Big media stuck whimpering in e-land

By David Walker (Google profile)

Back around 1998 - when the e-boom was booming and the Internet was still the Medium of the Future rather than the Medium of the Present - the subject of the "old" commercial media broke people sharply into two camps.

In the first camp stood people focused on the existing assets of the "old media" - existing corporate structures, knowledge of their field, brand names all the way from Australia's Financial Review to TV Guide magazine to the US NBC television network, user and advertiser loyalty, and gushing torrents of content, from news stories to lifestyle videos. Belief in the power of such pre-Internet assets is now routinely called the "bricks and mortar" view.

In the second camp stood those who believed the Internet was a new medium, where the old rules didn't apply and the old companies' much-vaunted assets would be useless against the new ways of doing business. You might call this the "younger and faster" view".

Move forward to mid-2001. The results are in from the first round of Internet commerce expansion -and in many industries, bricks-and-mortar has triumphed over younger-and-faster. Online-only grocery stores are mostly out of business (the US-based Webvan, perhaps the best known, folded last month), while real-world grocers like Coles keep grinding away at online strategies. The online-only Wingspan Bank is being folded into the mainstream activities of US-based Bank One. A recent McKinsey consulting firm study of online business results to June 2000 - called "E-performance II: The good, the bad, and the merely average" - found that 86 per cent of the best performing Internet retailers are offshoots of brick-and-mortar stores.

But in the media industry, the story is the other way around.

When McKinsey studied large ad-supported content sites, they found a business disaster in progress. Compared to other Internet businesses, "content and media sites were doing worse on every measure: their customer acquisition costs, for example, were rising even as their advertising revenues declined. These unfortunate trends produced an average operating margin of minus 217 percent."

Read those numbers again. An average margin of minus 217 per cent means these large content sites spent more than three dollars to make just one dollar of sales.

On these figures, the ad-supported online content business looked awful even in mid-2000; plunging banner ad demand since then has no doubt made things worse. According to McKinsey, even the best-performed content sites delivered operating margins averaging minus 50 percent.

But the best performers were less likely to have sprung from big offline media organisations. According to McKinsey: "Online-only content businesses tended to have a clearer focus on the needs and behavior of online visitors. This approach encourages customer loyalty, which in turn supports higher advertising rates."

The best performers were also more likely to concentrate on narrow niches: "Content sites aimed at special-interest groups ... were the least unprofitable of the content sites, with an average operating margin of minus 51 percent. Their costs were low partly because users supply much of the content, in chat rooms and on message boards. By the same token, general news sites did worst, on average, because their content costs were high in relation to their revenues."

An economist would say that old-media sites suffer from "diseconomies of scope". The broader their coverage and the higher the number of mediums in which they operate, the less their impact on their Internet users, and the smaller thair ability to make an online buck.

McKinsey's study suggests that online content sites "desperately need new income streams from transactions, licensing, or subscriptions".

All of these offline media giants no doubt have a story about how they're making those sorts of online changes, changes which will put them on the path to profitability. But the managers who run those organisations will sometime figure out that stories are for the customers. The shareholders want money.