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Plus Report - By Thomas Baekdal - September 2014

The Economics of Individual Media

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Walter Schaerer
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Last week we talked about the amazing new world of individual media, what it takes to be successful as a individual media company and the whole dynamics of this amazing new future of media.

If you haven't read it already, I very much encourage you to do that first, as this is the second part of that series.

In this article we will talk about the economics of these individual media entities. Specifically there are two things we need to look at. One is how different the market is, the other is how much people can expect to earn. Both are very different from anything you see in the traditional media world.

If you are a traditional media person, this is what you are going up against. And if you are person who is thinking of becoming an individual media company, this will give you a good overall picture of what you can expect from it.

First, let's look at the market. Imagine that the graph below illustrates your market. Each line is a different category of content (or products), and the size of each line represents its mass-market potential.

This could be any market, it's just an illustration. For instance, it could be the sport news market, in which case the bars would represent different forms of sport. You see how the really popular sports like NBS, MLB, NFL, Nascar have a huge mass-market appeal, while most other types of sport have a much lower mass-market appeal.

But again, it's just an illustration, this could be any market. Okay?

If we then look at traditional media (newspapers or TV stations), their traditional role has always been to create a package with the largest mass-market appeal. As such, they would choose to extensively cover only the big mass-market categories, and then 'fill' up the gaps with rather shallow reporting of everything else. This way they have a lot of the mass-market + a little bit of everything else.

The result is that the traditional media model looks like this:

Of course, being a traditional media company, they are extremely limited by the format. So ESPN, for instance, only has so many hours per day, and a newspaper only has so many pages to fill. As such, while they do have a good general coverage and a strong focus on the mass-market, there are still so much news that is never reported.

This the traditional model.

It's slightly different for the traditional magazine industry, because it often focuses on a much more defined area of expertise. For instance, a gardening magazine will mostly focus on gardening topics. Due to this focus, they can be more in depth with their writing than similar stories in newspapers.

So the traditional magazine industry looks like this:

While they are limited by having to create a package, it's still much more refined than what we see from a newspaper. This is why the magazine industry is generally much more resilient than the newspaper industry in terms of change.

Then we have the new digital world, which is very different. On one hand we have all the new platforms, like Facebook, Twitter, Google+, Pinterest, or the news aggregators like Flipboard or Zite.

As a result, they approach media from the bottom up.

They don't really care about any of the specific topics, they just want to be the place where people go regardless of what the story is about.

From the perspective of a tech company, this is a very interesting and also a profitable business. But it's not really that interesting from a media perspective. And the only reason why it works is because they don't create anything of their own.

This is why I recently tweeted:

Saying that journalists should 'compete with Facebook' is like saying Ford should compete with the highway. It's two very different markets.

But if we then look at the people who create content, as in the individual creators, the most successful ones are doing this:

Instead of the traditional media approach where you try to fill a package, these people focus on a highly specific topic. Often, so specific that it's even a small part of each individual category.

Traditional media people have a hard time understanding this focus, because they have to be trained to think 'mass-market' all of their lives. These individuals are thinking the same as book authors. The reason why Sherlock Holmes was so successful was because it was a very specific story, centered around a very specific type of person, doing a very specific type of activity.

It's this extremely narrow focus that makes it successful. And it is this kind of dynamic that is now being expressed via individual media.

YouTube, again is a great example. I mention her in another article, but look at Jemma's Cupcakes. It is a wonderful channel just about cupcakes. Can you imagine a magazine of a newspaper covering just one type of food?

This is the difference between the digital and the traditional world. In the digital world we see individuals who are creating channels that are insanely specific, and because of that, that they can take it to the absolute max.

In comparison, you can go to the New York Times' cooking site, search for cupcakes, and you will be presented with this (see picture below). Most of it isn't even about cupcakes, and those that are, are just shallow basic variations that nobody really cares about.

What Jemma is doing is this:

 

Now do you see why Jemma has 125,000 subscribers on her YouTube channel? This is why these individual media people are winning the future. The New York Times might have 1,500 recipes on their cooking site, but who cares?

This intense focus also comes into play when individual media people want to expand. If Jemma wanted to tell you about a different type activity, like DIY or Gardening, she would not try to add that to her Cupcake channel, she would create a second channel just for that.

Of course, this all ties into how people behave online, which you can clearly see just by observing social behavior for a few minutes. In the digital world there are two things at play: What people follow, and how they discover things.

Discovery is caused by 'the link', and people share a huge amount of content about all kinds of things every day. And if you are a platform (remember the bottom up illustration above), this link economy can create a huge amount of traffic because there is so much of it.

But when you look at what people subscribe to, you see a very different behavior. Generally speaking, people don't follow random sites. Instead, they choose these very specific individual media people, with their extremely specific media focus.

