On Commoditization of Content

This a quote (long) from What Were They Thinking?: Unconventional Wisdom About Management by Jeffrey Pfeffer (2007), on commoditization of content

This raises the question of why one would buy a paper whose quality and uniqueness is declining because of inadequate investment in staff; why not just buy the paper from which the Chronicle gets a lot of its stories and which has invested in its own, unique news gathering and reporting? The point is that the more newspapers cut their quality, the less incentive there is for anyone to subscribe. So subscriptions fall, more cuts are made, and the death spiral continues, if not accelerates. The only thing that can possibly provide competitive advantage in a saturated media marketplace is the quality of the writing and the ideas. An undifferentiated, unoriginal product of low quality is not going to save any company in the newspaper, or for that matter any other, industry.

Prices of undifferentiated, unoriginal, non-unique, low quality content with unlimited supply will hurtle towards its marginal cost. In the case of digital content the marginal cost is $0. Facing commodotization, newspapers should not be lowering their price to $0 but stop producing such undifferentiated content.

The new media experts are right in saying newspapers cannot succeed by erecting pay walls for their online content – but only half right. If you are not adding unique value, you cannot capture value by erecting pay walls.

Careful what you ask for in WTP studies

In a seminal work titled “How the questions shape the answers” published in American Psychologist (1999), Norbert Schwarz describes how responses are influenced by question wordings, format and context. Schwarz writes,

“Self reports a fallible source of data and minor changes in question wording, question format or question context can result in major changes in the obtained results”

This is especially a more pronounced problem when it comes to survey questions that ask customers for their willingness to pay (WTP) for a product. When you directly ask a customer questions like:

  1. will you buy this product at  10?
  2. how much will you pay for product?  a) $4   b) $8   c) $10   d) $10    e)  $12
  3. will you buy this product if this were not offered free any more?

The researcher run the risk of getting answers that are not in any way  a true representation of what the customers will actually do. These kinds of questions assume that customers know how much they value the service and  customers are willing to disclose it. Another flaw in WTP studies is treating customer WTP as a fixed number in the minds of customers while it has been shown to be malleable (Thomas and Menon, Journal of Martket Research, 2006).

I saw a report from Forrester research on US customer WTP for online newpapers.  I admit I have not read the report but only their promotional blog post about it. The report claims 80% are not willing to pay for content From what I read I am not satisfied with study or its methods. The survey question was:

If the Web sites for the newspapers and magazines you read were no longer free, how would to prefer to pay for that content?

  1. Wouldn’t access them if I have to pay
  2. Subscription access to access all online content
  3. Subscription that combined print, web, and mobile device access
  4. Individual payment for each article read

The biggest flaw I find is anchoring – the question clearly reminds that the content has been free. The question  was too generic, asking  about newspapers and magazines you read and not about a specific newspaper or magazine. The respondents could be thinking of all newspapers, even those they read occasionally while answering this question.  There were no questions reminding respondents of value they get or to rank the online news sources by importance.   If the question had been,

If your most favorite newspaper cannot financially support the free online access, would you be willing to pay in one of the following ways?

  1. Subscription access to access all online content
  2. Subscription that combined print, web, and mobile device access
  3. Individual payment for each article read
  4. Wouldn’t access them if I have to pay

… the results would have completely different.

Based on their survey, Forrester  recommends:

  1. Publishers should continue to offer free, ad-supported products to the 80% of consumers who won’t pay for content online; and
  2. Publishers should offer consumers a choice of multichannel subscriptions, single-channel subscriptions, and micropayments for premium product access.

I do not agree. Even if we assume the 80% number is correct, does providing free provide higher profit than charging?  Do newspapers rally want higher reach (because of the Ad revenue)?

If a newspaper publisher really wants to find customer willingness to pay for content they need to do more targeted study of their readers,  use methods like Conjoint analysis to tease out the segments, how much customers in each value the product and focus on methods that help improve customer reference price before charging for content.

The net is the results are unreliable and Forrester’s recommendations are plain wrong.

WSJ Charging For Mobile Version

If you are used to reading complete WSJ articles on your Blackberry of iPhone, the end is nigh. Starting third week of January they are going to charge for mobile access.

A mobile only subscription will cost $2 a week. For those with either a print or WSJ.com subscription, the cost will be $1 a week. People with both print and Web subscriptions will get full mobile access for free.

I think it is a great idea to charge separately for the mobile version. But the pricing is not perfect and needs adjustments to maximize profit. Let us analyze this deal and the prices of rest of their offerings (print, online only and the bundle) to see if there is room for increasing profits.

Print + Online Print Only Online Only Mobile Only
Weekly price $2.69 $2.29 $1.99
Weekly mobile price $0 $1 $1 $2
Total $2.69 $3.29 $2.99 $2

The first observation is for those who are considering Print Only or Online Only subscription and need Mobile version, the most cost effective version is the Print + Online version at $2.69 a week. This indicates pricing inefficiency in their current Print+Online bundle. This is something they should have fixed even before the  introduction of pricing for Mobile version.

