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.