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June 27th, 2010
Digital Quarters, a blog on Publishing 2.0, recently posted an analysis that showed that main stream media is losing online traffic share to new online entrants. The conclusion that Digital Quarters drew from this analysis is that “the great brands of old media aren’t proving out to be much of an asset online”. While the analysis is telling, this conclusion may not be accurate. In fact, it is very easy to demonstrate that, while main stream media brands may have lost share over the last year, they almost certainly would not have had that share in the first place without their brands. Further, as online media fragments with the infinite distribution available online, brands are more critical than ever to cut through the online clutter. This is because brands drive revenue as well as audience and that is the measuring stick that really matters.
Cable Television and The Predicted Doom of TV Networks – A Historical Perspective
The rise of cable television gives a good historical perspective that demonstrates that market share is not the only measure of the value of a brand. When cable networks unlocked the distribution bottlenecks of broadcast television by providing “room” for hundreds of channels, many pundits predicted the death of network television. They argued that the big 3 networks could not possibly compete with the hundreds of options of specialized programming that consumers could receive via cable and that their shares would be eroded to the point that their expensive business models would no longer work. Sound familiar? But then something unexpected happened. Ad rates for the big television networks actually increased dramatically even as their audience shares were declining. This occurred because there were fewer and fewer places that big media advertisers could find to reach mass audiences and because these same buyers were more interested in associating with reputable brands than a bunch of unknown, upstart cable networks. Therefore, while the large TV networks lost share of viewership, their revenues did not decline nearly as much as expected. Today, the big television networks remain relevant.
Higher Ad Rates Compensate For Lower Traffic Share
Let’s look at a simple numerical example. Assume that a new online property has come online in the Fashion vertical and has taken 7% page view share from a traditional brand in that space. Let’s also assume, though, that as with network television, there has been a “flight to quality” for advertisers and they are willing to pay 20% higher ad rates to place their ads with the traditional brands than they were the year before. In this example, the assumption is that the new entrant is still monetizing at remnant rates because they are not yet large enough to justify a direct sales force, particularly because they cannot leverage this sales force across offline properties as well. When you run the numbers, the revenue share of the traditional brand has actually increased by 230 basis points, while the revenue share of the new entrant has only increased 20 basis points. The point is that brands matter for more than just traffic – there is a revenue component as well.
Conclusion: Main Stream Media Needs To Defend Their Brands
The conclusion here is simple: main stream media needs to protect and nurture their brands if they are to survive in an environment in which distribution is effectively unlimited and extremely cheap. In order to do this, they need to continue to differentiate their product offering from the new entrants in terms of quality. New brands have and will continue to be developed online, just as they have in cable television. CNN and ESPN, two products of cable television, are now two of the most valuable brands in media. Online, TMZ has developed a valuable brand and has, in fact, extended that brand offline. Main stream media used to defend market share via limited distribution, but that is no longer possible. The way to rise above the clutter of the Internet today is to have a strong brand and a high quality, differentiated product that allows a media property to aggregate audience and to command premium advertising rates.
Tags: mainstream media, media business, MSM
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April 19th, 2010
In my previous post, I argued that the iPad is a game changing technology for mainstream media businesses, especially magazines. Why am I so confident? The answer is the power of FREE.
Chris Anderson, in his excellent book Free: The Future of a Radical Price, points out that when consumers are asked to pay any price for a product – even a penny – they hesitate and evaluate their decision. But FREE eliminates the psychological inhibitions that cause them to hesitate and dramatically increases demand. In short, moving from a price of one penny to a price of FREE increases demand far more than reducing the price of a product from ten cents to nine cents (or any other comparable one penny decrease). Josh Kopelman of First Round Capital calls this phenomenon “The Penny Gap” and it is most definitely real. Chris Anderson further points out that FREE is almost inevitable in any market in which the incremental cost of delivering one additional product approaches zero. And that is what the iPad really unlocks for the publishing industry – the incremental fulfillment cost of each additional subscription approaches $0.00.
So let’s assume that most magazine publishers realize this and decide not to charge for their publications on the iPad. In this case, I believe real demand would be unlocked and the incremental revenues to the industry would be between $927 million and $1.8 billion. This would be meaningful for the magazine publishing industry, increasing revenues between 8% and 16% in the first two years of the life of the iPad. And if this device achieves penetration rates that even approach those of the iPod (and who wants to bet against Apple?), this revenue stream will increase dramatically. This is a game changer.
But don’t take my word for it. Let’s drill into the numbers.
Magazine Industry Ad Declines
 Magazine Industry Ad Declines According to the Magazine Publishers of America industry association, total revenues in the magazine industry have declined almost 25% in the past two years. Most pundits who have weighed in on the potential of the iPad to help arrest this decline have focused on the incremental subscription revenue opportunity. Well dearly beloved, I’m here to tell you, there’s something else… the advertisements (all due credit to Prince for this line).
When you take a closer look at the revenue decline in the magazine industry, it is apparent that it is being driven by a reduction in the number of advertising pages generated (see the graph to the left). Advertising rates, on the whole, have actually held up fairly well during this downturn and total magazines delivered have stayed right around 369 million per year. Some magazines have shut down but other magazines have apparently picked up their slack in terms of circulation.
So why are total advertising pages down so drastically? Anyone who subscribes to a mainstream magazine like BusinessWeek understands this phenomenon. During the height of the previous expansion, BusinessWeek was a 150-160 page magazine, half of which were advertising pages. Today, the magazine is generally 100 pages or less (and still around 50% ads). Data from the Magazine Publishers of America shows that BusinessWeek’s total advertising pages are down over 30% in the last two years – in line with the decrease in the size of the magazine.
iPad Impact on Magazine Revenues
So the key to reversing revenue declines in the magazine industry is to increase the total number of advertising pages available. This usually happens naturally during the economic expansion following a recession. However, I believe the iPad has the potential to dramatically accelerate this recovery. To believe this, you must first accept the assumption that the iPad is going to be a runaway success. I do, but I’m not here to debate that point. So let’s look at a few scenarios based on a couple of common assumptions:
- 16 million iPad units will be shipped in the next two years
- iPad users who read magazines on the device will subscribe to an average of 2.3 magazines – the average number of magazines subscribed to by offline magazine readers, according to the Magazine Publishers of America
 iPad Impact on Magazine Revenues Scenario 1: Premium Pricing Model
The first scenario assumes that most magazine publishers pursue a premium-pricing model, charging an average of a 50% premium over their offline magazine prices. This will obviously limit incremental subscriptions somewhat but will increase revenue per subscription. Let’s assume that in this scenario, 10% of iPad users subscribe to magazines. Based on offline advertising rates and a 50% premium over the offline subscription rate, this would allow the magazine industry as a whole to generate $309 million of incremental revenues, which is only a 2.6% increase in industry revenues.
Scenario 2: Print Pricing Model
The second scenario assumes that publishers choose to charge the same price for an iPad magazine subscription as they do offline. If you assume this will double the iPad magazine subscription rate to 20%, then the industry would generate $515 million in incremental revenues. This would yield a 4.4% increase in overall industry revenues.
Scenario 3: FREE Pricing Model
Obviously, neither of these first two scenarios is really a game changer for the magazine industry. And that brings us back to FREE – and the analysis I offered at the beginning of this post. As stated, FREE would unlock demand and potentially generate incremental revenues to the industry of between $927 million and $1.8 billion (8% to 16%). This is the game changer.
But before I declare victory, let me address what I’m sure will be the most common objection to my argument – why should we assume that magazines on the iPad will be able to command advertising rates that approach those of offline magazines?
The answer is simple. The iPad will allow magazine (and newspaper) publishers to package their publications the same way they do their offline equivalents. Further, the ads can be the same, high quality ads that appear offline. This means that the reading experience will be the same and the ads will be part of the reading experience. In fact, because the packaging and ad formats on the iPad will be very similar to the print editions, the Audit Bureau of Circulations decided that iPad subscriptions can be counted in the total circulation numbers for magazines. This alone should ensure that ad rates are comparable. And if the ads are actually of higher quality because the iPad is capable of interactivity, video and other elements that will make them even more effective than they are in print, the rates could be even higher.
And so with the launch of the iPad, to quote the artist formerly known as Prince (who is now once again known as Prince), the magazine publishing industry should be ready to party like it’s 1999 (which, by the way, was a banner year for the industry).
