Short version:
Publishers no longer control digital distribution. The choice is to either go free with Google, and find other ways to try and make up the shortfall in the P&L, or backtrack, take their content out of Google and aggregators, and go it alone. Of course I am simplifying, and there are options in between those extremes, but publishers are wondering: To Google or Not to Google? But should we redefine the question to “provide utility or no utility?” That’s a much more revealing way to look at the issues facing the publishing industry.

Let’s start with some background (please skip down a few paragraphs if you are up to date):

Publishers always used to own the distribution channel. By packaging news, analysis and opinion as physical products (newspapers, magazines, and books), or by delivering a service (paid syndication and newswires), they had control over the exploitation of the value they were creating.

Publishers realized they had to be seen by the rapidly growing online audience, and therefore subsidized online operations to build a business in this new world. The trouble was that the internet, with its zero marginal costs of content distribution, had changed the game. People now didn’t like paying for something that was easy to republish for free.

Online visibility for publishers was (to a certain extent, correctly) seen as the Holy Grail, and Google et al were happy to provide this. Google, and republishing aggregators, became the distributors of online content – the newstands. Except no one got paid.

Yes, no one got paid
Recently, publishers have realized that the online advertising model will never sustain their content creation costs. So some have started to find ways to reclaim the distribution (and the ability to exploit it). This has taken the form of paywall-protected sites and micropayment network models (amongst others). And others have decided that they will never profit from paid-content, and have started to build other products and services that can exploit the large audience they amass – membership groups, iPhone applications, and events.

And then we have Rupert Murdoch’s ranting. Now, on the topic of new media distribution it is easy to criticise a 78-year-old man who rarely uses email, speaks from what can be perceived as a archaic viewpoint, and is known for aggressive business strategies that make enemies out of his competitors. But his outspoken commentary has certainly been calculated to start drawing lines, and flush other publishers into the conversation against Google’s power. But we won’t go down that rabbit trail now…

Google’s Mission
Let’s take a look at Google’s mission:

to organize the world’s information and make it universally accessible and useful

Now, it doesn’t use the word “free”, but the insinuation is there. For how can Google organize the world’s information without having access to it, and how can they really make it universally accessible and useful if it isn’t free?

So Google clearly favours a free content model. And indeed survives off it. And if traditional publishers cannot survive, the news will have to be provided by new structures. The organisation and republication of content will only become easier and more frictionless as time goes on. If it’s online, people will link to it, abstract it, paraphrase it, and copy it outright.

Brand vs Utility
Publishers are having to choose very fast whether this is the reality in which they wish to do business. But the problem is, there is not much that any publisher can do to stop this. The New York Times is clearly making a stand by de-indexing from Google and banning aggregators of its content. It is choosing to go it alone. Well, not alone. It is drumming up support from many other publishers, considering the option of licensing its content exclusively to Bing, and speaking to a huge range of hardware manufacturers. But the battle as currently defined is, unfortunately for publishers, brand versus utility. The New York Times versus free and easy access. This is not a battle that can be won in the long term. Or probably even in the medium term. Until publishers get on the side of utility – providing real value, that cannot be reproduced easily elsewhere, they are on the losing side.

It’s also a battle of scarcity versus utility. The newspapers looking to de-list from Google are trying to create scarcity. It’s the oldest trick in the book for enabling price rises. Constrain demand and price increases. Except scarcity of content just doesn’t work in a fully networked world. Scarcity can work: but it’s scarcity of experience, scarcity of connection, scarcity of value, scarcity of quality community and events. Not scarcity of mainstream news or information. Just de-listing from Google takes you out of the game.

Google does not want to destroy newspapers.
In fact, Google’s revenues rely on quality content drawing hundreds of millions of people to use its search engine to find information. But Google is striving for utility – organizing the world’s information and make it universally accessible and useful. And in this striving for utility, Google is building some really functional tools for news delivery. We will look at these in another post tomorrow, as well as posting a little announcement about a simple application we are launching with Google and a UK newspaper.

Publishers mustn’t get focused on the Google issue. It’s the wrong question.

