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Separation of revenue and value

By April 24, 2007 One Comment

I have written before about how DRM might be more important in TV and film than it is in music (and maybe books). My argument was that musicians have multiple revenue sources, whereas TV and film producers only really have one. Musicians can be relaxed about piracy of their music in the belief that their tunes will then be more widely distributed, which will drive extra concert ticket and merchandise sales, but that option isn’t really open to the TV and film industry.

I had breakfast last week with a friend from GuardianUnlimited, and that got me thinking that these same issues apply to the newspaper industry.

For years newspapers have combined revenues from advertising and newspaper sales to fund their expenses of producing good content and printing papers. As consumers we have accepted that you have to pay more for good content and/or less advertising. There are lower quality free papers and higher quality titles that we happily pay a premium for, as well as a range in between.

But on the web things are different. Not many of us pay for online content, we expect it to be free and to be good quality, and the good news for us as consumers is that we are not disappointed. The bad news is for the content producers who struggle to make decent (or any) profits.

The underlying issue here is that value has become separated from revenue. The value is being created by the content owners, but too much of the revenue is ending up in the hands of other companies – and Google looms large as a major beneficiary. In fact you could argue that Google wouldn’t enjoy such fantastic margins if it wasn’t benefiting from the value created by other people.

Ultimately revenue needs to flow to where the value is created – otherwise people will simply stop creating it. Going back to the music industry – the value creators there can get revenues from merchandise and content, but in other industries the big guys are starting to go after Google to see if they can get what they see as the just rewards for the work they have done. Witness Viacom suing Google for taking unfair profits from it’s video content and French and Belgian newspaper groups making similar allegations.

These things take a while to play out though. The two main reasons I see for that are:

  1. Legal processes take time
  2. In some (probably most) quarters traffic growth is still a higher priority than revenues and until that flips around companies won’t get aggressive with companies like Google that drive people to their sites

There will be an adjustment though, and when it comes it will be painful. And we won’t simply go back to old models – IMHO content bundles like newspaper and TV channels will continue to disappear, and that ultimately means for most stuff we will have to get used to paying for each unit of content as we consume it – via advertising for content that is cheap to produce, or micropayments for the premium pieces.

The beauty of the web, of course, is that distribution is virtually free. That makes it feasible for anyone with an alternative revenue stream to give their content away for free as a kind of loss leader strategy. This is what is emerging in some parts of the music industry, and in a way is why I can write this blog. This is a significant qualification to the micropayments argument I made in the last paragraph and is why I am saying it will only apply to “most stuff”.

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