Saturday, February 20, 2010

The Gray Lady Finds A Sickle

There are legitimate complaints that can be raised against Wal-Mart, but one thing it has consistently succeeded at is offering low prices. What if that changed? What if instead of trying to keep prices low, Wal-Mart decided to aim at keeping profit margins high? Presumably, it would have a few highly profitable years, and then its market share would start to dwindle. Other stores would undercut Wal-Mart and people would start shopping there. But the key is that this isn't instantaneous. It would take accumulating evidence for people to believe Wal-Mart had changed. And it would take a long time for a competing superstore to enter many regions.

This process is sometimes called "harvesting": using the success of a business to create short term gains at long term expense. I first heard the term in this article (strongly recommended), which argues that the high cost of baseball tickets brought lots of money to the teams, but destroyed interest in younger generations. Harvesting is generally viewed as a negative process, a mistake businesses make. But harvesting is starting to look like an important business model online.

Consider Facebook (cash flow positive for the first time just a few months back), Twitter (again, cash flow positive but not profitable yet), Flickr or any other free internet service. They take on debt and investment on the hope of someday finding a way to be profitable. The idea is that charging for Facebook would prevent it from ever catching on, but that once it has caught on you can find ways to monetize it. In Facebook's case, this looks to be true. For Youtube, it's less clear that will happen. Sooner or later the investors into an online business will demand revenue pick up, and at that point the choice becomes harvest or close down. It might kill the business in the long run, but it may be the only way to generate money in certain niches.

The best example I can think of for internet harvesting is "Mommy Bloggers", quite likely the most financially successful portion of the blogosphere. Young, new moms started blogging about their experiences raising a child. Communities of mothers started following them. Recently, sponsors and advertisers got involved, paying these bloggers and sending free products in return for plugs. Some are using this as a profitable addition to their site, but some will push too hard and alienate their readers. As the readers are slowly pushed away, the blogger will be raking in cash. Eventually too many readers leave, and the blog is effectively dead.

Newspapers look to be in harvesting mode now as well. The New York Times is going to start charging for its content online. It's a respected paper, so people will pay. But I suspect it'll do poorly with the younger generations, who don't have the same veneration for the Gray Lady. Behind a paywall it'll bring in money, but not new readers, and when the old readers move on, there will be new news sources that are more generally respected. Perhaps that future news source will also take advantage of its reputation to begin charging. And then over time a new free news leader will emerge.

The key is that online popularity begets popularity. If you hit it big you'll grow and grow, if you don't you'll languish in obscurity. Some fields can grow and profit (Google), but a lot will only profit by shrinking their audience, moving out of the growth region and into decline. It's a weird business model, but it might be the future. In fact, there's a lot to be said for it: the Internet's propensity for change is actually quite endearing. If every decade sees new companies atop each niche, I think we'll see an overall healthier marketplace.

1 comment:

  1. One of those Mommy Bloggers, Heather Armstrong of Dooce (the only Mommy Blog I actually follow), just got a show on HGTV. She also has a book out and a few months ago inspired a huge boycott against Maytag simply by blogging about the bad experience she had with their repairmen (which resulted in Maytag offering her a new washer/dryer for free, which she generously donated to charity). She has effectively turned her Mommy Blog into a considerable powerhouse, not only financially but in terms of cultural power. She even created a secondary website where she posts all the hate email she receives alongside huge numbers of online ads--"Monetizing the Hate." While Heather is clearly interesting and clever, even she could not have done something like this, say, five years ago. It's really fascinating.