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• New York Times to charge for articles online using metered system, beginning next year (taragana.com)
• Do The Robot: How Publishers Dodge The Spiders (paidcontent.org)
• New York Times set to charge, again (go.theregister.com)
• Latest Google news service promises publishers money and readers (guardian.co.uk)
• New York Times plans to charge for some online access (macworld.com)

Its a sad story, but one we must learn from. Businessweek was founded in 1929, and by the 1990′s was seeing a circulation of more than 1 million people. It used to carry more advertising pages than any other US magazine (up to 6000 pages in 2000), and was a profitable, valuable, and well-regarded publishing success. And as the digital publishing revolution began, BusinessWeek was there – experimenting, spending, and learning.

In 2006 the print magazine was making $110 million in revenue, and almost another $20 million online. It was charging $25 CPM for online inventory, and selling 79%.

A few long turbulent years later, and print revenues have almost halved to $60 million, with ad pages falling to around 1,250 in 2009. Online, traffic has grown, and revenues have risen marginally (to $20.5 million), although CPMs have slipped and sell-through of online inventory has fallen dramatically. It’s the classic case of digital pennies not equalling print pounds.

The troubling thought about the Businessweek story, is that despite making innovative and positive moves forward with their online offering, despite spending a huge amount on digital, despite cutting costs, they will lose over $40 million this year, and are probably going to be sold for a nominal $1. Ouch.

According to many ‘digital experts’, they made bold moves that should have turned out better:

• They built a strong online offering.
• They spent a lot to build a strong and valuable social networking/bookmarking element to their service. Which they then promoted heavily across their properties.
• They were one of the first business publications to see the value in integrating with the LinkedIn API.
• They launched a range of blogs (currently 28 at last count).
• They engaged readers in creating content, as well as crowdsourcing questions for interviews with business leaders.
• They experimented with multiple channel delivery, including e-paper.
• They launched iPhone and Blackberry apps to ensure their audience could get the content anywhere.
• They were one of the first mainstream media sites to build upon the Twitter API.
• They talked the right talk.

They did the right things. But it cost too much. As an example, the social networking element they launched, Business Exchange, has cost $21 million over three years. Even now it makes around $600k a year in revenue. As Rafat Ali asked, “With tons of white label social net services out there, and the value of being a media org, BW couldn’t get a cheaper and better deal?”

But digital spending isn’t what is killing Businessweek. The trouble is that all the above simply tries to achieve the wrong objective. It is all about maintaining the existing structure, the existing editorial standards, and existing cost-base, and not about evolving into an entirely new one that could survive.

Let’s do some quick (and no doubt wildly inaccurate but hopefully directionally correct) maths. Based on what Businessweek currently makes off each unique monthly user ($3.64 per year), in order to cover this year’s loss, online traffic would have to more than triple to 15 million monthly uniques. And that is just to break even. And that assumes that the print side of the business maintains its current revenues (which is probably unlikely). And it also assumes there are 15 million people ready and waiting to read what Businessweek has to offer. Fantastic, so the solution is just somehow, someway, drive traffic. EXCEPT that as mentioned above, Businessweek does not even sell all their online ads now. In fact they now sell only 38% of their inventory. So even if traffic rose dramatically, Businessweek would likely only see a very marginal growth in revenue from display advertising.

As Jeff Jarvis recently wrote about newspapers, the problem is simply that they have been guilty of “not running a business. It was not creating a sustainable P&L.” The old cost structures just don’t work in the modern media landscape. Howard Owens, who has run online-only news sites since 1996, explained his revelation:

In a market where the newspaper newsroom might cost $10 million, I knew how to make $1 million online, or even $2 million, but I didn’t know — and still don’t — how to make $10 million. So if I can make a million online, why do I need operate a $10 million newsroom, especially given the greater efficiencies of online publishing?

Businessweek, as a print magazine, is all about the last 5%. That is to say, the finalising, careful editing and re-editing, and re-editing again, the intricate design decisions, and the polishing. It’s the last 5% that keeps 400+ people employed. But the tragedy is, that despite the historical value of this type of approach, it just doesn’t matter that much anymore. Only 16% of Businessweek’s online readers viewed original Businessweek content (the stuff that really costs). The rest looked at slideshows (45%) and other content aggregations. That’s incredible. And it underlines the business case for changing the way major publishers create content.

