Telecom, Media and

Technology

October, 2010

Internet monetization for

traditional media
Point of View
Remco Groeneveld and Gagandeep Sethi
The situation

Media consumption is booming. People spend hours every day surfing the Internet, watching
(digital) television, listening to the radio and playing games, often simultaneously. Despite this
surge in demand for media products, many traditional media companies are struggling to
monetize their assets.

To a large extent, inadequate strategic thinking on the part of media groups is to blame. Starting
with the dotcom boom, most media companies put their assets online without developing a proper
business model. Most were happy to chase eyeballs and valuations in the hope that revenues
would follow. Once users got used to getting content for free, however, they became unwilling to
pay for it. The advertisement model, free content supported by ads, has also tended to struggle
online as online ad rates have been and still are considerably lower than print ad rates1. This
means current online models require very high traffic in order to return a positive return on
investment.

As a result, media companies have often attempted hybrid business models, looking for both
advertiser revenues and subscriber fees. But, with low ad revenues due to insufficient traffic and
relatively few customers willing to pay for their content, most have found neither2.

The hypothesis

There is no “one size fits all” solution to the monetization of traditional media assets online.
However, the two most important factors that have to be considered are the consumers‟
willingness to pay for content and the opportunity to attract advertising income. To succeed,
companies must focus their efforts on increasing their performance on either or both of these
parameters.

Figure 1: Categorization of content companies

Understanding your position

Consider the figure above where we use those two revenue factors to set up a 2 x 2 matrix. Four
categories of companies emerge, namely Strugglers, Ad Magnets, Subscriber Magnets and
Blockbusters.

Strugglers have limited (or fast decreasing) opportunities to generate advertising income and
attract customers who are unwilling to pay for the content. Example of Strugglers are mid-sized
newspapers whose content is not distinguished enough to entice people to pay subscription fees3
and whose (classified) ad income has come under pressure from the internet. Even The New
York Times, one of the most well known newspaper brands, has been unable to break even from
advertising alone and has wrestled with ways to make its non-subscribers pay for its online
content4. It famously attempted to charge its readers for online content only to revert to free
access. It has now decided to have a metered system for usage by non-subscribers starting in
20115.

Subscriber Magnets have customers willing to pay to pay for content due to higher relevance,
but relatively limited advertising opportunities due to lack of customer acceptance or because of
their limited reach. For example, there is high willingness to pay for financial data (such as
Reuters and Bloomberg data services), but this content lends itself less to advertising. The
information is used professionally by a relatively small audience who do not want to be distracted
by ads.

Ad Magnets are attractive to advertisers, but do not have many customers willing to pay for their
content. For example, customers are unwilling to pay for entertainment news, but entertainment
blogs (such as TMZ.com and Perez Hilton) have been able to attract strong advertising based on
their robust readership and “ad-friendly” environment6. This is also the quadrant where most free
newspapers in Europe, dependent as they are on advertising, would like to be. For publications
with a lower cost base (such as entertainment blogs) advertising alone is enough to make their
business model viable.

Lastly, blockbusters boast high willingness to pay as well as significant advertisement

opportunities. Sports programming falls into this desirable quadrant7, but also financial
newspapers, such as the Wall Street Journal (WSJ) and the Financial Times (FT). These are
relevant to a very specific and affluent reader category and have the luxury of being ad-friendly as
well as having consumers willing to pay. There are over a million paid subscribers for the Wall
Street Journal8. The Financial Times has 126,000 online subscribers paying £3.29 per week and
two million readers registering with basic information for ten stories a month. FT.com is also ad-
supported, and the site charges an estimated £35 to £40 in fees from advertisers for every 1,000
views of a story9. The success of Financial Times pay wall initiatives has meant that for the first
time, the Financial Times has seen subscriber revenues (for the group) exceed advertising
revenues10.

Making a choice

Success at internet monetization hinges on developing products that are successful along the two
axes identified. For the successful companies the way forward is fairly clear.

For Subscription Magnets, the question is how to maintain customer willingness to pay through
maintaining relevance, while increasing ad revenues in a manner that does not turn away current
customers. For the Ad Magnets, the question is how to maintain consistently high ratings and
reach. In most cases, Ad Magnets will have a tougher time becoming Blockbusters compared
with Subscription Magnets. This is because consumers are generally unwilling to pay for
something that they have got used to receiving for free. For Blockbusters the question is how to
stay where they are and maintain both willingness to pay and advertising appeal, high relevance
and reach, for example by increasing access to high value content.