Who are the Print Only subscribers? Businesses, libraries, and some individuals who still prefer whatever convenience the print version offers. These segments get little or no utility from Online version and are unlikely to switch to Online Only version because of the higher price of Print only version.  While the 40 cents incremental cost to add online access  makes sense, the base price of the Print Only version leaves more consumer surplus than necessary. The Print only version can be priced higher than its current levels.

Who are the online only subscribers? Mostly individuals, the wired segment. For most of the sub-segments in this category, there is little or no utility by adding Print version. For some, this may even be negative utility. However for those who want the print version added to their online version, the utility they get from it is high. Hence the incremental price to upgrade to the bundle can be more than 70 cents they are charged today.

Who are the Mobile only subscribers? For people on the go with smart phones there is considerable value from the mobile version, more than the current $2 price,  but WSJ is prevented from capturing all the value because of the reference price set by their Online only version. Even though it is cumbersome, people can simply read the journal using the browser on their mobile phone, using their online subscription. So the $2 price for Mobile only version makes sense.

What about the price for adding Mobile version to Print only and Online only subscribers? For Online Only subscribers, the $1 is most likely the right price. I bet WSJ’s customer data showed that most of their Online Only subscribers will simply use the mobile browser instead of paying separately. In other words a very steep demand curve, with demand falling sharply after any price more than $0.  So the high $1 price for adding mobile version delivers more profit for WSJ than a lower price.

But for the Print only subscribers, those who did not even prefer reading the online version the incremental utility from mobile version is low. I believe $1 price for these subscribers is not the profit maximizing price. The price lies somewhere between  a few cents and  40 cents (the incremental price for adding Online version to Print Only subscription).

Why not give away mobile access for free to the Print Only  subscribers? Because this would make the print only subscribers who will never prefer adding mobile version think that they are paying for something they do not use. So the incremental price for adding Mobile version to Print Only subscription has to be more than $0.

The net of this is, it is a great idea to charge for mobile version. But the prices need adjustments to maximize profit. While they are at it they should also fix the pricing for the print only subscription.

Multi Version Pricing – Print and Online Newspaper

I came across the pricing list for print and online versions of The  Newport Daily News through Consumerology blog. The most interesting aspect of their pricing is how they priced the online only version (highest) vs. online plus print combo (lower). Why would they give away the version that includes print newspaper at lower price than online only version? The reasons could be:

  1. Their online Ad revenue may not be significant and advertisers do not think the readers respond to the Ads. Hence they want to compensate for lost revenue opportunities.
  2. There are additional revenue opportunities from print version, for example different types of Ads, inserts etc
  3. More people read the print version, either within households or it is bought by local businesses for their customers. In addition readers may spend more time reading the newspaper. Together these two factors increase the Ad reach and hence the price Newport Daily News can charge their advertisers.

But this pricing is unsustainable due to following reasons:

  1. Since the combo price is lower, those who prefer online version will buy this version and may simply throw away the print version. While the newspaper may claim higher “print impressions” with their advertisers, there is no net increase in reach for the advertisers.
  2. The pricing also goes against customer expectations and assumptions – customers believe online only version should cost lower than print version because of cost difference. To a marketer cost has nothing to do with pricing which is purely based on value, but customer perceptions set a low reference price for online only version. This low reference price prevents the marketer from capturing all the value.

The Newport Daily News may now be employing behavioral economics to nudge customers to pick the print only or the print + online combo over the online only version, but sooner or later they are going to find resistance or backlash to their high priced online only version.

Is Print Medium Dead?

Every other form of media has written the obituary for the print medium. Last week Brian Williams of NBC was on Jay Leno and said

“newspaper is so dated, before going to bed I know what is going to be in the paper next morning”

Do people buy newspapers for getting the latest information? No, I claim those who buy newspapers buy them for convenience as I explained in my post on books.  Newspaper are not dead. As long as there is a segment that prefers consuming the content that is printed on a paper rather than through any other medium there will be newspapers.

But the key point is to realize that newspapers are not anymore a product for the entire market, the customer mix is changing and shrinking. The price conscious customers have already moved on to cheaper alternatives. Anyone who buys printed newspaper now, values it a lot more than those who quit buying and hence should pay more to get it. So instead of  continuing to price the newspaper for the mass-market the publishers should price them at a premium and serve just the small segment with higher willingness to pay.

Charging higher for the print newspaper has another favorable side-effect, it helps to set a higher reference price for the online version – when the publishers decide to start charging for it.

It does not matter to customers what your costs are

The arguments on paying for online newspapers focus on the cost of running the news operation including the news desks reporters, editors, web site etc. Proponents of pay to read say readers must start paying because of these costs. On the other hand those who argue that information must be free focus also on the costs, the marginal cost, and a make the case that it costs you nothing to serve one more reader and hence it must be free.

The cost arguments are irrelevant. One can charge for a product only because of the value it delivers to the customers and not because it costs the marketer to produce. Similarly, free argument based on marginal cost does not hold either. If the readers can get the same content elsewhere for free, the content becomes commodity and its price will spiral down to $0.00. It does not matter that there are fixed costs to producing and distributing commodity content. Content can only be charged if it has differentiated value.

There is an Ad in today’s WSJ on their news sports coverage. It says

“When we report on sports, we focus less on what you’ve already seen happen and more on what will happen next”

That is differentiation.