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April 5th, 2010
On Saturday, Apple debuted the iPad – a device the company hopes will become the latest “must have” consumer gadget. I have already bought into the potential of the iPad and have placed an order for the 3G version, which is due out “at the end of April” (how nebulous is that?). But I’m a gadget guy, so placing an order did not provide enough satisfaction. As such, I made the trip to my local Apple store Saturday night to handle (okay, I admit it – fondle) the device myself. I came away impressed. The iPad is compact, fast and sufficiently versatile to make it a very interesting addition to my gadget arsenal. Given my interest in the media business, though, I found myself contemplating the future of mainstream media as I played with the iPad. Many have speculated on the potential of the iPad to “save” traditional media businesses, with opinions generally landing between maybe and definitely not. However, many publishers such as Conde Nast have embraced the new technology and have big plans to distribute their publications on the iPad. Hearst has even announced a similar tablet reader device of their own.
 iPad in Action So who is right? Are these MSM businesses fooling themselves or are the pundits overlooking the potential of the device? In short, I believe the iPad is a real game changer for magazines, but newspapers face more significant challenges in finding a way to utilize the iPad to make a difference in their businesses. The reason for my seemingly contradictory perspectives is actually quite simple. It comes down to consumer benefit – the iPad has the potential to far surpass the Internet in providing the value consumers get from magazines, but is only incrementally better than the Internet in providing the benefits consumers glean from reading newspapers.
But before I explain these opinions more fully, let’s first acknowledge the elephant in the room. In order to benefit anyone (including Apple), the iPad must first gain widespread consumer adoptance. This is far from a foregone concluson, because it is still questionable how this device will fit into the lives of everyday consumers. Not as powerful as a laptop computer and not remotely as portable as a smartphone, the iPad resides in a consumer space that has not yet been fully defined. Engadget probably summarizes my feelings on the iPad the best. As of today, the device is really a bit of a “tweener” that will be adopted by one of two groups - consumers that foresee a potential to the device that does not exist today or consumers that have to have the latest consumer device and can afford a luxury item. For me personally, I view iPad as a replacement for my Kindle. I will use the device as a portable reader, web browser and e-mail client for those times when I don’t want to boot up my laptop. Given the success of the Kindle, it seems clear that there is at least some market for this type of device. But let’s assume for the moment that Apple has done it again and developed yet another “must have” device. Given this assumption, let’s explore the potential of the iPad to “save” the magazine and newspaper industries.
Magazines Will Benefit From a Reversal of Declining Circulation Rates
With the advent of the Internet, many magazines have been suffering from declining subscriber bases and, as a result, declining advertising revenues. The reason is convenience and cost – why should consumers pay to have paper magazines delivered to their homes when they can receive the same information for free online? However, magazines have a different usage pattern than the Internet. I subscribe to BusinessWeek because I want to keep up with important developments in business and I feel that by reading each edition of BusinessWeek in full, I am staying current. Most magazines focus on providing relatively complete coverage (or at least a point of view) on a specialized topic. I cannot get the same benefit from the Internet because when I get busy for a few days and fail to visit their website, I feel that I have missed important events. Therefore, the Internet is a poor substitute for the benefit of a magazine subscription. Many consumers, though, are willing to live with the limitations of the Internet model because they don’t want to have to carry around several magazines at a time in order to stay current. The iPad has the potential to overcome this significant weakness of the Internet. It will allow consumers to easily carry around an effetively unlimited quantity of magazines and read them at their leisure, rather than having to frequently visit the publisher website in order to obtain this same information. In short, the iPad has the potential to provide a consumer benefit that is difficult to replicate with the Internet. For this reason, I believe consumers will find the iPad a significantly better source of this information than the Internet. This benefit will help arrest declining circulation rates.
