The rise in online media as well as the decline in advertising revenues over the last decade has changed the face of the media industry. Despite the slow uptake of online advertising revenues, the future of the media industry continues to look uncertain.
Publishers around the world are desperately trying to monetise content online, with some resorting to setting paywalls to charge readers for access to online content. Typically, these paywalls either limit the number of articles visitors read or prohibit them from reading any articles unless they purchase a subscription. However, for many online content sites the introduction of a paywall has decreased the number of visitors, thus further damaging advertising revenues. Just recently, we saw the South China Morning Post revoke its paywall in favour of free content.
There is evidence that the demand for news varies hugely throughout the year – it is highly cyclical. For example, in business, the cycles are quarterly as they relate to earnings reports; in US politics the cycles are four-yearly to coincide with the elections; in sport, demand is unequivocally higher when it is ‘in season.’
In our research, we find that the number of unique visitors to relevant websites more than doubles when a sport is in season. Conversely, when the sport is not in season the number of unique visitors to a website drops by about 50%.
Classic economic theory suggests that increasing prices during periods of high demand is the most profitable approach. In reality, however, this isn’t necessarily the case.
Customers typically sign long-term contracts when they pay for online content, such as an annual subscription fee, prior to which they may be given the option of a free trial. Alternatively, a content provider can offer a fixed number of articles per month for free, before they start charging. This is, for example, what the Telegraph in the UK does. While such policies are advantageous, the inflexibility to respond to demand shocks in the organic news cycle can be a setback for a firm’s bottom line.
When it comes to charging customers for online content, research I have worked on with Kanishka Misra, assistant professor of marketing at University of Michigan’s Ross School of Business, suggests that it may be optimal for providers to offer more free content during periods of high demand, rather than increasing the amount of paid content at that time.
Providing more free content when there is more demand can help balance the trade-off between subscription and advertising revenues. It allows a firm to gain subscription revenue by attracting high value consumers off season without alienating low type consumers during the season. ESPN is an example of an outlet that follows this pattern. Our research revealed that the number of paid articles available on the site varies across days and sports. When demand is high, such as on days when games are played, ESPN reduces the share of paid content available on the site.
This ‘counter-cyclical’ revenue model relies on the fact that when a sport is in season there is a large share of consumers willing to visit, though still unwilling to pay for access to content. This presents a window of opportunity for businesses to generate more advertising revenue, rather than subscription revenue, thanks to high viewership.
Responding to an increase in demand by offering more free content can be a profit-maximising approach for online content providers to follow. Perhaps most significant, a company does not need to be able to predict demand in the long run. Digital technology means that content providers can flexibly assign any new piece of content to be free or paid as they observe real-time changes in demand.
Content providers need to broadly identify their own cyclical demand shocks so that they can adjust their share of free and paid content. Those that offer long-term contracts with their customers, such as an annual subscription, can benefit by flexibly responding to changes in demand without actually varying their prices.
The writer is Anja Lambrecht, assistant professor of marketing at London Business School.