Time to Change Blades in Occam’s Razor

The centuries-old principle known as Occam’s Razor states that the simplest solution is most likely true. Indeed, we all like complex or seemingly chaotic things reduced to simple solutions, answers, formulae, or business plans.

But try stating Occam’s Razor to quantum physicists, meteorologists, cosmologists, brain researchers, Britney Spears’s psychiatrist, or people who analyze business plans for online publishing or online broadcasting. They’ll shake their heads. Things don’t get simpler, they get more complex. E=mc² might appear to be a simple formula, but Einstein needed pages and pages of dense formulas to explain it to his peers. What is true and works is complex, not simple. Nowadays most simple solutions are propaganda, not reality.

Thus, I’m always amazed when a room full of media-company executives or media-school graduate students asks me, “What’s the business model for online publishing or online broadcasting?” Those people are experts who pride themselves on the complex skills they have learned, yet they somehow suspect someone possesses a simple formula they don’t know.

Were that someone did.

Let me tell you what I tell them: There is no Santa Claus, Tooth Fairy, or Simple But Undiscovered Business Model for online media. Sure, there are as-yet-undiscovered business models, but those are unlikely to be simple — just as quarks aren’t as simple to understand as the now antiquated atom model was in physics. I’m sorry to disappoint you or extinguish a pipedream, but new media are more complex than traditional media were.

The complexity shouldn’t be surprising if you understand that new media converge all previous media and combine almost all of those media’s capabilities. This convergence sharpens everything but doesn’t simplify anything. Imagine if you had a new vehicle that combined the capabilities of an automobile, airplane, train, ship, and submarine. Do you really think it would have simple controls? Do you think that all the things you’d have to learn to control it might be simple? Think again.

Indeed, to operate vehicles from another medium, you’d have to unlearn many things you might otherwise take for granted. For example, did you know an aircraft’s throttle controls its altitude, not its speed? Or that what looks like a steering wheel in a railroad engineer’s cabin actually controls the train’s speed? It’s no wonder why people who’ve learned things in one medium crash when they find themselves in another while acting as if everything in the new medium were the same as in the old one.

What’s the difference between media company executives and media school graduate students? The grad students don’t have years of practice to unlearn. This makes it much easier for them to learn new concepts and learn differences between new and traditional media.

For example, I’ve encountered no problems teaching my graduate students how the advertising economics of traditional media are based on scarcity but those of new media are based on surplus, and how this affects advertising inventories.

Imagine that a 30-page printed newspaper with a daily circulation of 100,000 miraculously has its circulation permanently doubled. Would its publisher automatically double the number of pages in each day’s edition? That’s very unlikely, although she might add a few pages. However, she almost certainly would double the rate the newspaper charges its advertisers. The ad space inventory she sells in that paper is finite and that scarcity now has twice the demand.

Now imagine a 60-minute broadcast program, sponsored by commercials, permanently doubles its viewership. Would its broadcaster double its air time to 120 minutes? No, she’ll double the rate the program charges its advertisers. The ad time she sells in that program is finite, and that scarcity now has twice the demand.

But unlike the space on a printed page or time within an hour, online space is infinite and surplus. Imagine the newspaper or broadcaster has a Web site that features at least one banner ad per Web page. If the site’s traffic permanently doubles, does that mean the site’s operator can double the rate charged to advertisers? No, it means the site’s advertising inventory has doubled; its operator now has twice as many banner ad spaces for which she has to find buyers.

She can’t very well present the advertisers who bought her initial inventory with invoices for twice as many exposures as they’d purchased. If she can’t immediately find buyers for double the number of ad exposures — and buyers are a very finite quantity — then all those extra exposures the new traffic generates will go empty and unsold. She can either remove the banner ad space from half the pages exposed or run all her sold ad exposures twice to cover all pages exposed , thereby cutting her site’s effective ad CPM (define) rate in half.

Because advertising economics of new media are based on surplus, unlike the scarcity-based advertising economics of traditional media, increased traffic doesn’t result in higher CPM ad rates. It does result in higher blood pressure for Web site advertising managers, however.

It causes CPM rates to be roughly the same no matter how much traffic a site has. A 1 million circulation printed newspaper might charge $100,000 for a full-page ad, a 100,000-circulation paper charge $10,000, and a 10,000-circulation paper charge $1,000, but all their sites will charge roughly the same CPM rate for banner ads. The sites with more traffic will earn more revenue, thanks to volume, but they won’t have volume plus higher rates, unlike in traditional media. It’s one of many reasons media companies’ Web sites earn only a fraction of what those companies’ traditional media do.

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