However, all of this is moot if the publishers cannot charge sufficient ad rates to make money on this new subscriber base. Revenues in the magazine industry come from two sources – subscriptions and advertising. Generally, magazines attempt to cover most or all of their distribution costs with the revenue from subscriptions. However, subscription revenues are often not sufficient to even cover these costs. In fact, most magazines primarily charge their readers subscriptions in order to ensure that their reader bases are actually interested in the subject of the magazine. In effect, the nominal subscription fees are used to convince advertisers that the subscription bases of the magazines are relatively targeted. Magazines make most of their money from advertising. Many pundits compare the ads on the iPad to mobile ads and claim that the market for these ads is too immature to generate real revenue. However, because the ad formats can replicate (and, in fact, exceed) the formats in the physical magazines, I believe that the ad rates on the iPad will be more similar to the ad rates in the physical magazines than to mobile ad rates. This idea is supported by the Audit Bureau of Circulations’ announcement that iPad magazine subscriptions will be counted in total circulation numbers for magazines. To summarize, I believe the iPad will help increase total circulation for magazines and the ad rates will support a resurgence in revenue for magazines.
Newspapers Will Not See a Similar Resurgence in Circulation Rates
 First Experience With the iPad Like magazines, newspapers have also been suffering from declining circulation rates thanks to the Internet. However, I do not believe the iPad will immediately help reverse this downward drift. The consumer benefit of newspapers differs from magazines in one important regard. Consumers typically read newspapers in order to stay current with daily news, generally regarding their local communities. Newspapers have done an impressive job of fulfilling this role in the past by providing relatively complete coverage, including news, sports, business, leisure and more. However, in order to stay current, readers must read the newspaper on a daily basis (at least those publications that are dailies, which most newspapers have traditionally been) and they generally have to browse through a lot of stories in which they little interest in order to find the few that they want to read. The Internet actually delivers a comparatively good news reading experience. The news available at a newspaper’s (or competitor’s) website is more up to date than the physical medium, is searchable and is very well cross-linked, all of which allows consumers to find the information they want more quickly. In addition, there are a variety of specialized news sources available online that might provide much of the benefit of your favorite section from the local newspaper without all of the extraneous information in which you are uninterested. In short, the generalized, daily nature of most newspapers make them much more vulnerable to replacement by the Internet than the more specialized, periodic magazines. The iPad’s ability to give consumers a means of taking their favorite newspaper with them will do little to change this value equation.
However, there is a chance I am being myopic. Perhaps the NY Times, Hearst and other newspaper companies will figure out a way to present newspaper content on the iPad in a fashion that is significantly more compelling than the Internet. For instance, I might be interested in a customized local newspaper (only the topics in which I am interested) that is packaged and available to me offline. If so, then there is a chance that the iPad could make a difference to circulation rates, and therefore to profitability. Because the iPad reduces distribution costs to near zero levels, newspapers have the potential to provide a superior newspaper reading experience at no cost to consumers. If newspapers are able to find this new compelling experience and are willing to provide the service for free, then perhaps the iPad will help drive up their subscriber bases and have a meaningful impact on profits. This is a much greater leap of faith to make than for magazines, though.
Conclusion: Magazines Yes, Newspapers Maybe
In summary, I believe the iPad will have a material impact on the circulation and profits of magazines because consumers get benefits from packaged magazines on the iPad that the Internet lacks. However, newspapers do not have a similar consumer benefit on the iPad that Internet websites lack – at least not today. The ability of the iPad to have a meaningful impact on circulation rates and profits of newspapers is predicated on these publishing companies finding a way to use the iPad to deliver a service that is meaningfully different than the Internet. Such an app does not exist today. Then again, it wasn’t too long ago that we didn’t even know the slogan “there’s an app for that”, so don’t bet against such an app being developed.
Oh, and by the way, get your iPad order in today – it really is a cool device.
- Steve (admitted gadget junky)
Tags: Apple, Apple iPad, circulation rates, Hearst, iPad, iPad ads, magazines, mainstream media, media business, MSM, newspapers, The New York Times
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March 17th, 2010
My colleagues have been diligently reporting from SXSW this week on various topics, including mainstream media’s ongoing efforts to adapt to the new environment of the Web, including competing with content farms for prime positioning in search engines. In my last post, I noted that mainstream media (MSM) brands likely generate over 50 times the revenues of non-branded web properties. But the reporting from SXSW made me wonder about one important question – do mainstream media brands get their “fair” share of search traffic? Rather than build suspense, allow me to jump to the punchline. My research indicates that, despite their significant advantages, MSM brand sites are not effectively targeting search traffic and, as a result, content mills and other unbranded sites are winning a disproportionately large share of this market.
