December 3rd, 2006

Content Businesses Don’t Scale Anymore

by

Can anyone think of a content business — meaning a company that produces original content — that has scaled dramatically in recent years? I can’t. Look at the businesses that have scaled — Google, MySpace, YouTube — all platforms for content, but not producers of content. Compare those to original content businesses like Weblogs, Inc., Gawker, TechCrunch, Paid Content — they are successful at their scale, but that scale is still tiny compared to the scale of the aggregation businesses. Even portals like AOL and Yahoo are much more aggregators of content than original producers of content.

Last spring I wrote about the Long Tail of Revenue 2.0, observing that the most of the revenue goes to aggregators in the head, and the rest is spread very thinly across an ever growing and ever thinning tail of content creators. Tim O’Reilly has posted a version of this obeservation in The Economics of Disaggregation:

…long tail businesses disproportionately benefit the aggregator. While they create new opportunities for content providers “down the tail” who might not otherwise have been noticed, they create even greater collective benefits for the Amazon, the Google, the Netflix, who hosts the entire collection, the dog who wags the tail.

William Bulkeley put this phenomenon in a larger context in a WSJ article title, “The Internet Allows Consumers to Trim Wasteful Purchases“:

Marketing 101 says success comes from selling things people want. But advanced marketing calls for companies to leverage the relationship to get the buyer to pony up for other products — or at least for extra product. When customers find a way to avoid buying the excess baggage, they change quickly.

Take the film business. Eastman Kodak and Fuji Photo Film had a highly profitable duopoly for 20 years before digital cameras came along. They never dreamed customers would quickly abandon film and prints. But customers are happy to pay for new digital cameras because the cameras let them pick the good pictures without having to pay to print out a roll of mostly mediocre shots. Now film sales are dropping 20% or more a year and Kodak has reported losses for eight consecutive quarters while closing plants around the world and laying off thousands of people.

Jack Shafer in Slate narrows the lens on the newspaper industry:

Bulkeley could have easily applied the wisdom of his lesson more broadly to newspapers. It’s not that the complete gestalt of local, state, national, and international news plus sports, comics, classified, opinion, and hints on fashion, home, entertainment, and food isn’t still useful. It is. But given a choice, and the economic means to make a choice, many buyers prefer to make an unbundled purchase. Unbundling the news they want from the news they don’t want is what the Web allows readers to do now.

The result of unbundling, disaggregation, the loss of pipe control (to use Andy Kessler’s construct) — i.e. the inability to force people to consume content they don’t want — is that content businesses don’t scale anymore. That doesn’t mean creating content isn’t profitable — independent publishers like Mike Arrington and Rafat Ali can have nice little businesses — but the same phenomenon that allowed them to become business at all will probably prevent them from becoming large businesses. I’ve heard Mike Arrington say he wants TechCrunch to be as big as CNET — the problem is that CNET’s audience is not only being chipped away by TechCrunch but also by hundreds of other independent technology publishers, which limit the growth of TechCrunch as much as they shrink the reach of CNET.

Robert Young posits the “fat belly” as a missing link in long tail economics:

The recognition of the existence of the Fat Belly is critical for many reasons, but allow me boil it all down to this overarching statement: Any economist or political scientist will agree that the health of any democratic society that’s fueled by free market capitalism is measured by the robustness of its middle class. A large and vibrant middle class demonstrates a healthy redistribution of wealth within a nation and its economy, ultimately serving as a catalyst for the power of one vote and equality amongst its peers/citizens.

The comparison to the middle class is exactly right — content businesses will have a share of the welath, but they will never scale to be “wealthy” like the aggregators.

So does that mean that content creation will forever be a small business? Likely, yes, unless you can aggregate your way up to scale — this is what Weblogs Inc attempted, realizing that none of its blogs would ever be a big business unto itself — aggregation also enables an internal network effect that gooses the scale. But even Weblogs is still dwarfed by the aggregator businesses, even after it was acquired by one (AOL).

The democratization of the content businesses, like any other democratization, requires a flattening of the business — a lot more people can play, but the opportunity is limited by each successful entrant. There’s still a finite amount of attention for content. And let’s not forget that much of the new content is being produced by people who have no interest in being in the content business — they just want attention in some form. But all those MySpace pages and silly YouTube videos take dollars off the table — except for MySpace and YouTube.

