As Rates Drain, Hope Springs Eternal

Hope springs eternal, but money doesn’t. Let me put that another way: Hope doesn’t always pay the rent. We all hope there’s an easy way, a simple formula, a hidden answer, or a secret model for success. Everyone still hopes for alchemy.

Publishers all too frequently ask me, “What’s the secret formula for charging for content?” Or, “When is all this uncertainty in the industry going to stop?” They want the magic bullet. That desire is probably why you’re reading, too.

Wouldn’t it be great if there were a secret formula? And if lost loves were always found, every lottery ticket won, and all children were healthy, smart, and handsome? Maturity is the capability to accept and deal with reality, not fantasy.

Today’s reality is that fundamental changes in publishing economics are underway and not all the changes will make you happy. Last year, I wrote about how Internet access has given consumers such an abundant information supply, an abyss has grown between the price most consumers are now willing to pay for that information and the price most publishers would like to charge for it. Result: a malfunction in the online market for information.

Traditional publishers hope this isn’t true or, at most, it’s temporary. They ignore supply-and-demand economics and tend to make consumers their scapegoats. They say online consumers are “habituated” to pay nearly nothing for content and must be “educated” back to paying the prices publishers charged back when supply and demand didn’t favor consumers.

Wishful thinking.

Meanwhile, some pure-play Internet publishers hope commercial success is a zero-sum market: If traditional publishers aren’t succeeding, then nontraditional publishers (such as bloggers and nanopublishers) automatically will, despite no prevailing evidence.

Wishful thinking again.

Hope and wishful thinking obscure the few realistic perspectives about content pricing.

For example, last month I discussed a very realistic essay Columbia University economics and finance professor Eli Noam wrote about information pricing. Noam notes:

The information economy is likely to be a volatile, cyclical, unstable mess. The problem is not the “creative destruction” one would expect in an innovative economy, but the structural instability of an economy whose major products have very low marginal costs and hence prices, but are not low-cost to product. The notion that an information-based economy will be inherently prosperous must be revised for a less optimistic scenario.

Earlier this month, Noam widened his view:

There’s more trouble ahead. With convergence, the sub-industries in the information sector affect each other more than ever before. The swings of the overall economy were the swings of the sub-industries. Before, those were relatively dependent. They’re much more interdependent now.

In other words, when information was published only on paper, the economics of wired computers didn’t affect it. Now it does. Soon, the economics of wireless access and other factors will affect it, too.

Noam suggests:

The key strategy is to innovate and differentiate, but that’s not something everyone can do. People’s attention does not increase at the rate of Moore’s Law. You can’t run an entire economy on niches. That’s the embarrassment of niches. So people will consolidate to maintain prices. As a result, hopefully, prices will rise, which will lead to expansion, entry, and a new price collapse.

Economics has been called the dismal science. The reality it finds is often the opposite of hope and wishful thinking. That’s why most of the industry reaction (which I’d encourage you to read) to Noam’s dismal but sober-eyed view about the information market failure was more wishful thinking and hope.

Some hope commercial blogging and nanopublishing will grow more quickly than information pricing will drain away. Some hope smaller, less capital-intensive (iPods, not iMacs), dollar-volume uses of technology will foster a new golden age. Some think the online network is infinitely expandable and elastic, so opportunity and revenue must be as well.

I agree with Kevin Werbach, the Clinton administration’s counsel for new technology policy and a former newsletter editor. He compared the publishing worlds of online newspaper chain president Jeff Jarvis and commercial blogger Nick Denton:

I’m as excited as they are about new bottom-up markets and content forms like blogs. The problem is simply that you can’t get there from here. A hundred Nick Dentons wouldn’t pay for one floor of the Conde Nast headquarters building where Jeff works…. There’s no scenario that doesn’t take a substantial amount of money from the traditional media sector — and telecom, and IT — and replace [it] with a smaller amount of money in distributed alternatives.

Things will get worse before they get better. There’s no free lunch. There’s no easy answer, simple formula, hidden answer, zero-sum game, or secret model for success. That’s the dismal but realistic view. How you price your online content depends on a variety of complex, competitive factors that are often subject to constant change.

So what specific advice can I offer here? The strategic advice to remember is pricing obeys the laws of economics, dismal as those laws can be. We each hope and wish our projects will work, but projects that do work are those based on sober analysis and pricing that matches (whether the publisher likes it or not) what consumers are willing to pay. The major challenge to the information industry is to adapt to changes, not fight them. Adapt or die.