McKinsey Quarterly published an article in 2011 entitled, “The Web’s €100 Billion Surplus,” which talks about the value that the media ecosystem creates for publishers. Naturally, this topic leads to the discussion of the nature of media economics on the web that allows for the rise of monetization techniques.
The article explores how online companies can offer their services for free because advertisers help online companies shoulder the costs of providing the service. Or, the online company itself may strategically bet on the value of the audience it accumulates on its website, thus removing price as a barrier to site visits. On top of that, the ability to distribute content for a low price, driven by what is commonly called, “economies of scale,” enables online companies to build products and services without incurring such great operational costs. Compare this to the offline world which has to deal with increasing variable costs (and possibly increasing fixed costs, too) the more people it serves.
Another way for online companies to generate revenue is to charge consumers for services that is more costly for online companies to provide. This is what Forrester Research Analyst Sarah Rottman Epps calls, “the freemium” model, where certain services are free, while others require payment. For example, The New York Times allow you to read up to 10 articles before asking you to pay for the next articles you read. The Wall Street Journal uses a different tactic in that it gives you certain articles to read for free, while longer or more in-depth articles require a payment.
Some online companies employ both ways to create value, which is to generate revenue through advertisers and customers at the same time. Many online newspapers, magazines and portals use both methods. The McKinsey article mentioned above refers to this as “multisided markets.”
From the perspective of the consumer, the “value” that online services bring to him or her should be greater or equal the price it warrants. Even if the service is free, it should be compelling enough for the consumer to spend the time to use service. For example, the articles in online editions of magazines such as The Atlantic or Vogue should be interesting enough for the consumers that he or she would want to visit the site, and keep visiting after. These online magazines provide even more content in the form of videos, audio, pictures (and even sometimes games), to attract the consumer. Online companies should note that convenience is a value that many consumers are looking for, so the more convenient and comfortable the consumer experience is, the better.
The challenges tied to these monetization techniques center around the consumer. Some consumers are intolerant of advertising, and would rather shell out money to avoid the disruption to their experience. Others don’t mind the advertising if they are able to get content for free. Another key issue is around data privacy. Every move one makes on a digital device can be tracked in one way or another. The question is: who is collecting the data and how are they using it? How do we balance opportunities for advertisers and the privacy of consumers? This is currently the challenge faced by the entities in the digital media ecosystem, among them: online companies, advertisers and their agencies, and consumers themselves.