Media searches for a new business model

Michael Hedges April 29, 2008

The business model you choose depends on where your product/service is on the product life cycle. Media business models by nature must interact with other business models, which are also moving. New business models are rare and disruptive.

Truly new business models, if that’s really possible, disrupt older ones. Truly successful new business models disrupt more than one at the same time. At the risk of infuriating those who don’t want to hear it one more time, the Apple iPod succeeded because the dominant business models in other sectors were failing.

The broadcasting and music have been bound at the hip for a century, and were soon joined by video (film) producers. Radio (then television) receiver inventors couldn’t very well sell hardware to people without some sort of content. Their retail technology business model factored in the cost of providing that content. Once radio receivers and television sets reached market saturation the retail technology business model obligated the consumer electronics industry to raise the value proposition. Enter portability (the Walkman), improved sound (FM stereo), convenience (TV remote control and PVRs), improved video (plasma screens) and on and on.

The music business was transformed into the music industry about 50 years ago, just in time to benefit from global economic vitality and a surge in the teenage population. As a media business, the music industry mediated between musicians (singers, songwriters, guitar players) and the consuming public. The stock in trade, according to Roger McQuinn, was ‘plastic wear’ produced, packaged, marketed and sold through a competitive and lucrative retail business model.

Broadcasting, too, mediated between content producers (singers, actors and journalists) and the consuming public. 

Governments, outside the Americas, largely, quickly concluded that they and only they should be the arbiter of the publics’ media consumption, spectrum for broadcasting being scarce.  They would provide the broadcasting content and tax each household for owning a receiver to pay for it. The license fee is still the dominant revenue model for public/state broadcasting.

Within the Americas, and largely due to intersection with the consumer electronics and content production/distribution industries, broadcasting adopted the sponsor/advertiser model honed to a fine edge by the publishing industry.

The most favored media business model has been the sponsor/advertiser model. Broadcasters and publishers have continued to create content but the focus is on delivering a marketable audience to advertisers. Content that reaches the most favored (at the moment) audiences is more valued by advertisers and sponsors who, then, created their own business model on buying, trading and selling minutes and seconds of broadcast ad time. The business models in broadcasting and publishing intersected with the sales service business model of the advertising industry.

Twenty years ago, these intersecting industries – consumer electronics, content production, broadcasting, publishing and advertising – were making enough money to buy around their mistakes. Arguably, they didn’t see the ones they were making. The biggest mistake – for all except the ad business – was misunderstanding the changing value proposition. Without that the business model fails.

The consumer electronics industry, which in the late 1980’s included the personal computer hardware and software, failed to understand the consuming publics’ limited demand for ever increasing sophistication. Consulting a major retailer/manufacturer at the time I heard a senior executive say that the way to sell more radio receivers was to put more dials and switches on the box. He was wrong. It’s an old saw but most owners of video cassette recorders never bothered to learn how to ‘program’ the machines. And all were delighted to throw them out with other items of inconvenience.

Content producers – music and video entertainment – changed their business model from collecting from the consuming public directly to collecting fees (rights) from broadcasters. Giant retailers forced down wholesale prices of cassettes, CDs and DVDs so they could sell as loss-leaders, leading to the disappearance of music and video specialty retailers, not to forget cinemas. And, at the same time, the music industry counted on free marketing from broadcasters. 

Broadcasters and publishers have had the most difficulty arriving at business models that produce a desired result. Broadcasters have opted for a distribution business model, adding as many cable channels as possible and aggregating the measured audience for the best possible cost per thousand for quantitatively disposed media buyers. For free-to-air broadcasters – as well as publishers – content value (better stuff on TV) with its increased cost no longer mattered as media buyers bought aggregated commercial minutes and the ‘good stuff’ was being siphoned off to pay-TV. All of a sudden airing blockbuster films or major sport events became less important to the bottom line than having multiple channels with ‘anything’ on TV. Radio broadcasters followed the same business model, offering more and more channels based entirely on specific music content – DJs, show hosts and presenters scuttled as too expensive.

Public broadcasters with a reasonably steady income from taxation have approached the marketplace in the same way, adding new channels and services as a means of demanding an increased levy on the consuming public.

Pay-TV, both pay-per-view and cable operators, continue to benefit from the simplest, oldest and most efficient media business model: subscription. Satellite radio in the US is wildly popular with stock traders and financial analysts, even if consumer interest is lagging, because the business model is simple and basic. The consuming public pays for the content they want.

Nothing, though, has disrupted these media business models more than the Web. And it ain’t over yet.  In barely a decade a world wired to Internet Protocol has unhinged media managers as it threatens to discard business models created to monetize content and its distribution.

After several steps in development, internet search engines offer ranked indexes of headlines, subjects and links for hundreds of millions of audio, video and text offerings of anything their robots can find on the Web. The revenue model is extremely low cost per thousand advertising multiplied by tens of millions of daily users. The cost model is (almost) pure technology, investment limited to refining algorithms and expanding capacity. It is the mass market advertising model taken to the extreme with the necessary post-modern touch of highly customized, almost individual service to the user as well as the advertiser. What’s not to love about it?

If the music industry was unhinged by Napster giving the consuming public the ability to download content for free, its business model was completely disrupted by the Apple’s iPod and iTunes. IPod provided the device and iTunes provided the system for the consuming public to connect more quickly and conveniently with music content. The value proposition overwhelmed the music industry, then much of radio broadcasting.

All of a sudden, the value proposition in music-only radio broadcasting disappeared among the audience segment most highly valued by advertisers, persons under 35 years. Broadcasters noted significant changes in audience behavior and, true to form, blamed the measurement. Another business model disrupted.

Television is facing business model disruption from all sides; however, its primary value proposition is extremely robust. Television offers passive entertainment (with a little news thrown in) for a mass audience uninterested in either sorting through or paying for pay-TVs offerings. The scale of that mass audience, so far, keeps the advertising industry happy.

Broadband is not so widespread as to allow for the iPod/iTunes model…yet. Mobile TV is wholly unproven, yet promising, as a subscription business model for enhancing the revenue for mobile phone operators. And, too, even the most conservative forecasts expect ad spending on internet based content to gobble up TV spending. But the business model for the advertising industry – getting the consuming public to buy things - requires access to any and all media and no media will be ignored.

But while total ad spending keeps increasing its distribution among media relying on it looks like the famous Long Tail distribution. With more media outlets pushed farther down the ‘long tail’ their take from the great pile of ad money gets smaller. For broadcasters and publishers the cost of maintaining audience and readership of scale is greater than the revenue potential. But Facebook – hype notwithstanding – remains unable to monetize its zillion hits per day.

Two business models for media are showing great stamina. Interestingly, both are the oldest media business models based on excellent value propositions. Both are being adopted and refined by old and new media alike.

The subscription business model has withstood test after test. The consuming public will pay, incrementally, for content. And for broadcasting and publishing it’s a model with the least amount of uncertainty. This business model – finally saluted by Rupert Murdoch, himself – offers a solid value proposition both for the consuming public and content producers.

The other business model, certainly the oldest media business model, showing resurgent interest is the sponsor/patron model. Swiss publisher Edipresse recently launched a content-rich website – Swisster – under the patronage of a very big Swiss bank. Other sponsor/patrons may be added and they will ‘give’ access to whomever they want. The value proposition for both the patron/sponsor and the consuming public is clear, though a tad tenuous. The patron/sponsor retains full control over content and the (invited) consuming public has access to that content, to which presumably that have some sort of affinity. This business model may, in fact, be the savior for social or professional websites.

That is, of course, if anybody wants Facebook and its clones to survive.

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