We see this a lot in the Let's Play community (read part one). People prefer subscribing to the Let's Players who are only playing the type of game they themselves are specifically interested in. It's the same with food. People only subscribe to the food channel for the types of food they like. If you don't like cupcakes, for instance, you won't follow Jemma, but instead you might follow DJ BBQ, or the Eco-Vegan-Girl.

What we to choose to follow is incredibly specific. And it looks like this:

This is an illustration of what just one person have decided to follow. First you notice a faint line at the bottom. These are all the things this person sees via links and it has a very wide scope. But she then follows several extremely narrow and very specific topics to the max.

And the important thing to understand here is that each person has a different graph. If you were to look at this for another person, she would follow completely different things.

Think about how different this behavior is from the traditional newspapers. The traditional newspaper doesn't really cover anything to the max. It's all a bit shallow. And they force you to get just one package with a bit of everything, in which you have no choice over what goes in it, and you have to see the same things as anyone else.

But what does all this have to do with the economics of individual media? Well, for one thing, it changes everything.

Traditional media makes its money based on the mass of their packages. As such, people generally don't care about the articles themselves, but rather the newspaper as a whole.

Individual media people are all about creating individual pieces of content, combined with the momentum of how it all fits together (series are very popular). That is the complete opposite of what traditional media is doing.

As a result, individual media people survive almost exclusively on the value of each individual piece, and you will often hear them being absolutely obsessed about it. They will not just post something quickly. They prefer to put some effort into their content, because they know that this effort is what makes it unique.

However, because individual media is so incredibly narrow in its focus, it also means they have an extremely narrow market. And this makes it very difficult to do things at scale. As such, the individual media companies are not defined by a few really big media companies. Instead, they are defined by thousands of individual media people, each making enough of a living to make themselves happy and to continue what they do, but not making enough money to make them rich.

Let me give you a few examples of that.

First, take a person like CPG Gray. He is a wonderful person who makes very interesting and educational videos like this, "How many countries are there in the world?"

 

Making such videos takes a lot of time and effort. His latest video costs thousands of dollars and took hundreds and hundreds of hours to make. So, CPG Grey has to find a way to cover that cost.

Remember, when I talk about the future of individual media, I'm not talking about people running a blog or posting videos on YouTube as a hobby. I'm talking about people who have decided to make a living out of it. To run your individual media company as a business.

This means that, like any other business, you need to make enough money to cover your costs, and even grow.

So what kind of monetization options are available?

The hopeless state of advertising

First we have the good old advertising model.

In the old days of the internet, this was rather simple to do. Just launch a free site, work hard to make it grow, and if you did that well you would have enough money to make a decent living from advertising.

This, as anyone in the media industry knows, is no longer the case. The truth that everyone faces is that, while the overall digital advertising market is growing (which is nice if you are Google), the actual payout from ads to individual publishers are in a continual and desperate state of decline.

In other words, publishers make less and less money per view, and the minimum level of traffic that you need is constantly going up.

And let me just illustrate how profoundly this has changed by pointing you to this old article from 1999 about online advertising rates.

In the fourth quarter of 1998, by contrast, the average CPM rate dropped 3.2 percent. The average CPM rate by year-end '99 was 9.2 percent less than it had been two years earlier.

The major web category experiencing the largest drop in average CPM rates between Dec. '98 and Dec. '99 was computers and technology, which dropped from a web-high rate of about $45 to about $39. This leaves only two significant web categories with average CPM rates at or above $40: corporate web sites and professional publications.

A year earlier, at year-end '97, the average CPM rate at professional publication web sites was around $51.

Sports is another category that has dropped significantly over the course of two years. At the end of 1997, average CPM rates for sports sites were the highest on the web at around $52. By the end of 1999, those rates had dipped to about $31.

Two categories did experience a rise in average CPM rates between Dec. '98 and Dec. '99: shopping/transaction, which rose slightly from just under $30 to just over $30, and shareware, which rose from roughly $21 to about $26.

This was 15 years ago, and it sounds exactly like how we talk about advertising today. The decline in advertising rates is one of the most persistent trends on the internet.

But look at what those CPM rates were back in 1999. The 'average' CPM rate for a professional publication being $51, with lower end sites around $30.

Today, of course, the online ad market looks a lot worse. The average advertising rates today are $1.9 (a 96.3% drop), with lower end sites earning $0.5 (a 98.3% drop in ad rates). This drop in ad rates that people complained about in 1999 has been in a continual decline ever since.

And it has changed the internet dramatically. If you wanted to make a living from advertising in 1999, by having a personal income of $35,000 per year, you could do that by placing 3 ad spots on a page, and only reaching 30,000 pageviews per month.

It was that easy. And it was this that caused this whole 'everything on the internet should be free' mentality because, with such high ad-rates, you only had to be marginally successful to make a ton of money.

But if you want to do the same today (3 spots, $35,000/year), you would instead need to reach 2 million pageviews.

This is the reality of today's advertising market. The minimum level of pageviews that you need to reach to make a living from advertising is now so high that most people simply can't reach it.

