To date, there’s been a lot of discussion about the economics of internet publishing. But the discussion has mostly concerned internet finance — banner ads, affiliate programs, e-commerce partnerships, etc. — and not economics per se. A true discussion of economics must holistically analyze the systems behind the conversion, exchange, and the flow of internet publishing currency.
“I’m not going to pay a lot for this web site!”
We start with web publishing costs. Despite the internet’s promise of reduced publishing costs, you can’t ignore that the expense of creating and maintaining a web site have escalated tremendously over the past several years.
In the web’s cruder, earlier days, the one way a business could compete was simply by upping the ante. By deploying slicker designs, glossier graphics, and the latest HTML bells and whistles, businesses defined online dominance as whoever offered the fattest retainer to a group of online Madison Avenue wannabes.
This self-perpetuation couldn’t last forever. Businesses wised up to learn that more wasn’t necessarily better. The rapid-fire pace of change in web publishing technology also cooled off; today’s de facto HTML standard has remained largely unchanged since May of 1996.
Yet according to Netmarketing’s Web Price Index, the median price for a simple business web site reached $44,500 (U.S.) in June 1998, up from $25,000 eight months earlier. These figures only cover content and design — they exclude any expenses for advanced, transactional features such as personalization and e-commerce.
The Web Publishing Value Meal
So what are the economic motivations behind these heavy investments in web site design and content? More importantly, where should a business invest its online budget, and why?
Making several observations with CNET’s Director of R& D, Daniel Austin, we discovered what can be roughly defined as three economic models for web publishing — illustrated in the table below.
Three Economic Models for Web Publishing
||Revenues for content
The first model, value-add, represents what might be called web media companies. Revenues are derived directly from content through advertising and e-commerce deals. While content is important, it is typically derived from other, more official sources (for example, Reuters, WeatherLabs, Etak, etc.). The value proposition for these sites instead lies in the packaging of this information — ergo design.
The second model, vendors, represents sites that primarily derive revenue indirectly from their web publishing efforts. These sites are often the authoritative resources on a given subject, and design is usually of lesser relative importance.
For example, the primary objective of Microsoft’s web site is to sell more of its software. Microsoft is the definitive resource on the subject. However, in contrast with value-add sites that also inform Microsoft users, Microsoft need not differentiate through superior packaging of this information.
The most curious model are what we call vanity sites. These unsupported sites make up the web’s grassroots publishing. Their influence on the economy is to raise the bar for revenue-generating sites in both content and design. As freely-available spoilers, they make other sites work harder to justify their income (see our previous article, Free-for-All).
A Rhetorical Question
These classifications are hardly unique to the web. Parallels can be found in Rhetoric 101, which tells us of the arguments by merit and design. The differentiation between the two tells us something about their respective value — and perhaps something about their value to web publishers.
According to rhetoric, the argument by merit appeals to professionals who appreciate the meticulous and methodical construction of logical arguments. While these arguments are difficult to refute, they typically require much more time, evidence, and expertise to develop their case. Think lawyers and scientists.
In contrast, the argument by design appeals on the basis of its packaging. These arguments are often more direct and can be immediately grasped by the untrained layman.
Unsurprisingly, they are the basis for nearly all marketing and advertising messages. It’s much easier to deliver a message with emotional appeal in a 30-second TV commercial than it is to argue the merits and reputation of a product or business in the same time period. This is what’s affectionately called “selling the sizzle and not the steak.”
Is it a chair or a seating solution?
For any model to be of value, it must be predictive. While we don’t profess to be experts on post-Keynesian theory (it’s merely a hobby of ours), we do note that the battle over design has been critical in the early stages of commercial web adoption.
Web sites are so new that their reputations are in the early stages of development. All commercial web sites hope to establish long-term merit, but lacking this foundation many are currently forced to argue by design.
For example, according to recent research by the Boston Consulting Group, web retailers spend 65 percent of their revenues on marketing and advertising — arguments by design — compared to 4 percent for most traditional retailers. Web companies also spend an average of $26 (U.S.) per order received, compared with only $2.50 for offline retailers.
For online publishers, both established offline brands and new online brands are battling it out on the design front — albeit for different reasons. New online brands use design to lure new customers, eventually hoping to establish merit. Offline brands leverage their offline credibility, yet they typically prevent brand dilution by achieving design parity with the online start-ups.
An Economic Model Argued by Design?
While there are still enough holes in this economic model to pass a James Cameron movie, there are a couple of worthwhile take-home messages.
For one, if you derive your revenues directly from your site’s content, don’t skimp on design unless you own the content. For another, design, marketing, and advertising will probably continue to eat heavily into online revenues at this early stage, but that’s bound to subside as online businesses establish merit.