"Price Toward Free" Marketplace Challenges All Advertising-Dependent Media Companies - JackMyers Think Tank

Kyle in South Park, Episode 1204 (one of the great all-time TV episodes): "We thought we could make money on the Internet. But while the Internet is new and exciting for creative people, it hasn't matured as a distribution mechanism to the extent that one should trade real and immediate opportunities for income for the promise of future online revenue. It will be a few years before digital distribution of media on the Internet can be monetized to an extent that necessitates content producers to forgo their fair value in more traditional media."

You can watch clips from last week's brilliant South Park episode and read Ed Martin's comments on the program at JackMyers.com. Everyone in our business who's invested in the continued financial stability of traditional media and/or the growth of digital media should watch the episode, or at least the clips.

The South Park observation that "it will be a few years before digital distribution of media on the Internet can be monetized" is a cruel reality for Michael Barrett, who is departing as head of sales for Fox Interactive Media on the heels of News Corp's advisory that FIM would under-perform sales expectations by as much as $100 million (10% below projections). Barrett is a skilled and seasoned online sales veteran and Fox needs innovative approaches to close the gap between expectation and possibility. MySpace has become the poster child in the media industry for low cost-per-thousand networked inventory, as the Internet follows a price toward free model. With MySpace now partnering with Sony BMG Music, Universal Music Group, and Warner Music as announced late last week, the issue is whether two highly commoditized products can somehow develop a more profitable business model.

It would be wise for all media companies to closely follow MySpace and understand the implications as media supply inexorably increases and costs-per-thousand are relentlessly pushed downward. "$0.00 Is the Future of Business," writes editor Chris Anderson in the March 2008 issue of Wired magazine. "Once a marketing gimmick, free has emerged as a full-fledged economy…. The rise of 'freeconomics' is being driven by the underlying technologies that power the Web. Just as Moore's law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping faster," write Anderson. "Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero."

And that includes advertising. Wired's Anderson also recalls Stewart Brand's original aphorism from 1984: "Information wants to be free. Information also wants to be expensive… That tension will not go away."

Advertising wants to be free and costs-per-thousand are clearly moving in that direction, although there remain pockets of resistance. Advertising also wants to be expensive, but the traditional models and metrics for establishing value -- based on cost-per-thousand eyeball impressions -- are tools for zero-based pricing, not for establishing new valuation models.

The "Price Toward Free" concept is not an original one. In my 1998 Book Reconnecting with Customers in The Relationship Age™, I quoted author Kevin Kelly, who suggested in the September 1997 issue of Wired magazine that companies do the following: "First, think of 'free' as a design goal for pricing. There is a drive toward free… that, even if not reached, makes the system behave as if it does. A very small flat rate may have the same effects as flat out free. Second, while one product is free, this usually positions other services to be valuable. Thus Sun gives Java away to help servers, and Netscape hands-out consumer browsers to help sell commercial server software. Third, and most important, following the free is a way to rehearse a service's or good's eventual fall to free. You structure your business as if the thing that you are creating is free in anticipation of where its price is going."

Kelly pointed out that the first indexes to the Web, in its early days, were written by students and given away. "By being available free, indexes became ubiquitous. Their ubiquity quickly led to explosive stock values for the indexers and enabled other Web services to flourish." In my 1998 book, I anticipated that AOL would be required ultimately to reduce its fees to free. I also argued that "In the New Media Age, commercial inventory for advertising messages will be a relatively cheap commodity, following a downward curve toward free, as media companies develop services and transactional capabilities that will be far more valued by the marketplace."

While some TV networks, several magazines and selected media companies are actively investing in enhanced services and transactional capabilities, many more remain dependent on traditional metrics and business models. Size remains the pervasive measure of performance for the vast majority of media companies.

Every day I receive press releases and information about new media companies, almost all of which will be relying on advertising revenues to achieve the ambitious goals of their investors. Many of these businesses are aggregators. What they aggregate varies, but they are all in the same game on the same field. The field is "Madison Avenue" and the game is the aggregation of eyeballs and/or clicks (which are essentially interchangeable in media-buyer parlance) and selling them at market rates. What many of these companies are failing to recognize is that their currency is becoming valueless. Unless they can define new forms of currency, they will never achieve their aggressive revenue goals.

There is, however, a solution that I will outline in next week's JackMyers Think Tank. Share your comments at www.jackmyers.com .