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Online economics 2001: Davids win, Goliaths lose

by Daniel Rutter

 

My day job is at News Interactive here in Australia. I write reviews and a column for the australianit.com.au Web site. And, wouldn't you know it, The Great Dot-Com Purge has now made it to the Dot-Com-Au parts of cyberspace, too.

No names, no pack drill. But if you're an employee of a big company with a stable of Web sites that haven't been paying their way - and which don't have a revenue graph that suggests they're likely to make money before the sun expands to swallow the inner planets - then, ah, pre-paying for your company parking for the next year might turn out to be a bad decision, OK?

So I'm listening to the radio the other day, and a Fairfax mouthpiece (John Fairfax Holdings is a major print-media competitor to News Limited here in Australia) is making sage pronouncements about how News Interactive just laid off a hatful of people. About a third of the total staff.

The Fairfax chap didn't say the obvious, of course - "we're losing a lot of cash too, so either we'll be doing the same thing pretty soon, or we have collectively decided that we're teapots". No, he was talking about how major media operations that run lots of Web sites must recognise the realities of the marketplace, tra la. And, wait for it, "move towards a subscription model".

Whereupon everybody near me fell about laughing.

Subscription Web sites do work, once in a blue moon. The classic example is the Wall Street Journal site, a one-year subscription to which costs $US59.

But just as every buy-things-online site isn't Amazon, every subscription site isn't the WSJ.

If you're not presenting very high value information to a pretty well-heeled readership, charging subscription fees is just a great way to hugely reduce your server load. Your visitors will sprint off en masse to get the same stuff somewhere else. "Subscription" is practically a curse word among Web venture strategists.

Subscriptions are not a cure for the Fairfax and News Interactive and, for that matter, AOL Time Warner site-profitability woes. All of these organisations have enough financial inertia to run wegiveyoufreecash.com for arbitrary periods, of course; none of them are pruning (or going to prune...) their Internet staff because the whole supercorporation's headed for bankruptcy otherwise. But industry-wide cutbacks are happening anyway, whether or not companies absolutely have to make them, simply because there are lots of sites that don't make money and don't look likely to.

What is the cure for the profitability problem, then, I hear you ask?

Well, nothing is.

This is hardly an earthshaking new discovery I'm about to expound, but since I didn't hear a thousand voices raised in a heartfelt cry of "Bollocks!" when the dreaded S-word was mentioned on the radio, it could just be that some people thought it to be a perfectly reasonable plan. I'll bet you that some people in my office believed it was.

I know that, because plenty of times, when I've been discussing some goofy, badly flawed Web site business model with its merry exponents (at various different dot-coms, not just News), they've said to me "So what do you want us to do? Just give up?!"

Well, yeah.

There's a few online business ideas that are just absolutely raving mad, but some others aren't that bad. They're in some way related to a thing that could work.

There's income, there's outgoings, all you have to do is see if and when the former will exceed the latter.

Often, though, it doesn't take long to figure out that a particular site is not even vaguely likely to generate enough money to cover its costs.

And big media companies have a problem in this respect. They are, by their nature, incapable of doing anything in a small way.

Big media companies have huge overheads to pay. They're companies with three hundred yards of fluorescent lighting, cleaners that come through every night, fire exits to handle an office occupancy of a thousand persons, cafes on the bottom floor and a masseur who comes in on Fridays. They've got marketing departments, creative departments, programming departments and system administration departments. They've got ads on TV and on radio and on the sides of buses. They've got security guards and parking lots lit all night by metal halide lamps. They're companies with sound and video editing booths, with which they create multimedia content that, rounded down to the nearest thousand, nobody ever views.

All of this stuff, you'll be staggered to learn, costs money.

And so big media companies just absolutely positively cannot make money from sites with relatively small revenue - even though lots of other people can. And do.

No matter what big media company radio interview victims may say, "free to air" Web sites can make money. Plain pay-per-eyeball banner ads are becoming lousier and lousier sources of income with each passing day, but it is eminently possible to get a decent revenue stream from a non-subscription site that does nothing but tell people things.

You just make deals with people who sell products or services relevant to the audience you attract, you don't surround the links to your sponsors with "CLICK HERE TO SUPPORT THIS SITE" exhortations, and the sponsors therefore get a decent flow of people who are genuinely interested in whatever they're selling. The click-through rate may be lousy, but the value per click can be very high.

Establish this value - which, thanks to referrer tracking, is much easier than telling whether print or TV or radio ads work - and Shazam!, you've got yourself a business model.

But it's still not likely to add up to nearly enough money to cover the outgoings of a major media company.

The clincher, the simple point, the open secret that nobody in a major media organisation with a Web arm - which is all of them - ever mentions, is that sites with a very small staff and none of the big-company overheads can compete very effectively with a large number of the major-leaguers.

I should know this. I've got one - dansdata.com.

Dan's Data is my part-time hobby site. It makes me about the average Australian wage, all by itself.

Its staff is as follows:

1) Me.

Its premises are as follows:

1) My bedroom.

