What Happens When the Ad Money Doesn’t Go Round?

[Posted by Mark Mulligan]

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The web has always been about free: most Internet users will not pay for content, it’s that simple.  So it’s no coincidence that content owners of all shapes and sizes have been ramping up their free strategies online over the last 18 months or so. Most free initiatives have been pretty successful to date, ranging from the BBC’s iPlayer, through Last.FM to YouTube.  But ad supported free content strategies are facing their sternest test yet.

Consumers are consuming more content in greater numbers than ever before but the ability effectively monetize the growth in audience size and engagement has not been keeping pace.  Central to this is the fact that many online content destinations have to pay a license fee every time an individual piece of content is consumed.    So content owners see all of the growing consumer usage and expect to see appropriate increased compensation, but the sites themselves are often not seeing their ad revenues go up accordingly.  So you end up the situation where some ad supported content destinations are beginning to face up to the reality of not being able to afford to grow their audiences.  

The problem is compounded by the softening effect the economic downturn is having on the online ad market.

Content providers are caught between rock and a hard place.  If they don’t grow audiences and engagement they weaken their chances of growing ad revenue.  But if they do grow their audiences they threaten their financial viability.   

We’re already beginning to see the manifestation of these dynamics in the marketplace:

·        Last.FM recently announced it plans to start charging listeners for access in markets where it doesn’t have strong ad businesses. 

·        Original ad supported music start up Spiral Frog recently closed down its service.

        ·        YouTube is currently in dispute with  UK rights body PRS for Music over terms for streaming    
            music video.

·        Also in a related trend, some TV broadcasters are pulling content from online sites, typically to protect TV ad revenues, which are implicitly weakened by the audience fragmentation that online sites facilitate.  (see James McQuivey’s fantastic report ‘Preparing For The Coming Online TV Backlash’ for more on this) 

The trend is not about to lessen.  As the economic downturn bites more consumers will seek out free content, thus driving up online consumption, but at the same time weakening ad spend will limit the ability of content providers to monetize effectively. 

It’s beginning to look like the current economic climate is creating a unique period for the ad supported content sector that will require a similarly unique framework of understanding between content owners and providers.  It’s in the interest of both parties that workable solutions are reached.  The alternative is ceding more ground to the illegal sector.

Forrester is soon to publish a report on this topic.  Watch this space for more detail.

Comments

[Vijay Rayapati]

Freemium business models will no longer work - as sustainability becomes difficult once you outgrow in the userbase so innovation in business/revenue models is what we need now.