Sunday, July 25, 2010

The supply/demand curve for paid news

A few weeks ago I discussed how long-form journalism was a poor fit for mobile devices. In addition, long-form content such as features is increasingly tough to use on the Web, where information/entertainment distractions are never farther than a hyperlink, bookmark, or tweet away.

But Frédéric Filloux's excellent Monday Note brings up another factor that's going against lengthy essays, features, and videos: A shift in consumption habits among young Web users (Digital Natives) who have grown up with the technologies. He writes:
"... The fastest is the best. Forget about long form journalism. Quick TV newscasts, free commuter newspapers, bursts of news bulletins on the radio are more than enough. The group will do the rest: it will organize the importance, the hierarchy of news elements, it will set the news cycle’s pace."
The "group" is the trusted social circle which serves as an echo chamber and information channel. Trust is vitally important to this group, Filloux writes, and most corporate media doesn't have it.

The other essay that is worth a quick scan is Jeff Jarvis' analysis (via Mediagazer) of the recent Conde Nast corporate shakeup and the company's admission that advertising cannot be counted on to support operations (I wonder how much they paid McKinsey for that piece of advice?). As for Conde Nast's plan to recoup revenue through high-priced online subscriptions, Jarvis' incredulous reaction nails it:
The problem is going to be that there is only *more* competition in content and so trying to suddenly charge *more* flies in the face of basic economics. The absurdity of the strategy struck me yesterday as Amazon tried to sell me a subscription to Time for 28.8 cents an issue while Time is trying to sell its iPad issues for $4.99 and I see no reason to buy either. In what world do these economics make sense?
I agree with Jarvis (I had a similar reaction to Conde Nast's "How about a buck a click" quote when I saw it), but wouldn't it be interesting to do a back-of-the-napkin supply/demand curve to model what's going on with online information and plans to charge for it? I'm pretty sure the demand curve would show a small number of people who don't care about price and will gladly register for paid news or download an expensive mobile news app; a large (but not huge) population who won't pay much and are extremely sensitive to price increases; and then the majority of the population who won't pay anything. If plotted, it would look something like this:
"P" represents price on the Y axis, and "Q" represents quantity on the X axis. Both lines continue off the page. In my microeconomics class, demand levels were depicted as being linear or slightly concave. But for online news, I believe demand at high price levels is very low, and rapidly drops as the price increases (iPad news app developers, take note!). It flattens out as prices approach zero, but that shouldn't be much consolation for providers. The price level is too low to support operations unless there is a massive audience, but Q hits $0 much too soon -- there's simply too much free news out there, plus many other free or low-cost alternatives (see "Quality vs. junk journalism"? Or news vs. other information/distractions?), meaning that the Q value for paid news will always be low.

What's missing from this chart? The supply curve. Typically, it runs perpendicular to demand, starting near the origin of the graph (where x and y intersect) and moving up and to the right in a more or less straight fashion, reflecting the fact that as prices increase, more Q (i.e., more supply) will be made available to sell and consume.

But for paid news, I can't quite figure out how to draw it. Any product in a capitalist economy should follow the basic supply curve pattern described in the previous paragraph. But in the online news industry, publishers are making so much content -- including high-quality content -- available for free. How do you draw that? (Economists or readers with a better understanding of how the theory works in situations like this, please feel free to weigh in below, in the comments section)

In some cases, publishers are offering content for free on some platforms, while attempting to charge for it on others. Conde Nast's Wired is a perfect example: Conde Nast has $10-$12 annual subscriptions, which are sometimes issued for free (I pay nothing now -- is my zip code that good?), or you can pay the $5 newsstand price. Wired's paid and verified circulation is 754,574, according to the Conde Nast media kit. Or, you can read most content online for free. Quantcast reports more than two million people do that every month. Then you have the Wired iPad app, which launched with lots of fanfare earlier this year at $5 an issue, but was almost immediately discounted the following month. The total number of June iPad issues sold the first month? 95,000. If you plot the online/digital users on the demand curve, it would look something like this:
Theoretically, supply and prices should dial down to meet demand and reach a state of equilibrium. I don't see how this can happen for paid online news, as long as there is an open system of information exchange that allows for a constantly growing mass of content of all types, most of it free. There may be some exceptions in niche topics such as finance. But news, commentary, and analysis in most other fields is rapidly becoming a commodity in a sea of information alternatives. Add to that factors such as the consumption patterns cited by Filloux, and a never-ending stream of new platforms and information products, which fragments the audience even further. In such an environment, the prospects for getting people to pay for news are very limited.

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