A guest post by David Mahoney:
Last week the CEO of news platform Medium (and former Twitter cofounder) Evan Williams announced they were laying off 80 employees, closing their New York and Washington DC offices, and declared their ad-funded business model broken.
This is an economic reality that has been brewing for a while for the publishing industry, and it’s the latest signal that the era of free news is coming to an end.
Here’s why the ad-funded news model is broken, what needs to be done to fix it, and how we’ll all be better off.
The main reason the ad model is broken is that people don’t like online ads, especially the ads that make decent money.
To their credit, publishers have been very creative at trying to make free content with ad revenue work economically, but online ad formats and concepts have pretty much all been exhausted, and 80-90% have failed.
They have failed because for an ad format to work, all three parties need to win: the publisher needs to make money, the advertiser needs to get promotional benefit, and the user can’t be annoyed by it. It only takes one of these parties to lose and the format dies.
For example, advertisers and publishers love big ad formats that take over the entire page because they’re eye-catching and lucrative. But users get very annoyed by them so now they’re basically non-existent.
As for the smaller size ads, eye tracking has shown that people routinely ignore them, a concept known as ‘banner blindness’. And they only click on them about once every 5,000 times they appear.
As a result, advertisers will generally pay a pitiful $20 for those 5,000 appearances.
To add insult to injury, 198 million people now use ad blockers, further reducing already low online revenue. And print revenue, which still generates over 70% of newspapers’ income, has halved since 2005.
The final hope for publishers is native advertising, also known as sponsored posts or branded content. But although reasonably effective advertising, readers gradually feel misled and click on them less over time.
The conclusion of this sad situation is pretty clear. The economics of digital advertising is so bad that essentially no general news publication can be profitable giving their content away for free.
Some business news publications have valuable enough audiences to be profitable with ad-only revenue. But they are a small minority.
So because users have resisted ads so much, most publishers have two realistic choices: charge for their content online or shut down.
However the problem with this new paid content era will not be the cost – it will be the equivalent of two coffees or a pint of beer per month.
The real problem will be the friction. Buying subscriptions is a hassle, and so is accessing them.
Imagine every time you walked into a bar you had to either fill in a registration form or provide a username and password. That is what online news sites will be asking people to do. Most readers won’t bother and publishers will conclude that people don’t want to pay for news.
But publishers only need to look at companies like Amazon, Uber and Seamless (an American food delivery platform) to realise that if you make things super easy for people, they will pay.
The Washington Post has just become profitable partly because people can subscribe with a couple of clicks via Amazon.
So publishers should be doing whatever they can to allow people to buy news with minimal effort (whether it’s a subscription or an individual article) rather than forcing them to fill in a registration and billing page each time.
That same friction experience applies to accessing content too. Currently subscribers need to enter a username and password to get access, but people easily forget these, especially for business publications.
Instead, access authentication should be governed by device. This approach would give readers access on maybe three or four chosen devices password-free. And it would prevent login sharing as well.
And these buying and access issues don’t just apply to news. Such headaches extend to the entire growing list of subscription content bought online, including print news, music and TV streaming, business software and even subscription boxes.
The good news is that news quality will improve. Free content has degraded news quality by forcing fewer journalists to write more while getting paid less. And when advertising is your only source of online revenue, publishers prioritise what gets the most clicks – usually gossip and sensationalist articles.
With paying subscribers (each forking out roughly about $5-20 per month, much cheaper than before the internet), publishers will be able to invest more money into quality news, including more fact-checking and investigative journalism.
Content owners need to remind themselves that good content is worth paying for: history has repeatedly shown this, even in the internet era. But the pain-points around accessing and paying for it need to be solved. Otherwise publishers will simply be replacing one industry problem with another.
David Mahony is CEO of Auckland-based startup Gosub, and has spent 10 years working in digital advertising and publishing in Auckland, London and New York.