Content farms are Web properties that aggressively target search queries with very specific content that attempts to directly address the searcher’s intent in performing the query. Because they aggressively target specific queries, content farms have a distinct advantage over MSM in generating traffic from these queries. They have processes that ensure that their articles are loaded with search terms that match as closely as possible the searcher’s query. For instance, Answers.com (the fourth largest research site on the Web) has an article in their Wiki titled “What is the largest animal in the world?”. When a searcher is seeking to answer that question by performing a search at Google, Answers.com has a distinct advantage.
However, brands also have their advantages. As SEOMoz notes, click-thru-rates on SERP results are one of the factors that Google evaluates when determining how highly to rank a particular page of content in its listings. Brands have a distinct advantage over research sites when seeking high click-thru-rates at Google and the other search engines. While my mom might be highly likely to click on stevewalkerknowsall.com when looking for an answer to her question at Google, I dare say that most people would be more like to click on an article from www.latimes.com. This higher click-thru-rate should lead to higher rankings and more search traffic. In addition, MSM brands are able to gather organic inbound links naturally since people are very likely to want to comment on (and therefore link to) branded publications.
 Search Traffic for MSM Brands versus Reference Sites Which leads back to my original question – do MSM brands get their fair share of search engine traffic or are they being squeezed out by content mill mercenaries? In order to answer this question, I looked at how much traffic the top 100 MSM brands get from the domains of the primary search engines (Google, Yahoo, Bing, AOL and Ask) versus the amount of traffic the top 100 reference sites get from these same sources. Reference sites include the most aggressive search query targeters on the Web – sites such as the aforementioned Answers.com. On first blush, it appears that the MSM brands get a comparable amount of traffic as the Reference sites (1.0 bil monthly page views for MSM brands versus 1.1 bil monthly page views for reference sites). However, in its ongoing struggle to Do No Evil, Google (and other search engines) actually give preference to MSM Brands by referring traffic to these sites through services such as Google news. When you factor out this traffic (which reference sites such as Answers.com do not receive), the top 100 MSM brand sites actually get less search traffic overall than the top 100 reference sites. I would argue that this demonstrates that the MSM brand sites are actually not getting their fair share of search traffic. In fact, the top 100 MSM brand sites get only 15% of their traffic from search, while the top 100 reference sites get over 30% of their traffic from search. Clearly, MSM brands are lagging when it comes to winning search traffic.
Given their distinct click-thru-rate advantage, why would MSM brands lag in search traffic? One factor is clearly the aggressiveness of reference sites (and content mills) in targeting specific search terms. These sites ensure that everything from the title of their articles to the keywords in the articles are highly relevant to specific search terms. MSM brands, on the other hand, (WARNING: radical concept alert) actually produce articles with the reader in mind rather than the search engines. (I know, the concept shocked me too.) A second factor is the relative indifference of MSM media sites to obtaining search traffic in the first place. Rupert Murdoch has actually accused Google of stealing his content and has further claimed that search traffic has little value. Many claim that Murdoch’s assertions are just negotiating ploys, but there is actually some real data that backs up his claims. But that is a good subject for another post. Suffice it to say that with attitudes like Murdoch’s, it is no wonder that many MSM sites lag reference sites in generating search traffic.
So let’s pretend for a minute that you own a MSM brand site and you actually value search traffic. How do you compete with the reference sites and gain your fair share of search traffic? The answer is to think like a reference site when producing and migrating your content to the Web. Understand what search queries your content is addressing and ensure that the content clearly targets those queries. Simplistically, this means having appropriate titles, title tags, keyword density and links (inbound and outbound) that clearly define for the search engines what the content is about. It is about SEO 101. However, an even simpler approach is to contact Perfect Market. (Didn’t see that one coming, did you?) Our goal as a company is to help valuable, branded content gain traction at the search engines (and to help the owners of this content effectivly monetize this content). And we know, and can demonstrate, that traffic from search is extremely valuable. (Sorry Rupert.)