As Clay Shirky wrote:

“If the old model is broken, what will work in its place?” To which the answer is: Nothing. Nothing will work. There is no general model for newspapers to replace the one the internet just broke.

The new owner of Businessweek (if it ends up being sold), would be wise to:

• Push up the print cover price, to improve profitability.
• Continue moving the print version to provide analysis and in-depth reporting that is separated from the fast-moving cut-and-thrust of news publishing.
• Keep building the digital strategy, supplementing original content with aggregations and reader-created content, pushing out via multiple channels, engaging readers with social elements, and publish for the ‘audience of one’ using personalization methods.
• As the most fundamental point, take a step back and plan the staff requirements from scratch. Everything that can be done by the crowd, the audience, technology, other complementary or even competing services, should be done those ways. And everything that doesn’t add tangibly to the bottom-line, must be ignored in the first instance.

The last one about staff costs will be especially painful for all concerned. But it is the only way. Whilst mainstream media stood back and criticised new publishers such as Techcrunch for not having high enough editorial standards, or not providing enough original thought, it is now the turn of the growing ranks of online-only publishers to say, “One word, two syllables: profitable” (yes that’s an Office reference, not a typo…). Oh and growing like a weed. And not drowning in debt obligations. And hiring new staff.

Persisting blindly with print is like...

To summarise the new reality:

• Print circulation is declining across the board, and in many cases will become unsustainable as a mass distribution channel.
• Advertising revenue in the print medium is declining rapidly, and advertising overall is becoming fragmented across many types of properties, including social networks, blogs, aggregators, and other services.
• Content is expensive, but almost no one will pay for it online.
• Publishers are able to freely reach much wider audiences than ever possible before, including new emerging markets, but the competition for eyeballs is fierce.

So the problem is huge; affecting hundreds of publishing companies, and many thousands of employees at those companies. So what can be done? Well, lots of things. And most of them simple, but its the complexity of managing many new and different models that is causing problems (well… and some crazy head-in-the-sand distractions). Even at this stage, many online business models are classed as “experiments” and are therefore not assigned due weight in the organisational plan. This leaves new businesses (like Craigslist, Monster, Facebook, WordPress, etc etc) the opportunity to leapfrog major publishers in specific areas, leading to the slow death-by-a-thousand-cuts that we now see.

Dan Blank of RBI has a good list of potential revenue streams (and he goes into more depth on the relevant options for B2B publications) which is worth reading. To provide a more general approach, I have summarised the main approaches as a framework, and then highlighted the most interesting and effective approaches I have seen. Some are fundamental shifts from the traditional publishing model that are only suitable in some contexts, and some are new revenue streams that are more universally applicable.

It is important to understand that publishers must move away from trying to monetise content, and focus on monetising their audience. This frees the publisher from a one-dimensional paid-content model, which usually won’t work, and from the relience on CPM advertising, which doesn’t seem to be working right now. New publishing business models will almost always combine many revenue streams, but the following is intended as a framework for exploring the possibilities.

A framework for the new publishing business model

Audience revenue drivers

Advertising – the more targeted and engaging the better. Standard formats don’t work best, but do reduce the cost of sales.

Affiliate/CPA – augmenting content with links to relevant products and services on an commission or cost-per-action basis. With the huge coverage of affiliate networks, and startups like Skimlinks (which turns product links into affiliate links), there are always relevant products to which readers can be referred.

Sponsored Content – clearly marked articles, videos, podcasts, and other content forms that are branded. See this post for an overview of the recent growth in sponsored content.

Content revenue drivers

Custom publishing – creating bespoke content for brands, for distribution as sponsored content or on the brand’s site or network. This post presents the case for custom publishing. A timely example is the recent launch of AOL and Sear’s collaboration on Good News Now.

Syndication – charging for republication of content in other formats and on other channels. With the rise of the link economy, this has become less profitable, but there are lots of opportunities. For example, Sunsilk’s microsite in India pulls in MSN India entertainment feeds.

Paid-content – charging users to access certain premium content. This can also include repurposing existing content into new and valuable formats such as ebooks, print, and mobile apps.

Data revenue drivers

Lead generation – connecting brands with users that an expressed or implied interest in the product offered. For a raw example, see Incisive Media’s IThound, which is a portal of premium content for the sole purpose of linking vendors with warm prospects in the technology and finance sectors.

