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
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?!"
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
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
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:
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
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
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
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
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
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;
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
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.
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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