- Steve
Tags: content farms, mainstreet media, MSM, rupert murdoch, search, search engine optimization, search engines, SEO
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March 2nd, 2010
Many pundits denigrate major media companies as slow-moving entities that do not understand the web and have missed an opportunity to capitalize on their brands online. I disagree with this assertion. In fact, if you look at the web properties of major media brands, you can clearly see how incredibly valuable these brands are online. If my numbers are to be believed (and they always should be), then websites that start with an offline brand generate more than 50 times more revenue than websites that do not have this head start.
Methodology
So how did I come to this conclusion? To analyze the value of a brand online, you need to compare the metrics of a population of websites that started with an offline brand with a population of websites that did not. To accomplish this comparison, I used data provided by Compete.com and compared two sets of websites based on Compete.com categories: the top 100 most trafficked “News and Media” sites and the top 100 “Blogging” sites. My assumption was that, generally speaking, blogs started their lives online without a major brand to provide a head start, while the top news and media sites all had a valuable brand before moving online. I further refined the data by eliminating sites that did not fit this assumption. For instance, I removed scout.com from the list of news and media sites because it did not start with an offline brand. I then compared the performance of these two populations of sites, both in terms of page views (estimated by Compete.com) and revenue (estimated based upon Perfect Market’s knowledge of both populations). The difference in performance was dramatic.
In the Battle for Eyeballs, Brands Matter
The average top 100 News and Media website has approximately 150 million monthly page views, according to Compete.com, while the average top 100 blogging website has approximately 25 million monthly page views.  Everything else being equal, it would seem that the brands of these major media companies help them drive six times more traffic than a blog that had to build its brand entirely online. Of course, everything else was not exactly equal. For instance, many of these major media companies have significant resources beyond just their brands. Regardless of whether you believe that the key factor in driving high traffic to these web properties was the brand itself or some other asset, without the brand, all of these other advantages would quickly evaporate. One need look no further than the success ESPN has had in building its traffic online to see that a major brand and an offline platform that can be used for promotion helps dramatically accelerate the growth of the website.
When Converting Eyeballs Into Revenue, Brands Matter Even More
 Interestingly, it seems that companies with major brands have an even greater advantage when it comes to monetizing traffic online than they do in driving traffic. Most blogs monetize at remnant ad rates, which are generally less than $1.00 RPM (revenue per thousand page impressions). Let’s assume for the sake of argument that the top 100 blogs monetize at an average of a $2.00 RPM, a rate that is better than straight remnant. (If you believe this is overly negative, please see comments from Eric Hippeau, CEO of The Huffington Post, regarding ad rates from ad networks.) On the other hand, major media companies have sales forces dedicated to selling ads online. These sales forces generally allow them to monetize at a rate much higher than remnant rates. Again for the sake of argument, let’s assume that these media companies average an RPM of $10.00 across their inventory.
This means they make an average of five times more per page view than an average blogger. Interestingly, though, most major media companies also have other sources of revenue that are often comparable in size to these ad sales.
Newspaper companies, for instance, have classified advertising and paid verticals such as auto and recruiting referral sections. Based on discussions with former insiders and other experts on these companies, for media companies with larger web presences online (in this case, the top 100 sites), these additional revenue streams are generally comparable to their ad sales.
 So let’s assume that these revenue streams are equal in size to the advertising sales, which effectively doubles the RPM to $20. This would imply that a site with a major brand, as well as the scale that comes with that brand, is able to command 10 times the revenue per page view than a site without such a brand. Part of the higher monetization at sites with brands is derived from the scale that comes with being a major brand online (see the discussion on traffic above). However, part of the value is derived from the brand itself. Advertisers and potential partners are much more likely to want to associate their products and services with the LA Times or BusinessWeek than they are to want a similar association with stevewalkerknowsall.com — even if each site has exactly the same level of page views.
Conclusion — The Brands Have It
Bottom line, in terms of total revenue the “News and Media” sites that are my proxy for sites that arrived on the web with a significant brand likely have over 50 times the average revenue of “Blogging” sites, which have built their brands strictly online. This advantage in revenue is driven both by eyeballs (six times as much traffic) and monetization (ten times higher RPMs). Other than being an interesting factoid, though, what does this really mean? In short, it means that having a well known brand online is a significant advantage and that major media companies fortunate enough to have this head start should be careful to nurture and protect their advantage.
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