Renting user database – conducting direct mail and email campaigns to the user database on behalf of brands.

Market research – providing anonymised preference and behaviour data for market research purposes. This is especially relevant if detailed and actionable data is being recorded as part of the publishers standard business process.

Advertising data – selling behavioural and other usage data to advertising networks for better targeting. This is only appropriate for very high-volume sites, but I have heard that a couple of advertising networks are working on easy-to-implement solutions which will allow less-trafficked sites to sell-back their data.

Brand revenue drivers

Products – selling iPhone apps, ebooks, market reports, or even physical products that are relevant to the audience. You can see an overview of iPhone apps run by magazines here, and read about a magazine that sells physical products as part of its new business model here.

Events – running events, meetups, webcasts, unconferences, panels (etc) for the audience. Many B2B publishers have been doing this for years, and given that “real-world” events are holding their value in the digital age, it is worth every publisher looking at this revenue opportunity.

Services – selling related services to the audience. This one really requires publishers to stop thinking like a traditional newspaper or magazine. Le Monde in France allows vetted bloggers to use “yourblog.lemonde.fr” subdomains for around EUR5. A website in Moldova operates in similar way.

Licensing – renting the publishing brand for use on products, events, and services of related companies.

Please let me know any improvements and comments you have on the above. Although I’ve tried to simplify the issues into a framework, I am very aware that every publisher will have to chart its own course, based on the vertical, audience requirements and other factors.

For consumers, display advertising is a necessary evil, ignored or blocked at every opportunity. The most interruptive formats have received considerable backlash from users, and in most cases the less interruptive formats are just background noise on the page.

For publishers, things also do not look so good. CPMs are declining, as available inventory rises. The huge inventories of the major social networks have contributed to an overall depression in achievable CPMs, as supply simply outstrips demand. When unable to sell directly to brands, publishers achieve fractions of a dollar per thousand views, via the large advertising networks that deal in mass-volume remant inventory.

It is certainly not all doom and gloom however. Countless companies are still experimenting with contextual and behavioural targeting technology, which generally demonstrate improved click-through rates. Improved formats, including those that integrate with conversations on social networks (Social Media is leading the space here) are likely to prove more enticing to consumers. However the biggest trend, is that of sponsored content (sometimes called branded content). This ranges from the much-maligned “pay-per-post” approach, which blurs the boundaries of advertising and editorial by paying for coverage without requiring clear disclosure, to the creation of valuable content (especially research, video, and announcements) on behalf of, or by brands, for disclosed insertion into media properties.

From the metrics I have seen, on our sites and others, it really works. If properly disclosed, branded content can be valuable to the reader, effective for the advertiser, and can produce a lot more revenue than standard banners for the publisher. The resistance is that it takes a lot more thought, and often significant technical integration. Here are a few good examples of sponsored content:

Daily Beast

The Daily Beast, a very popular aggregator and curator of news, has started moving its brand messaging from the confines of ad boxes, and mixing it more closely with content. You can see the range of formats on offer here, which range from large rich-media units, to full sponsored stories like this one.

idiomag

On idiomag we run sponsored content, which can range from viral videos, to sponsored artist profiles, to full flash games. This article and video by Ford highlights the street art of Banksy et al around the East End of London, and then links off to an edgy campaign for the new Ford Ka, which includes a 3D mobile app. Formats like this on idiomag regularly achieve click-through rates around 5% (which is pretty impressive given that display advertising usually returns a CTR of around .25%.

Digg

Digg have just started trialling their new advertising format – allowing brands to pay to promote stories on the Digg homepage (more details here). It works a little like Google’s AdWords, with the more popular sponsored stories costing the advertiser less. Although the Digg community is notoriously resistent to advertising, this looks like it will really fly as it finds a good balance between the necessity of brand involvement, and giving the community power.

Gawker

The VP of popular blog network Gawker was recently quoted on saying that in a few years time sponsored posts will bring in “the majority of our advertising revenue.” The network has just started running posts about the HBO vampire series True Blood (see an example here). The issue is that their sales department thought that the topic of vampires would allow them to be “looser with the disclosure and create a little disbelief” – in other words, there is no disclosure that the content is sponsored. This has obviously caused some concern, although interestingly not so much from readers.