A guest post by Greg Satell – Digital Tonto
There’s been a lot of talk lately about how the media business model needs to change. That’s undoubtedly true. Much like any other industry, the business context is changing rapidly and business practices need to reflect that.
However, once you start to explore the issue, another arises: Which business model?
Media is actually a very sophisticated business that’s full of very smart, innovative people. I’ve worked with almost every conceivable kind of media in five different countries and, everywhere I go, I’m always amazed how many ingenious ways media businesses make money.
To give a quick look at the complexity of the media business, let’s look at three simple types of models:
Speculative Media Models: Industries like TV and film have huge up-front costs and very uncertain returns. Whether a producer is betting $100 million on a feature film or a programming executive buys 13 episodes of a new show, it’s basically a crapshoot.
Think for a second about what goes into the decision to produce your favorite TV show. A programming executive is presented with an idea. If he likes it, he has to make a bid. To do that, he needs to know the average rating on his station, then use that to make a prediction about the ratings of that show in particular, along with the future cost per rating point of the target audience.
But that’s not all. He’s not just trying to find hit shows, but programming whose revenues most greatly exceed costs. Programming executives have to crunch numbers like a bond trader and appreciate nuance like a wine connoisseur.
(btw. It should be clear why reality shows have become so popular. They’re cheap and fairly predictable.)
Branded Media Models: Other media businesses are driven by brands. Some cable channels work this way as does radio, but magazines are the best example. Despite what a lot of people say these days, brands like Cosmopolitan, Vogue and Men’s Health are a license to print money.
This is obviously a lot less stressful than TV or film. Magazine brands last for decades and there are rarely big surprises in either costs or revenues. In the US, 85% of copies are sold by subscription, so even newsstand sales aren’t much of a concern.
Nevertheless, while TV executives get to start over every season, magazine publishers must constantly cultivate their brands. As your audience ages, you need to figure out how to stay relevant without alienating loyalists. A declining brand is incredibly difficult to revive.
Commodity Media Models: VC’s and webheads love to talk about “eyeballs” some businesses have made a lot of money thinking the same way. The billboard industry is one of the media world’s most profitable businesses. Even in our high-tech world, people make a lot of money with paper, ink and glue.
However, any business that lacks differentiation will have a hard time being both innovative and profitable. There’s a good reason why Facebook has trouble being profitable even with 500 million users. Branded content sites earn 10-20 times as much as they do per page view.
Of course, the framework I’ve presented above is far too simplistic and certainly incomplete. Most media businesses are a blend of models. For instance, a TV network is really speculative in prime time, branded for News content and a commodity business in off-prime. Most web sites have various tranches of inventory, which must be valued and optimized separately.
So the real question for media isn’t coming up with new business models, but how best to deploy the endless permutations that already exist.
Note from Tim: Greg wrote this post in response to my earlier piece on media business models. His blog, Digital Tonto is one of the best around – I recommend that you check it out if you haven’t already. He has some related posts there, including: