Why the subscription model is hard to lose

This post was inspired by Sean Carmody’s comment on my last post about subscription versus advertising business models on the web.

His observations initiated an important discussion about businesses in decline and those in their ascendancy. For businesses that are receiving significant cash flow from a declining/stagnant brand, it is difficult to forgo this income to gamble on a completely new approach to revenue. It seems that in the online publishing world the declining model is that of subscription and the model in the ascendancy is that driven by advertising, precisely because of the nature of the net and its multitudes – and the huge forecasts in online advertising growth in coming years. VC companies have had an affair with free content / advertising-driven models for some time now, much to the chagrin of those entrepreneurs with different ideas.

Web 2.0 is largely funded by advertising. Advertising is an AUDIENCE business. So, when Paul Graham is telling his companies to worry about building audience first, that’s actually a good point of view to take. It’s like building a magazine. If you don’t have any readers you won’t get any advertisers.

Robert Scoble – Scobleizer

However, subscription sites will continue into the future. An online media business with a significant subscription base would be loath to write off the resulting revenue to bank on it being replaced by advertising – even if that subscription business is markedly in decline.

The strategic end of those subscription-based media businesses caught in this quandary, such as the Australian Financial Review (under threat from Murdoch’s Dow Jones/Wall Street Journal purchase) and other major B2B organisations I have dealt with, either have related advertising-only businesses (such as the Sydney Morning Herald and The Age) or are investing in free, advertising-only models that service the same market under different brands, to hedge themselves.

As content creators and publishers determine who is best placed to do what over the coming years, we will see businesses managing the subscription and advertising models to maximise revenue from their assets.

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2 Responses

  1. Absolutely Sean, and often, particularly in the digital environment, the new, more nimble businesses have much lower OHs to cover. They can focus on specific niche markets that larger, more generic businesses are slower to move on, either for strategic (revenue) reasons or due to cumbersome management structures.

  2. Part of the story here is the challenge established businesses always have in dealing with new entrants. The new entrant, having nothing to lose, can easily pursue strategies that are risky for the old player.

    As an example, when ING Direct launched in Australia they were offering high interest rates for online deposit accounts. While the established major banks could easily offer the similar products (and eventually did), the risk they ran was that this would cannibalise the significant revenue streams that existing low interest deposit accounts generated.

    Similarly for digital media, traditional media are focusing on attempts to preserve at least some of their existing revenue streams, while the digital innovators do not have to worry about that at all and so are more nimble.

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