As if current economic conditions weren’t dire enough, several forces conspire to push the media sector’s financial performance further downward. These factors are an obsession with market share, price wars, and first movers’ ability to set the tone, often for the worse.
Take the iPhone application market as an example. At first, publishers were elated—at last, a content distribution platform with an embedded transaction system. They saw it as the first step to making customers pay for content. Then, another idea took over: market share. Like “eyeballs,” the old Internet Bubble metric, market share is today’s mirage: Once you get it, profit is (almost) sure to follow. Never mind there are zillions of companies that have once and for all severed the connection between market share and profit (Apple [AAPL] for computers, BMW in the auto industry, Nucor in steel production, to name but a few).
Unfortunately, the first one who shoots for market share sets the standard, sometimes with surprising twists and turns. Consider the Wall Street Journal: first-rate Web site, highly successful businesswise with 1 million paid subscriptions (about $100 per year). When it came to the iPhone opportunity, guess what? They went for a free application loaded with pathetic ads—apparently locked on the saturation mode, since the same banner kept showing endlessly. Just a few weeks ago, seeing a steep drop in profits, WSJ.com reversed itself and restricted access to its app.
The same thing happened in France with Le Monde: The paper launched a free iPhone app even though some parts of its Web site are paid for. As a result, no one in the French market is considering a paid application.
Even if the media industry calls it a “game changer,” it appears the iPhone will be slow to strengthen bottom lines. Look at this chart produced by the consulting firm Medialets. As it indicates, the news category is the second largest for free apps (73 percent of the total), the first being the social networks (94 percent free, understandable considering the younger demographic). As a comparison, only 12 percent of games are free, for two reasons: 1) It’s hard to put advertising on a game, and 2) the gamers are used to paying.
How wrong are online newspapers not to charge for their iPhone App? Quite wrong, actually, for several reasons.
First, there is not that much price elasticity in the mobile phone industry. As a graph made by Pinch Media shows, a $0.99 app is not downloaded substantially more than a $4.99 app. Says Pinch Media: “We suspect that the relatively strong performance of $4.99 applications are a reflection of their quality, and a sign that the App Store will support higher prices for an engaging experience.” And we can safely say that watching a major newspaper’s iPhone app is undoubtedly an engaging experience. Second, also according to the Pinch Media survey (the six-slide presentation is here), paid apps tend to be used more than free ones by a significant margin.
There are two underlying messages here:
1) News organizations should hang on to their value propositions. The free model has its virtues, as we explained in a previous issue (see Inhale, It’s Free), but in the case of a particularly engaging content or service, paid-for can be justified.
2) Act together. The battle to convert some free digital users to paid ones will be won or lost, depending on whether key players join forces or not. Weirdly enough, due to their difficult financial situation, U.S. newspapers appear to show a readier disposition to a coordinated move than, say, French papers, which are essentially good at collaborating to beg for subsidies.
That leads us to the price-war issue. As a whole, the media industry is prone to such practices, especially in the turbulent digital transition. Take the American book industry: In the United States, the fight between Wal-Mart (WMT) and Amazon (AMZN) is a perfect example of MAD-ness, as in Mutually Assured Destruction. To sum up, Wal-Mart (No. 1 in the retail world: $400 billion in revenue, 2.1 million mostly low-paid employees) wants to take the lead in the e-commerce business. To achieve that goal, it needs to take on Amazon, No. 1 e-retailer in the United States. Hence its choice of weapon: cultural goods associated with the Amazon brand. Currently, the two giants are tied in a damaging price war on books—they flog best-sellers at about a 70 percent discount of the suggested list price—and DVDs as well. Needless to say, they lose money on each sale. The discount is so huge that the three warring retailers (Target [TGT] has also joined the fray) are rationing books to prevent secondary resales. The American Booksellers Association has asked the Department of Justice to investigate the book war.
How to get out of this vicious spiral? Regulation is but one solution. The book industry’s health and vigor seem quite related to the degree of regulation. In Germany, where discounts are verboten, there are 2.25 times more bookstores and 31 percent more new titles per 1000 inhabitants than in the United States. And when we compare the revenue generated by each new title in Germany and in the United States, the German book market brings slightly more money (more than 12 percent) in absolute terms, but four times more when you factor in respective population sizes.
What regulation can’t do must be achieved by collective action. In some countries, the mobile phone industry has been quite clever in “cartelizing” itself in order to avoid a lethal price war. That said, the price fixing often happens at the consumer’s expense: In France in 2005, the three carriers (Orange, SFR, Bouygues) were fined €534 million. (Today, they’re back to the same business tricks, don’t worry.)
The media sector suffers from its fragmentation. Still, many business components could be improved with coordination. Besides sharing logistics and, to some extent, technology (see our story about "coopetition, "The End of Walled Gardens"), the downward spiral of advertising prices could be checked using concerted strategies, ranging from closing down the disposal of the long tail of digital inventories to price dumpers to simply saying “no” to excessive discounts imposed by media buying agencies. In the context of prices that are about 20 percent to 30 percent below last year’s level, thinking in those terms is a matter of survival.