Innovation in Software

Back in February I had a little rant about business models in the news industry. A couple of things have prompted me to come back to this story. I want to be more positive and less ranty this time.

First, let’s get the something out of the way. Before this continues one more stupid, misguided step, I want to address the “linking is theft” attack being supported by some newspapers. Even my brother-in-law is starting to get worried about this, and he rarely shows an interest in the inner politics of online business.

Richard Posner has stipulated that linking to copyright content without compensating the publisher who paid for the content to be created, is the culprit of newspapers failing.

At first read, his argument seems almost sound. Almost.

It roughly breaks down like this:

1. Newspapers have fixed costs (staff salaries) that must be reduced if advertising revenues fall
2. Online news websites (as well as general economic conditions), are taking a slice of advertising revenues, thereby harming newspaper revenues
3. These new-comers are only able to operate because they piggy-back on the newspapers content
4. Ultimately this means newspapers go out of business, and the online operators will rake in the cash as consumers have no other source

The flaws are subtle and hard to spot unless you understand a couple of key points:

1. Online, linking is the only currency that counts
2. Linking is currency. It’s like cash. It’s why we trade it.
3. Linking to somebody is like paying for their advertising
4. Currency, online? It’s called linking

I had never heard of Richard Posner before he posted his article. Many of you won’t have, either. Yet there’s a link to his website up there. If you click on the link – the link I gave him in my blog article, without permission and without charging him a penny for advertising his content – I am sharing my readership (you, my valued friend!), with him. He gains. You may choose to subscribe to his blog. He may offer to sell you a t-shirt with a witty motto on it that you buy. I have given him the first thing you need to succeed in business online: audience.

He may choose to ignore that opportunity, but that’s his right.

Handily, as he has a trackback URL, some of his audience might discover me as well. See how this works for everybody? Incidentally if you’re reading this after clicking a link on Posner’s blog, would you like to buy a t-shirt? No? OK, back to business models of newspapers then…

It’s reckoned that Google through its search and news operations drives between 30%-50% of traffic to online newspapers. Imagine what would happen if it switched that traffic off tomorrow, unable to find a way to pay the fees newspapers demand of it. Imagine if the only way you could enter the news industry online was to pay for advertising. Imagine if not one piece of your archive would be available through traditional search. Imagine if in addition to your staff costs, you now had to pay out a couple of hundred thousand a month in advertising on Google, on billboards, on TV, or wherever you could. How does a sharp increase in costs help a business facing sharp decline in revenues survive?

Well, it doesn’t, does it? Quite.

What is worrying is that according to the Guardian he is well respected on the legal scene, and somebody, somewhere, might think this is a good idea. I have a horrid feeling newspaper owners are amongst the crowd cheering him on. I sincerely hope they fail – not only would it kill off online news, it would kill off news, period. I am constantly left astonished at how bad the thinking behind major institutions is. These guys help form societal opinion on major issues? Time to step aside…

Imagine my pleasure then, when another story came along that suggests, somebody, somewhere has got a clue.

Chris Anderson – editor of Wired magazine – was cited as stating:

With newspapers debating their future, the argument has been pitched as free versus paid-for models, but Anderson argued the real decision was free versus “freemium” – not about whether to charge, but choosing carefully which specialised content people will pay for.

[...]

Instead of working on growing the audience more, he believes publishers will need to grow their offerings. Right now, Wired provides three pricing tiers: free content on the web, about $5 for a magazine and 80 cents for subscribers. In the future, he believes Wired will have many tiers.

Even so though, the linking-is-evil campaign was stalking around at the back of the room:

Guardian editor-in-chief Alan Rusbridger asked about Google’s role in this freemium world; 40% of the traffic to its sites comes from Google.

Anderson said: “I consider that a gift, but papers consider it theft.” Newspapers could exclude Google from indexing their sites or could band together and charge Google to index their content. But it might be a self-defeating move.

“Newspapers need to be part of the conversation” on the net, he said. In the end, Anderson thinks that the democratising effect of the internet is a good thing, which will lead to a richer society, but, he added: “I don’t deny that it will get messy.”

Messy? Sounds good to me. Revolutions that have lasting impact normally involve guillotines and blood. Sorry newspapers, but your middle management strata are starting to look a little like the French royal court sometime around 1789, and we peasant revolutionaries are eyeing up your Bastille.

So, freemium, what does that look like?

Well, to be frank it’s going to be a bit strange for newspapers to get used to. Getting rid of most of their ad sales team is going to hurt, and to those working there I am sorry, but the bubble has burst and it’s time to move on. Advertising might bring in some revenue over time, but it’s likely to be more cost-effective to outsource that sales component to an external agency dedicated to online ad sales.

They then need to start thinking about what content they can get away with charging for. Strong candidates include going deep on content, say something like a standard news story of 400 words is available free, the longer 1,500 word version is available to paying subscribers or on a per-story charge basis. Content people are genuine fans of like crosswords could bring in revenues too.

However, there’s more than just content, there are service limitations to lift too.

For example online software applications normally give a free option away with limitations and then offer to remove those limitations in return for cash. It may be a project management tool where you can – for free – have one project and 2 users, but if you want to move all your projects and team onto it, you stump up the cash.

If the future of online news is to become more interactive and newspaper business models become more like those of applications, the limitations are available to exploit all over the place. For example, plenty of people would pay a small charge just to guarantee they’re getting the latest content: delay it for an hour to free users and see what happens.

Online applications have been playing this game for years. If you’re a newspaper exec, go and take a close look at the adult film industry online: they’ve perfected making money in a world of competitive free content. Follow their lead, and you have a proven model. Yes, it might seem distasteful, but that sector are masters of exploiting the audience into paying money without playing tricks on them or insisting nobody ever links to them.

I’m amazed it’s taken so long for an industry insider to spot it. I thought it was obvious, but didn’t mention it because I assumed everybody else had realised that this was the way to go. Boy, do I feel dumb right now.

Perhaps I’m wrong, I’m biased: it is this freemium model that is the basis of the Kagtum business model

We’ll aggregate, link and provide the ability for you to add/edit stories for free. But there will be areas you want to go into a little deeper or tools we can provide to make your life easier that will be available for a small fee. We think you’ll be compelled to want to hand over some cash for those tools and content because of their quality, and then we become your news source, not our advertisers.

“Ah”, you say, “but Kagtum isn’t live yet, is it? Come on, Paul, when is it launching?”. My lips are sealed. Sooner than you might think, but not as soon as I want. Watch this space.