Media companies across the spectrum are struggling to find a sustainable model for monetizing digital content. As the transition from analogue to digital formats gathers pace, solving this problem lies at the heart of the strategy and potential survival of organisations across the print, video, music, and home entertainment industries.
Businesses have, since the advent of mass media 100 years ago, packaged products that large numbers of customers have consistently been happy to pay for. The entertainment, knowledge, stimulation, escapism and overall experience that media products have delivered has created utility that audiences both rich and poor have been happy to pay the cost of a cup of coffee or in some cases a simple meal.
However in the past 10 years the landscape has changed dramatically. Whilst the core product and value being offered to digital consumers remains essentially the same , willingness to pay for digital formats has dramatically declined in some parts of the industry (e.g music, newspapers), increased in other categories (e.g pay TV), with the jury still out in sectors early on in their digital transition (e.g book publishing & games).
On the surface this is hard to fathom. Digital products should be commanding higher rather than lower prices across the board, given the potential to increase customer utility via the benefits of increased choice, control, and immediacy. After all, if consumers have demonstrated they are prepared to pay materially more for a cup of coffee over the past decade, why shouldn’t they be paying more for products that are an even more important part of their daily diet ?
How can this be explained ? Well a systematic analysis of what content consumers are willing to pay for on digital formats, and what they are not, reveals some consistent themes.
Firstly on the open internet it is currently incredibly hard to get customers to pay for content. However on closed or Walled Garden digital Platforms, particularly those linked to simple ‘on bill’ payment mechanisms (like mobile and pay TV), it is relatively easy.
Walled Gardens (like Kindle, I-Tunes and new players like Microsoft's Zune) promise a consistency of experience (in quality of streaming, speed of download), the support of a trusted aggregator brand, quality customer service, and simplicity both in terms of ease of finding and in paying for content . This experience makes it easy for impulse content purchasing, which is frankly very hard on the open internet. In addition there is growing evidence that consumers will pay for the convenience of mobile access, and the entertainment value of seeing content on the big TV screen that Walled Garden operators can offer (even when the same content is being offered free on the internet).
The open internet cannot currently compete with these benefits. Not only is getting consumers to part with their card details (or to use payment intermediaries like Paypal) a challenge for low value micro transactions , audiences are also in a different mindset on the open internet. So long as there are high quality, free and roughly comparable alternatives a couple of clicks away, most consumers will understandably choose not pay.
This all helps to explain why the vast majority of pay revenues for digital content remains on closed platforms, and this I would contend is likely to continue for some time (or at least until mass adoption of a new micro payments systems like Google’s new ‘One Pass’ , or on-line entertainment retailers like Amazon start to build very large businesses in digital formats).
Secondly many digital products, either by accident or design, do not offer sufficient customer value to command a premium pay price point.
In the newspaper and magazine market, some incumbents have delivered digital products of arguably lower perceived value than their physical equivalents.
Offering consumers the opportunity to cherry pick favourite stories, undermines the value in the bundle of content offered in print. Failing to deliver true portability removes another benefit supporting purchase. Whilst replicating analogue content on-line without delivering the real benefits of digital distribution (such as true personalisation, social & multimedia features, and increased depth and choice), disappoints customers used to enjoying new benefits from going on-line.
Creating compelling digital products is an expensive & highly skilled business (something that has not come easily to incumbent media companies). Not everyone has the stomach for it – particularly when business models are unproven, old media revenues are declining, and legacy cultures are entrenched. However to expect customers to pay without delivering a premium product is misguided.
Thirdly the skill that has been applied to digital packaging has varied enormously in different parts of the media industry. And choosing the right pricing and packaging strategy has a huge impact on the success of digital pay propositions.
The mistakes made in packaging digital content are well documented and include the polar extremes of stymying take up by pricing too aggressively (e.g digital movie downloads priced higher than the cost of a DVD) and giving away content that customers are used to paying for and thus devaluing it forever (e.g the digital editions of some newspapers).
However there is a growing body of smart operators deploying new packaging models which leverage digital’s added value and reflect changing customer behaviours. Whether offering access to content across multiple devices for one guaranteed price (pioneered by Sky and other pay TV platforms), intelligently packaging physical and digital products together (e.g the added value Nook experience available in Barnes and Noble stores ), crafting freemium offers that drive purchase through trial (e.g mobile games offered by publishers like EA), or bundling content with hardware & access (e.g Virgin Media’s bundle of video on demand programming for its pay tv customers, and Vodafone’s bundle of digital music with mobile internet access). Those that experiment with these new models, and build new digital packaging skills to support these efforts, will create the foundations for success.
These insights help to explain why some media companies have prospered whilst others have floundered in transitioning their business to digital, and provide a guide to what digital pay strategies are likely to be successful in the future.
I would recommend that media companies consider the following as they develop their monetisation plans for digital content.
1. Ignore the sirens cry that all digital content must be free – pursuing a strategy that balances advertising with pay revenues hedges risk in a digital world that is dynamic and uncertain.
2. Invest in digital product (and product development talent) to support pay offers & deliver an experience that is not only surprising and delightful but also better quality, more flexible, more personal and social than analogue or physical alternatives (Virgin Media's Tivo box proposition is a nice example).
3. Strengthen relationships with walled garden operators (with a particular emphasis on those reaching large number of customers across multiple platforms) who will to continue to account for the vast majority of pay revenue in the short term.
4. Explore strategic partnerships with ISPs – and other entities with large customer databases, billing relationships, and the potential to package content & access bundles.
5. Use the open internet principally as a free showcase for pay products – ensuring sufficient data is being captured to maximise free to pay conversion rates.
6. Develop packages that enable consumption across multiple devices. And Where appropriate integrate physical and digital products in one offer – to ensure customers are retained during digital transition.
7. Convene cross industry initiatives to deliver new pay propositions (which include a critical mass of popular brands) and aim to reach consensus of what products will remain free.
In summary, I would contend that in the future it should be easier (not harder) to get customers to pay for digital content. Lessons can be learned from the mistakes of the past. So long as media companies apply rigorous thinking & slick execution to their monetisation initiatives, the obstacles to getting consumers to pay for content can be overcome.
The development and marketing of digital media products should be treated no differently from other fast moving consumer goods. If the product has a clear target audience & competitive positioning, delivers benefits that are valued & clearly communicated, & billing is seamless and convenient, then customers will pay.
Google One Pass - Hoping to make micropayments easier on the open internet
Barnes and Noble Nook - offering a value added experience in Barnes and Noble Stores
Virgin Media Tivo box - a nice example of a digital product that reflects changing customer behaviours
Microsoft Zune - One of a number of operators providng that i-tunes isn't the only Walled Garden in town.