Last week, I posted part of my email exchange with Ramon Casadesus-Masanell and Feng Zhu (pictured), about their recent study "Strategies to Fight Ad-Sponsored Rivals." With Wall Street Journal owner Rupert Murdoch threatening to take all WSJ articles off of Google, it's an important time to consider the struggle of traditional, pay-for-service business models to compete with free, ad-based rivals. Here's how Casadesus-Masanell, an associate professor at Harvard Business School, and Zhu, an assistant professor at USC's Marshall School of Business, think fee-based models can stay competitive.
BNET: Unlike many other newspapers that offer all of their content for free, the Wall Street Journal allows readers access to some full articles but requires a subscription fee for total access. Is this a viable compromise? Are there drawbacks to this mixed approach?
RCM & FZ: The benefit of this approach is that the firm can charge subscription fees to those who value high quality content (i.e., high-end consumers) and at the same time generate ad revenue from offering low quality, ad-sponsored content for free to low-end consumers.
The drawback is that if the quality of the free content is not very low, the free content could cannibalize sales of the high-quality content. The cannibalization problem becomes worse when the firm is competing with other free, ad-sponsored content providers and has to use the free content to push them out of the market. In this case, the quality of the free content cannot be very low, and cannibalization becomes inevitable. Firms need to consider this trade off before adopting this dual business model.
BNET: Due to the current economic crisis, companies have less money to spend on advertising. Has this negatively affected the companies that rely on ads? Are any of them starting to charge for products and services?
RCM & FZ: Yes. Firms will find ad-sponsored business models attractive only when they can finance their business through ad revenues. With the economic crisis and the increasing competition among ad-sponsored players for ad revenue, ad-sponsored models may not be as attractive as before, and we expect many firms to switch to fee-based or mixed business models. Indeed, many newspaper sites (e.g., New York Times, The Minneapolis Star Tribune, The Newport Daily News) are considering charging readers for content.
BNET: As consumers become used to getting music and news for free, what is, in your opinion, the best survival strategy for the entertainment industry and newspapers to adopt?
RCM & FZ: The optimal strategy depends on many factors including product quality, the advertisers' willingness to pay, and additional costs of managing hybrid business models. While consumers are using many free products today, it's important for firms to realize that consumers are willing to pay for high-quality products. Our research finds that with competition from free, ad-sponsored products, fee-based models could become more attractive to incumbents with high quality. iTunes and HBO are two examples of companies using fee-based models to successfully compete against ad-sponsored rivals.