Strugglers face more difficult choices. Can they increase their advertising appeal or should they
focus on enticing paying subscribers? The decision on which avenue to focus on will depend on
their current position relative to these axes within the quadrant. This would depend on factors
such as the nature of the content, competitive environment, current subscriber base, existing
billing relationships, strength of the brand, access to key demographics etc.

Figure 2: Generic strategies for content companies

Increasing willingness to pay

Consumers today are accustomed to getting most of their content for free. The few successful
models of paying for music and books online have been centered on flat fixed prices, in a unique
environment (consider the iTunes and the Kindle).The question therefore arises, is it possible to
raise prices outside such an environment? Also, what is the impact of product innovation and new
devices on consumer attitudes towards payment? If customers do agree to pay, what is the price
they are willing to accept? How will that vary for existing subscribers? How viable is a pay-per
view (micro-payments) model? How feasible is a metered payment system? Is a flat fee possible?
Will promotion of online cannibalize the traditional revenues (swapping physical world pounds for
online pennies)?

Sophisticated consumer pricing methodologies can help answer most of these questions. For
instance, the first step to increase willingness to pay for a product is to understand the customer
and understand what the product is worth to the customer. The value of the product to the
customer is dependent on the situation, location, completion as well as the customer‟s state of
mind. Next, methodologies for pricing consumer products can be adapted for pricing media
content, for example with tools such as conjoint analysis and price experiments, as well as
research into historical elasticities.

Increasing willingness to pay is also easier for companies that have pre-existing billing
relationships. Consider „over the top‟ television (OTT TV), which allows people to watch television
shows streamed over the internet on their PCs and laptops (and increasingly on their home TV
sets). Demand for time-shifted and OTT TV has been increasing and to address this market cable
companies in the United States (notably Comcast and Time Warner) have come up with an online
television proposition called Fancast and TV Everywhere 11. Existing subscribers (with a billing
relationship) get access to TV programming online as well as eventually on mobile devices at no
extra charge using a special subscriber identification. Obviously, the thinking is to increase the
price for their entire package down the line. With their existing billing relationship and higher
customer lock-in due to the multiple services these cable companies provide they have a
considerable chance of success in the future.

There is notable difference in this approach of the cable companies, which limit access to
subscribers, and the strategy of media companies (like newspapers and magazines) which gave
away their content for free through their website to everyone including non-subscribers.

Increasing revenue from advertising

Basic online advertising used to mean banners placed on websites. Since most web-users have
learned to ignore flashing banner-like items (e.g., 77% of US news users ignore ads12), a more
targeted approach to online advertising is allowed by programs such as AdSense, Clicksor or
AdBright. These programs deliver targeted and contextual ads to visitors of those sites improving
conversion rates and therefore revenue. Revenue is then accrued on a per click basis, ranging
from a few cents to several dollars per redirected visitor.

While revenue share for Google‟s AdSense is 68:32 in the favor of the publishers, per-click rates
are generally low (a few cents to a few dollars per visitor) and few traditional media companies
can make enough money through this. For example, suppose you want to earn €1 million a month
by placing AdSense generated ads on your website. Assuming an average click through rate of
1.5% and average revenue of €1.50, your company‟s website needs to attract 1.5 million page
views a day13.

The key to increasing ad friendliness is understanding the customer. Some companies are
increasingly thinking of their consumers as „tribes or communities‟, based on common
characteristics, interests or needs. However, traditional segmentation is still relevant to most
advertisers. Advertisers are willing to pay extra for key demographics and psychographics, and
are also often willing to pay additional fees for unique distribution channels. For instance, Unilever
was reported to have paid $200,000 to place an ad in Time Magazine‟s iPad application14 . Also,
advertisements that are uniquely embedded within relevant content or which tie in with the brand
(e.g., high fashion in a fashion blog) can command a premium.

Another approach is for players to pool content and ensure a single website controlled by them is
the place to go for the content they specialize in. Resulting traffic can then be monetized through
advertising. Take for example the US online television market. Plagued by piracy and file-sharing,
major TV networks decided to take matters into their own hand by offering their content online for
free, through a service called Hulu. The service was a huge hit, with nearly 44 million monthly
viewers15. It is funded through advertisements, and has been profitable for the last two quarters.
Content owners get 50 to 70 percent of the revenue, and the networks keep the rest. Most
recently, it launched a paid-premium subscription service16.

Figure 3: Increasing willingness to pay or advertising effectiveness

Impact of new devices like tablets

In 2013, there will be nearly 100 million tablet computers in the market, with over 60 million sold in
that year alone17. Tablet computers like the iPad are designed for content consumption and
provide opportunities for creation of innovative content propositions as well as new exciting
opportunities for advertisers. Early evidence has shown that advertisers have been willing to pay
a higher rate for the iPad compared with traditional websites. The Wall Street Journal and Time
Magazine iPad application price is higher than both the newsstand and website price. More
interactive features allow for a more compelling immersive ad experience.

