So I went to a mid-tier business school, and might not be informed enough to offer some opinions on some things I've been reading about recently. But that won't stop me from doing exactly that below and if these thoughts are off, feel free to comment, make fun of me, or never read this blog again.
By the way, if you're wondering why I haven't posted in soooo long (I'm sure you are not), it is because I am lazy. Facebook and Twitter allow me to muse to the masses of people (none) that hang on my every word, and I can do so without having to offer anything remotely resembling a cogent argument since these are usually limited to 140 character bursts.
So enjoy some of these musings of based on things that I have been reading recently instead of doing work:
Marginal Costs of Web Content
There are a lot of libertarian-types who believe that since the marginal cost of producing digital content is essentially zero (that is, once a piece of digital content such as a song, movie or news article is created, it is virtually $0.00 to produce another copy of it), that such content should be free. Free is the new business model! But this does not reflect total costs, which this VC points out……charging for content shouldn’t be considered ludicrous only because of this economic phenomenon.
Take Comcast for example. They have already invested millions (billions?) to lay all of their fiber optic wire….its marginal cost to add another subscriber is virtually zero (they do incur costs for the installation – but they pass on that cost to you). But yet they still find a way to gouge around $150/month from subscribers for their “Triple Play” offering. People need to get over this whole “marginal cost = 0 then price should = 0” faulty logic chain.
The real impediments to monetization of digital content are bundling, scarcity and piracy. The first two I'll address later. The third, piracy, is pretty much uncontrollable without direly affecting the buyer’s experience (through DRM or subscription services, such as Rhapsody). The ease of piracy means content producers (particularly music content) have to focus on other places to make money. In the same way that refrigerators made it impossible for the market to charge for ice except in only niche circumstances (yes, there once was a burgeoning ice manufacturing industry in this country), piracy enabled by digital technology and the internet have made it impossible for the market to charge for music except in niche circumstances/segments.
Fixed Cost Structure versus Variable Cost Structure
This insightful (please note sarcasm) analysis by a blogger appropriately titled “Reflections of a Newsosaur” shows basic misunderstanding of this insightful, investigating, probing journalist on the concept of fixed versus variable costs. Though the underlying report was originally mis-published (no this is not a word but I choose to use it anyway so suck it), this individual can’t believe (understand?) how the newspaper industry could have a 100% decline in revenue but still have a 12% operating margin – and that maybe the industry isn’t so bad off after all (these statistics were originally misreported – however, the blogger’s misunderstanding of these statistics is what I’m addressing).
Newspapers have a lot of fixed assets – printing presses, delivery trucks, etc. The variable costs to operate these are not trivial…but it’s not like launching a space shuttle. If a newspaper isn’t heavily leveraged and burdened with outrageous debt/interest payments (see Tribune Company), the variable costs to operate a newspaper could still be modest enough to possibly maintain an operating margin “double that of Wal-Mart’s” even in the face of declining advertising revenues (Note that this guy is so sharp that he is amazed that an entity is printing money if its margins are 2x that of a discount retailer which competes on price and therefore has razor-thin margins.) The on-going costs to operate a newspaper – basically staff salary – for some papers may still be offset by its ad revenue. There is actually a paper in NJ that refuses to do any digital distribution and only offers a print edition – and is still doing OK. This primarily fixed cost structure is also exactly why the old-school copper landline phone business is minting free cash flow for Qwest, Verizon, etc.
The point however isn’t that newspapers should avoid digital and do only print. The point is that high fixed cost-based businesses, even if they have dying technology, should still continue to milk this until the business just dies. You realize that AOL’s dial-up service is still around? Yes, it is! It’s a high fixed cost business with low cost to operate. Mints money. UPDATED 12 AUGUST 2009: NY Times may even consider keeping the Boston Globe due to its (relatively) low cost to operated and cash flow it generates, even though it continues to decline.
As I’ll continue in the next post, the fixed costs/variable costs issue puts internet online web streamers/radio stations such as Pandora, Last.fm, Imeem, Spotify, etc., in quite a bind. As web pure-plays, they don’t have to invest in the broadcast infrastructure that terrestrial radio stations do. However, their costs are almost exclusively variable. The more listeners they acquire, the more bandwidth and royalty costs they incur. Contrast this against terrestrial radio, where infinite listeners can tap into the over-the-air broadcast without any marginal costs to the station.
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