OK, that's not counting the input of my friend who spends 20 minutes now and then to unwedge the server when it gets puzzled over something. But I pay not all that many dollars to have the site hosted by a big US outfit, and I've signed up with a few Web ad companies for pocket-money ads, and I've got a deal with Aus PC Market for more lucrative click-throughs (and no, if you click on that link just there, it will not make me any money). Dan's currently gets about a quarter of a million pageloads a month.

If I switched to working on dansdata.com full time, I could roughly double its revenue, I reckon. Which would make it a perfectly worthwhile gig by itself, for one person.

For two people, it'd be a lot less exciting. No way could two people make the site twice as valuable as one.

For four people, well, I suppose it'd beat being on the dole.

And if this site were a property of a big New Media venture with no option but to tie it in with the rest of their progressively synergistic hybridised multi-tiered leverage paradigm, thereby forcing creative people and marketing people and coders and sysadmins to spend time on it, Dan's Data would be a dismal flop.

Oh, it might make one or two hundred thousand Australian dollars a year. Maybe quite a bit more, if the sales people managed to pull in serious ad deals. There are lots of sites that make that kind of money.

And it could have a couple of reviews a day going up, and news as well, and Java games and competitions and buy-me links to whatever affiliate site suited the owning company. I could be Executive Editor or something, and a few other journos could help me push through the product.

It'd certainly look a lot nicer; it doesn't take a design guru to look at the site and see that as an HTML and Photoshop guy, I make a great hardware reviewer.

But once you subtract the wages for all of the cooks that have a hand in making the big media company broth so tasty, you find you're back in the red for things like news and review sites. My site's better focussed than most, and it's got a good niche; computer hardware enthusiasts tend to have a hard time keeping money in their wallets. If you've got a sports news site, you'll find it much more difficult to converting eyeballs to dollars.

So there's only so much gold in them thar hills. Big companies may be able to get hold of more of it by digging a big expensive mine, but it turns out that single people squatting by the river with a pan end up with better margins.

This is an unusual phenomenon. In traditional media, as in most areas of enterprise, the big boys can almost always do a better job. There are huge economies of scale, and revenues generally increase arithmetically with the audience.

But in the Web world, entry and operating costs are ludicrously low, and you don't need a zillion people or any large expensive objects. A popular site needs a serious server - even little old Dan's Data pumps out around ten gigabytes a month - but someone else will do that for you for a few hundred bucks a month. You don't need broadcasting licenses, distribution networks, warehouses, janitors, security guards or helipads.

Now, this argument doesn't work for every kind of content-focussed Web endeavour. Particularly those that primarily just repackage existing content from newspapers and TV shows and so on. They can be quite lean and mean, and provide plenty of reader value for not much expense.

How much readership they leech from the things they repackage is open to debate, of course, but viewer and reader numbers are even more fudgeable than Web statistics. No worries, mate.

But if you're a big media outfit with tens of millions of dollars to spend, your stable of, say, 20 sites, isn't going to be all lean and mean. You're going to want a tick in every box.

Does someone else have a gambling site? Then you need a gambling site!

Does someone else have an auction site? Heck, we'd better get our slice of the pie!

They've got a real estate site! And a job-hunting site! A dating site! A restaurant guide! Webmail! Stock tickers! Horoscopes!

Why don't we have that stuff!? Let's get it!

Something must be done, this is something, therefore we must do it!

Now, don't ask me why on earth a US company would want to start a mainstream book-shopping site when Amazon already exists. Or why anyone would start a new auction site in a market already well served by Ebay. Or an Aussie gambling site when you can already go to the William Hill site, belonging to a big British bookmaker, and place credit-card bets on Australian sporting events in Australian dollars. Or on Spanish sporting events in Norwegian kroner, for that matter.

I suppose companies do this sort of thing primarily because they can. They've got the budget. You've got to spend money to make money, old chap. Heaven forfend you should bite the bullet and hand some of the dosh back to the big boss.

If your half-baked Web ideas turn out to be big winners, you're a hero, after all. If they flop, then oh well, the market changed and you changed with it, lessons must be learned, plenty of jobs out there for experienced management, what a wild ride, eh?

It would appear that this particular roller-coaster's trundling back into the station, now, and a significant number of the passengers dropped out of their seats on that last twisty bit. Tolerance of online concepts that looked like duds to start with and have been proven to be just what they seemed is now in short supply. Never mind whether the shakeout happened in a smart way or a silly one; it's happened.

And now that it has happened, on the large scale to various dot-com big boys and in a small way to the scads of unfortunate minnows who signed up with now-dead site networks, perhaps fewer of us will find ourselves working in places that feel like one big consensual hallucination.

I probably will.

You see, when News Interactive rolled out the guillotine, I got the chop. I'm only going to be there for a few more days.

Maybe I'll be back as a contributor. Maybe I'll write for The Australian and have my work put on the Web along with all the other newspaper people. Maybe I'll do something else.

It's been nice being a remora on the side of this particular whale, though. And you'd better believe that if I find a cushy gig at some other place that I don't think has much clue about where it's going, but which clearly has lots of enthusiasm to pay me big bucks to push it along, I'll take it.

See? The little guy wins again.

 

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Daniel Rutter runs a successful site at http://dansdata.com offering hardware and software reviews, hints and tips, how-to articles and other computer information.
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