While these initiatives have been directed at early adopters, often more willing to pay, there is an
opportunity to sustain prices by creating a unique content proposition for such devices, as well as
by creating innovative advertising opportunities.

Figure 4: Impact of tablets on traditional media companies

Magazines and newspapers developed for the tablet are likely to contain greater amounts of
richer media while their websites are likely to restrict and reduce the free content available.
For books, tablet computers may allow for advertising. Ads can be time bound, so that they do
not run out of vogue as the eBook ages. These interactive ads can be well combined with e-
Commerce. Further, including interactive features in books may also increase the willingness to
pay. This may lead to new business models in the future such as books subsidized by
advertising.
Similarly, for television content devices like the tablets are likely to give impetus to mobile
television consumption, and push content companies towards developing new business models
for it. Already, Hulu is offering a paid service for iPad users.

As most content is created digitally, repurposing current content for tablets through a host of
already available low cost tools is not challenging for content companies, at least when going for
a basic experience. Also, there are substantial savings with regards to distribution and printing
costs. Still, to get consumers to pay for a product, it has to be truly differentiated and this will
require investments in design and development.

Conclusion

As eyeballs move online and revenues do not follow as quickly, the challenge for most media
companies is to protect the bottom line in the short term and build a sustainable business model
in the long term. In order to build a sustainable business model, companies must first understand
the reason behind their long term presence. Merely having a website and a certain revenue
model behind this website is not enough. Companies must understand where they want to be in
five years time. Will their online presence totally replace the physical production of (proprietary)
content? If yes, how soon? Their actions must flow from the long term outlook but cannot be
started without a thorough understanding of their product‟s current position.
 About the Authors

Remco Groeneveld is a Senior Manager in the Telecom, Media and Technology practice of
Deloitte Consulting. He is located in Amstelveen, The Netherlands. He can be reached at
Regroeneveld@deloitte.nl

Gagandeep Sethi is a Senior Consultant in the Telecom, Media and Technology practice of
Deloitte Consulting. He is located in Amstelveen, The Netherlands. He can be reached at
GaSethi@deloitte.nl

Acknowledgements

The authors would like to thank Charlotte Nouwens for her assistance in preparing this white
paper.

References

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 The State of the News Media 2010. An Annual Report on American Journalism – Online (p. 29)
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 Sarah Rotman Epps, Eight Models For Monetizing Digital Content. Ad Revenue Softens And
Publishers Seek New Ways To Make Content Pay, Forrestor Research Inc. 2009.
 The State of the News Media 2010. An Annual Report on American Journalism – Online (p. 31)
(http://www.stateofthemedia.org/2010/printable_online_chapter.htm).
 Ross Walker, The Top 10 Alternatives to Google AdSense, 2010
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 Aaron Wall, Google AdSense program review, November 21, 2003
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 Matt Asay, A simple formula to gauge a freemium model‟s success, August 20, 2009
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 Charlie C, 7 Companies that mastered the freemium business, March 31, 2010
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 Doubleyouwork, Freemium Business Model, January 10, 2008
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 Richard Pérez-Peña, The Times to Charge for Frequent Access to Its Web Site, January 21,
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 Hsiang Iris Chyi, Willingness to Pay for Online News: An Empirical Study on the Viability of the
Subscription Model, 2005, JOURNAL OF MEDIA ECONOMICS, 18(2), 131–142.
 The State of the News Media 2010. An Annual Report on American Journalism – Executive
Summary (p. 11) (http://www.stateofthemedia.org/2010/printable_overview_chapter.htm).
 The State of the News Media 2010. An Annual Report on American Journalism – Online (p. 26)
(http://www.stateofthemedia.org/2010/printable_online_chapter.htm).
 Matthew Saltmarsh, Murdoch Finalizes Paywall for Two British Papers, March 27, 2010
(http://www.nytimes.com/2010/03/27/business/media/27paper.html).
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 Sarah Rotman Epps, Eight Models For Monetizing Digital Content. Ad Revenue Softens And
Publishers Seek New Ways To Make Content Pay, Forrestor Research Inc. 2009.
 ANP, APS: Nederlandse oplossing maakt Content Syndication vindbaar voor Google, March 8,
2010
(http://www.perssupport.nl/publishingweb/pressrelease/detail.do?pressId=39707&type=today&se
archKey=ba3c2f67-2a9e-11df-a698-c91397ab600a&languageId=NL&pageIndex=1)

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