Ideas for Leaders #224

If the Price is Right: Charging for Online Content

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Key Concept

Publishers and media owners who provide sought-after online content can profit financially by charging for it – rather than relying on declining online advertising revenues. But it is crucial how a fee-based charging structure is implemented: charge too little and you are missing out on valuable subscription revenue; but charge too much – or for the wrong content – and you will lose viewers, further undermining advertising revenues. The key is for media companies to take a flexible approach, charging optimal fees for selected content

Idea Summary

Plummeting advertising revenues have led many online content providers to experiment with additional sources of revenue. Most often, firms aim to compensate for a loss in advertising revenues by charging consumers for access to online content. However, such a choice is not straightforward since subscription fees typically deter customers, further reducing advertising revenues.

Acknowledging the trade-off between subscription and advertising revenues, firms have in recent years experimented with a wide range of revenue models that include giving away all content for free (e.g. washingtonpost.com), charging for all content (e.g. thetimes.co.uk) and giving away some content free of charge but charging for a subset of content (e.g. ESPN.com). The industry norm is to follow a static rule on how much content is free or paid for, but firms can more flexibly adjust the amount of paid content they offer.

Until now, academic research has offered little guidance on whether in fact organizations benefit from charging for content and, in particular, how firms can optimally implement such a fee-charging model. This study examined whether and how firms should charge for access to online content. The researchers built a unique data set from the sports website ESPN.com to empirically study this question. ESPN.com offers the majority of content for free, but charges a membership fee for a subset of articles. The study collected data on the number of free and paid-for articles per day and type of sport, as well as demand for each type of article per day and sport over a period of 13 months.

The research went on to estimate how the number of free and paid-for articles affected viewership of the site and, from this, empirically to quantify the content provider’s trade-off between advertising and subscription revenues. The approach controlled for a wide range of factors that could affect viewer demand, as well as for variations in the number of articles the firm offered on any day.

The research found that, on average, the content provider should not adjust the amount of paid content. However, the researchers found strong differences across sports’ seasons: the marginal paid article increases revenue in the off season but decreases revenue in the regular season. These results suggest that this variation over time is largely due to a change in the number and type of unique visitors to the site.

Business Application

The research suggests that firms can increase revenue by adjusting their pricing strategy, flexing the amount and type of content they offer against a fee instead of setting a static paywall as is often the case.

Such a dynamic policy, (adjusting the number of paid articles by day, sport and season in the case of ESPN.com) can substantially increase revenues. In addition, by using detailed data on online usage that is now available to them, media firms may be able to go further, implementing a more granular form of price discrimination online.

With this fresh insight, leaders of media firms, who have often bemoaned the difficulty of making digital platforms pay, may finally be able to leverage them to their advantage.

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Authors

Institutions

Source

Idea conceived

  • August 2013

Idea posted

  • September 2013

DOI number

10.13007/224

Subject

Real Time Analytics