As if current economic conditions weren’t dire enough, several forces conspire to push the media sector’s financial performance further downward. These factors are an obsession with market share, price wars, and first movers’ ability to set the tone, often for the worse.

Take the iPhone application market as an example. At first, publishers were elated: at last, a content distribution platform with an embedded transaction system. They saw it as the first step to make customers pay for content. Then, another idea took over: market share. Like “eyeballs”, the old Internet Bubble de rigueur metric, market share is today’s mirage: once you get it, profit is (almost) sure to follow. Never mind there are zillions of companies that have once and for all severed the connection between market share and profit (Apple for computers, BMW in the auto industry, Nucor in steel production, name but a few).

Unfortunately, the first one who shoots for market share sets the standard, sometimes with surprising twists and turns. Take the Wall Street Journal: first-rate web site, highly successful business-wise with one million paid subscriptions (about $100/yr). When it came to the iPhone opportunity, guess what: they went for a free application loaded with pathetic ads — apparently locked on the saturation mode, the same banner kept showing endlessly. Just a few weeks ago, seeing a steep drop in profits, the WSJ.com reversed itself and restricted access to its app.

The same happened in France with Le Monde: the paper launched a free iPhone app even though some parts of its website are paid for. As a result, no one in the French market is considering a paid application. For good measure, we’ll recall Le Monde’s long history of setting costly standards for the industry. Ten years ago, when the socialist government imposed the work time reduction from 39 hrs to 35 hrs per week, Le Monde granted its employees a generous application of the law. The paper was similarly munificent when it negotiated copyrights for internet reuse of editorial production. Both first moves turned out be to costly to all publishers who had no choice but to align themselves to “le journal de référence” (not a reference in terms of business performance with years of continuous losses). As for now,  it doesn’t seem Le Monde has a plan to make a richer paid-for version of its iPhone app — even if the quality of the paper and of its web site could easily justify it.

Even if the media industry calls it a “game changer”, it appears the iPhone will be slow to strengthen bottom lines. Look at the chart below produced by the consulting firm Medialets :

As you notice, the news category is the second largest for free apps (73% of the total), the n°1 being the social networks (94% free, understandable considering the younger demographics). As a comparison, only 12% of games are free; two reasons for this : a)  you can’t put  advertising on a game and b) the gamers are used to pay.

How wrong are online newspapers not to charge for their iPhone App? Quite wrong actually.  For several reasons.

First, there is not that much price elasticity in the mobile phone industry. As this graph taken from a study made by Pinch Media shows…

…. a $0.99 app is not downloaded substantially more than a $4.99. Says Pinch Media: “We suspect that the relatively strong performance of $4.99 applications are a reflection of their quality, and a sign that the App Store will support higher prices for an engaging experience”. And we can safely say that watching a major newspapers iPhone’s app is undoubtedly and engaging experience.

Second, and this is also about engagement, still according to the Pinch Media survey (the six slides presentation is here), paid apps tend to be used more than free ones by a significant margin:

There are two underlying messages, here.

1/  News organizations should hang on to their “value proposition”. The free model has its virtues, as we explained in a previous issue (see Inhale, it’s Free), but in the case of a particularly engaging content or service, paid-for can be justified.

2/  Act together. The battle to convert some of the free digital users to paid ones will be won or lost, depending on key players joining forces or not. Weirdly enough, due to their difficult financial situation, the US newspaper industry appears to show a readier disposition to a coordinated move than, say, French papers which are essentially good at collaborating to beg for subsidies.

That leads us to the price wars issue. As a whole, the media industry is prone to such practices, especially in the turbulent digital transition. Take the American book industry: in the United States, the fight between Wal-Mart and Amazon is perfect example of MAD-ness, as in Mutually Assured Destruction. To sum up, Wal-Mart (n°1 in the retail word : $400bn in revenue, 2.1m mostly low-paid employees) wants take the lead in the e-commerce business. To achieve that goal, it needs to take on Amazon, n°1 e-retailer in the US. Hence their choice of weapon: cultural goods associated to the Amazon brand. Currently, the two giants are tied in a damaging price war on books — they flog bestsellers at about 70% discount of the suggested list price price — and DVDs as well. Needless to say, they lose money on each sale. The discount is so huge that the three warring retailers (Target has joined the fray) are rationing books to prevent secondary resales.  The American Booksellers Association has asked the Department of Justice to investigate the book war.

How to get out of this vicious spiral? Regulation is but one solution. The book industry’s health and vigor seem quite related to the degree of regulation. In Germany, where discounts are verboten, there are 2.25 times more bookstores and 31% more new titles per 1000 inhabitants than in the US. And, when we compare the revenue generated by each new title in Germany and in the US, the German book market brings slightly more money (+12%) in absolute terms, but four times more when you factor in respective population sizes.

What regulation can’t do must be achieved by collective action. In some countries, the mobile phone industry has been quite clever in “cartelizing” itself in order to avoid a lethal price war. This said, the price fixing often happens at the consumer’s expense: in France, in 2005, the three carriers (Orange, SFR, Bouygues) were fined €534m. (Today, they’re back to the same business tricks, don’t worry.)

The media sector suffers from its fragmentation. Still, many business components could be improved with coordination. Besides sharing logistics and, to some extent, technology (see our story about “coopetition” The End of Walled Gardens), the downward spiral of advertising prices could be checked using concerted strategies, ranging from closing down the disposal of long tail of digital inventories to price dumpers, or simply saying “no” to excessive discounts imposed by media buying agencies. In the context of prices that are about 20% to 30% below last year’s level, thinking in those terms is a matter of survival.

frederic.filloux@mondaynote.com

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