The real wealth generation opportunity for businesses like Weblogs, TechCrunch, and Paid Content is the prospect of being acquired by an aggregator — but I think we’ll see the continued growth of a new breed of “mom and pop” content business, content (pun intended) to make an independent albeit middle class living.

UPDATE

Some additional thoughts occurred to me on the treadmill:

Many of the aggregator businesses, like YouTube and MySpace, are better described as platform businesses, i.e. they provide a platform for content creators and distributors, which makes them de facto aggregators. Also, new platforms like Brightcove are likely to support lots of small content businesses rather than launch any large scale businesses.

The content creation space is also being crowded by brands, which are increasingly trying to create content as a destination rather than commercial messages as an interruption — and because they can leverage platforms like YouTube, they no longer have to pay content creators to ride along with their content. Every minute we spend with a brand’s content, whose objective is selling the brand, is a minute we don’t spend with content whose objective is selling the content.

Jonathan Miller at Web 2.0, shortly before his abrupt departure from AOL, effectively conceded that the content business is losing scale. John Battelle asked him whether portals like AOL can hold onto their monopoly, or whether they will go the way of cable TV, i.e. infinite fragmentation. Although he gave the dutiful public company answer, that in practice he didn’t see why AOL wouldn’t hang onto its monopoly, his first answer was frank and honest — in principle, there’s no reason why these monopolies shouldn’t unwind.

  • There is a difference between finding a content business that has scaled and saying that content doesn't scale. Foremski's first law of new media states that content is infinitely scalable...

  • Rahul Pathak

    Scott,

    I've enjoyed your blog for a while and thought this was a tremendous, thought-provoking post. I think you make a lot of sense and as an entrepreneur, it definitely makes you think about what you want your startup to be when it grows up.

    Thanks for posting.

    Rahul

  • Great post, Scott. But I actually think today's independent publishers have a better shot at scale than traditional media start-ups because, unlike media start-ups of the past, they can outsource more of the publishing work, namely ad sales, ad serving and collection of accounts receivable.

    At the low end of the effective CPM scale, there's Google. I'm at Federated Media, where we're trying offer independent sites with higher effective CPMs. We do this by working with advertisers directly (human sales people) to build integrated programs & to sell each site's unique magic. This gives us access to higher CPM brand-advertising budgets rather than the direct-response / CPC budgets that fund most of the campaigns with Google.

    Traditional print magazines and web publishing companies spend 75-85% of their budget on SG&A, the non-editorial stuff. Mike Arrington, Om Malik, the Boingers and 100 other indie publishers offload those costs to FM, while giving away (to FM) only 40% of the ad revenue. For small & mid-sized publishers, Google takes about 49%. FM's "federation" approach gives us economies of scale that small & mid-sized sites wouldn't have on their own. In other words, today's niche publications can collect the premium ad prices previously only available to major media companies with funds for big sales staffs -- without the same cost structure. Maybe those higher margins will enable them to publish more content, launch new publications, and reach larger audiences. Perhaps there's hope for scale!

  • My immediate reaction is that content never was truly scalable - but there are certainly some news publishing companies in the UK that recycle content across a series of their titles and through new giveaway editions. I guess it depends on your definition of dramatic.

  • Scott – what a great post!

    I work more with reference content in the STM (science, technical and medical) market and the “silver bullet” there is integrating content into the workflow and creating tools, thereby, making content more accessible (for a professional practitioner or researcher). If you look at Thomson, for example, they have been successful on this front and it is the mantra for Elsevier and Wolters Kluwer as well.

    But your point still holds in STM because even with the move towards integration and tools – companies that still want to sell JUST their content will meet with less success than those that are open to all content sources. Consumers want what they want regardless of who published it.

    Aggregation is an important model in STM, but even some aggregators are having a hard time keeping their market share. Aggregators that don’t keep updating their pricing, content "bundling" options, and platforms are learning the hard way that they can’t just “dump” books and journals on the electronic shelf anymore.

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