more of it is pushed that way by web economics, then I wonder who’s going to pay for the production of the stuff that doesn’t fit that model (which also may happen to be the best stuff).

    What, in other words, will end up falling through the cracks?

  4. Seth Finkelstein

    Me three.

    “A blog is a great personal branding vehicle, leading to anything from job offers to consulting gigs”

    This one of the standard blog-evangelism preachings. When it’s pointed out that a blog is of very little direct benefit, the marketer says (translated from marketese to English) “You can use the blog to MARKET YOURSELF!!!”. But the only significant group I’ve observed to benefit from that, are either a tiny number of (local) Big Heads, and another group of blog marketers who get job offers and consulting gigs to do blog marketing.

    Moreover, if the number of jobs is fixed, then everyone who is “personal branding” is striving against all the other “personal branding”, so everyone just ends up having to run faster to stay in the same place. Again, the only people who are going to make out in this situation are the sellers of “personal branding”.

    And again, how many little newsletters can any local market support? This question tends to be ignored, with handwaving. But it’s a simple one, and the point of diminishing returns is quickly reached.

    The blog evangelists are almost a textbook case of appealing but irrational fallacious “arguments”.

  5. pedrobeltrao

    From my own experience blogging has a lot of indirect economical value. I don’t even try to run ads on my blog, but it immerses me into a community that even if small is very valuable. I have learned a lot from this group of people and I am starting to collaborate with them more actively to build things. I am a researcher and blogging holds the interesting possibility to make the scientific process more transparent and to ease the sharing of resources. In the long run this means more science production for less money.

  6. Phil

    “Long tail economics means that companies can make a lot of money off the tail, but it doesn’t mean that the tail itself can make any money.” I blogged on this last year, in response to Pietro Speroni:

    Pietro assumes that a proliferation of niche markets will lead to a proliferation of niche suppliers, and hence the dilution of the authority of the big suppliers. I don’t see any reason to believe that this is the case. Indeed, one of Chris Anderson’s own preferred examples is based on Amazon sales rank – and there’s nothing very diffuse about Amazon, or the authority wielded by Amazon. Much of the buzz around the ‘Long Tail’ seems to derive, ultimately, from this confusion of the two meanings of ‘niche’. Clearly, mining niche markets can be profitable, if you’re a monopolistic behemoth like Amazon; but, equally clearly, it doesn’t follow that niche suppliers can make a living in the same way. Indeed, making niches visible to companies like Amazon actually threatens existing niche suppliers. (Ask your local bookshop, if you’ve still got one.)

    The comments about how Google’s self-interest coincides with the information-wants-to-be-free ethos of the old Web – and how misleading that coincidence can be – also reminded me of what I wrote about Google Base:

    Just under ten years ago, I went from Unix sysadmin to magazine editor, and rapidly discovered that commercial publishing looks very different from the inside. Perhaps the biggest single shock was the realisation that content doesn’t matter. Obviously I tried to make it the best magazine I could (and it got better still under my successor), but at a fundamental level editorial content wasn’t what it was about. If the advertising department sold enough space, we made a profit; if they didn’t, we didn’t. (Show me a magazine that relies on the cover price and I’ll show you a magazine with money worries. Show me a publication that gets by on the cover price and I’ll show you an academic journal.) The purpose of the magazine was to put advertisements in front of readers – and the purpose of the editorial was to make readers turn all the pages.

    So there’s nothing very new about Google’s business model: Google Base is to the Web what a commercial magazine is to a fanzine – or rather, a whole mass of different fanzines. The only novelty is that we, the fanzine writers, are providing the content: the content whose sole function, from the point of view of Google as a commercial entity, is to attract an audience which will look at ads.

    But that’s quite a novelty.

    The analysis seems to fit Google more broadly as well.

  7. Pietro Speroni di Fenizio

    But Pietro Speroni doesn’t fully agree with what Phil says Pietro is saying.

    Pietro’s post, in italian, was not speaking about money at all, nor about taxes, or law. It was speaking about authority. Which Phil translated as legal or economical authority. But that wasn’t the complete sense. I (pardon, Pietro Speroni) should have corrected it last, year. Many other things should have been done last year, and this is far in the long tail of them.

    But maybe I can correct it now.

    The problem is about unidimensionality versus multidimensionality. When we speak about money (or law, or taxes) we speak about something which is unidimensional. And of course only a finite amount of people can be an authority on that single dimension. You have a google, a myspace and a yahoo. You can’t have a million google all at similar size. Because on one dimension the curve follows a power law and although fat the tail still goes to zero fairly rapidly.

    But when you have more dimensions the situation is slightly different. Not in terms of the money. If you try to report it in a single dimesnion you are back on square one. But in terms of information authority. In other words, yes it is true that there is only one amazon, and one google, and they help reach the long tail making massive amount of money while we don’t. But thanks to them we can now find for each of our interest the authority. Now while money is unidimensional (everybody either has more or less money than everybody else) interest is multidimensional. In other words the number of different interests available is higher than the number of people. So everybody can be an authority in a very small sector. And everybody will have multiple interests respecting for each of them the authority of that one person who gained the respect of the internet community on that one interest. This will not make that one person rich, but an authority in his field yes.

    An example might finish to confuse the whole thing. :)

    I have various interests: taoism, diet, complex systems, go, etc. On each of them I follow some authorities. But each of those authorities are so small, so precise that few people in the whole world know them. They are not an authority in taoism, but in the particular type of taoism I am interested in. I might even find authorities in Go applied to Taoism. They are not going to get rich with my little money and the little money of the 50 other people interested in their work. But they will be able to deliver content, produce novelty, and generally feed their passion. No money still. Yet things that do have value. It’s just that not all value can be measured in monetary terms. (Although I understand this is a revolutionary concept).

    So the solution is to take off the google ads. Keep your daily job, find the blogs off the people who are an authority in the field you are interest in, feed them with questions. Blog about your passion, and answer the questions of the people who are interested in the topic you have become an authority into. All things that give life, not money.

    Pietro Speroni di Fenizio.

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