June 16, 2009

The Price of Paying

By Michael Grebb

It seems that a lot of people plan to start charging for Internet content that was once free. Newspapers are looking into micropayments of pennies to read particular articles. Hulu is contemplating charging fees for some of its highest value video content. And our old pal Barry Diller told attendees of Digital Hollywood’s “Advertising 2.0” conference last week that, well… advertising ain’t gonna carry all the freight: At some point, content owners will start charging for just about everything, and the public will—perhaps reluctantly at first—pay for it if they want to watch, read or listen to their favorite stuff. Meanwhile, cable operators and programmers are trying to figure out authentication, which promises to at least limit much online video content to only those who pay for cable. Seems like the online world is going to get a whole lot less free in the coming months and years.

It’s interesting to contemplate how all of this has evolved. Diller commented that the word “monetize” didn’t really exist before the Internet explosion of the late 90s. Why? Because in the prehistoric days before the Web, no one in their right mind would have thought about putting stuff anywhere for free with no plan on how to pay for it. But this was the “new paradigm.” Everything was going to be free. The digerati told the record industry not to worry about Napster. Just look at all those new eyeballs (or earballs in this case) checking out and sharing your artists! Surely, you’ll figure out a way to monetize it. As it turns out, everyone gave the record industry way too much credit. They weren’t prepared, and they suffered for it. We can debate whether the record companies really needed to sue everyone to get their way or whether they could have moved more quickly to nurture early subscription models like eMusic or worked harder to find innovative new business models. But that’s neither here nor there. iTunes’ pay-per-download model (essentially the digital version of selling LPs and 45s) has prevailed, and guess what? The record companies make a lot less selling digital downloads than they used to make selling CDs. And they are still the ones people use as an example of how NOT to handle a quick and severe change in consumer habits.

It’s fair for Diller and others wonder whether the cable content biz has been too quick to do the opposite of what the record companies did—all in a well-intentioned attempt not to become “dinosaurs” or watch as a new payment scheme results in a whole lot less money coming in the door. Look at all the online studios—some backed by media giants—that have simply shriveled up and died because no one could figure out a workable revenue model. This is business. It’s Darwinistic. And free content that doesn’t pay its own way tends to dry up eventually.

So it’s quite interesting that now—after people are so trained to access high-quality video content through Hulu and even certain YouTube channels, not to mention myriad individual cable network Websites—that the industry would pull back and say, “Gee, let’s start charging for this stuff.” It’s understandable. But everyone should understand the costs. The price could very well be fewer people watching that content, which in turn could help kill the prospects of getting decent advertising CPMs for that content over the longer term. The truth is that masses of eyeballs aren’t going to pay $1 to watch an episode of “Battlestar Galactica” even though it’s one of the best sci-fi dramas ever to grace the TV screen. They can rent past seasons through subscription services like Netflix or simply wait for it to show up on their free VOD menus through a cable operator. Or they could use any one of the underground file sharing sites to grab episodes if they’re willing to risk catching computer viruses or perhaps prosecution by copyright owners.

Cable’s authentication idea has a lot of advantages over an alternative world in which these shows are available mostly on a pay-per-view basis. That’s because it mimics a free model without actually being free: People who are already paying for cable go online and get anything they want without having to hit that “Buy” button or see some separate line item on a credit card statement. Meanwhile, programmers wouldn’t have to worry about cannibalizing the all-important dual revenue stream model that has been a lifesaver in this terrible advertising recession (Just ask the broadcasters, who wish they had even half the subscription fee revenue of a mid-size cable network).

One other thing: This recession won’t last forever even if it feels like it might. Advertising revenues will start to grow again and might even surpass anyone’s wildest predictions in the future as telescoping, hypertargeting and other interactivity starts to proliferate through computers, cable set-tops, gaming devices and other third-party devices (even TVs themselves). Content owners are likely to make a killing out there at some point. And cable operators are likely to implement some kind of authentication system that gets people to pay for content while feeling like they’re not really paying for it. That may, in fact, be the secret sauce that drives monetization in the future and ensures that the cable industry doesn’t suffer the music industry’s unfortunate fate. Yes, cable will need to do a better job explaining the benefits to consumers to avoid a blog-fueled backlash. It may or may not be successful in that regard. But it does seem like the dye is starting to set on this one: Like it or not, people are probably going to have to start paying for this stuff.

(SHAMELESS PLUG ALERT: CableFAX will host a Webinar on authentication on June 17. Check here for more info).