Obviously, this is only looking at CPM rates, which is the worst form. Action based ads, video ads, and especially native advertising are all paying higher rates. Video ad rates, for instance, are paying around $24 per views, but that's the number of views in which the video is actually playing (which is much less than the amount of pageviews). Or, for YouTube, the views where people aren't skipping the ad after five seconds.

Realistically (and from what I'm hearing), one million video views on YouTube equals around $2,000. Or in other words, an average rate of $2 per thousand views.

Note: This number fluctuates by quite a lot depending the on the quality and relevancy of the video ads.

This means that, as an individual publisher relying on video ads, you need to reach 1.5 million views just to earn $35,000 per year (or $2,900/month). Most individual media people will never reach that point, simply because of the size of their chosen niche.

Take my good friend Josephine, who has started her own yoga channel, Yoga To Go. It's about yoga (which a lot of people like), but it's in Danish (a country with only 5.4 million people in total). There is zero chance that she will ever get enough traffic to reach the minimum level she needs to be supported by advertising. And it doesn't matter how good she is (she is very good). Her market just isn't big enough to be supported by advertising. So she, like most other individual media people, have to find other ways to monetize.

This is the reality we live in today. The good old days of online advertising are long gone.

Sure, there are the few who really break through, like Bethany Mota who is the 19 most popular person according to young people, and has a YouTube channel with 7 million subscribers and each video ranking up 4 million views each. Or the super-popular PewDiePie with 30 million subscribers (earning him a cool $4 million per year).

They is living the good life based entirely on advertising, which means that they are free from all the problems of asking people to pay for their work. That's wonderful, but only very few people get to that point. Most individual media people have channels with an audience of around 50,000 people. A smaller group would have an audience of around 250,000. An even smaller group would have an audience below one million, and a very small group could have more than one million.

The very popular Jemma's Cupcakes, for instance, has 125,000 subscribers. Each of her videos reach about 50,000 views, and she makes five of those per month. That's a total of only 250,000 views ... or around $500 in ad income. Then YouTube takes 45%, leaving her with $275 in ad-income (before tax).

These are the economics of online advertising today for individual media companies. Advertising just isn't a viable option anymore for most people.

So, why am I saying that the world of individual media is the future of media? Surely, when the money is that bad, it can't possibly work?

The answer, of course, is that it does work because of the new and extremely exciting trend of asking people to pay real money to support you. And there are a lot of ways this could be done, with some of them being based on a form of crowdsourcing.

The basic crowdsourcing models

Let's start with the latest monetization methods. There are two very interesting crowdsourcing models.

One is the straight up model in which you simply ask people to support you, and this brings us back to CPG Grey. He is one of the many people who couldn't get advertising to work, not just because of declining advertising rates, but also because making longer in-depth videos is terrible for your ad performance.

So he has turned to two crowdsourcing platforms to ask people to support him. One is Subbable and the other is Patreon.

On Subbable he is simply asking for people to voluntarily pay whatever they want in show of support. He is not putting his content behind a paywall, or changing the way he works. It's crowdsourcing as a show of support.

 

On Patreon he is doing much of the same, but with a slight catch. Instead of asking people to pay to support him, he is asking people to pay 'per video' that he makes. The outcome is the same, but it's an interesting twist.

On Subbable he has now reached 109% of his funding goal (but I don't know what that is in money), and on Patreon, he has reached $2,250 in support per video that he makes (and he makes 1-2 videos per month).

The outcome is that CPG Grey now has a decent income. He is not getting rich or anything, but it's a decent life.

More to the point, he can focus his life on doing something he loves, which is a billion times better than having a 9-5 job in a cubicle somewhere. Or as I wrote: "these media individual are making enough of a living to make themselves happy and to continue what they do, but not making enough money to make them rich."

The conversion rates of crowdsourcing

We have to talk about conversion rates though, because this is going to come as a shock to most people.

Back in 2009, when traditional media companies realized that print was in trouble, many went out to do studies of how many were willing to 'pay for news'. Each one of these reports came back saying that about 5% would do so.

And while many newspapers have been able to convert 5% of their print subscribers to digital, when compared to unique visitors to their websites, they are not even close. The actual conversion rate for traditional media is much closer to 1%.

So can individual media companies expect the same? Well, it all depends on your popularity, your uniqueness and the efforts you are putting into what you do. The more you put into those things, the better your conversion rate (obviously). But even with that, the actual conversions are much lower.

For individual media people, the actual conversion rate you can expect is... between 0.1% to 0.2% (in general).

In other words, if you have 100,000 subscribers on your YouTube channel, only 100-200 people of those will choose to pay. This is the reality of the connected world. We have so many things to choose from, from so many sources, with so much abundance, that only your most loyal audience will pay.

The next question is: How much are people willing to pay? This is a bit tricky to answer, because it varies greatly depending on your 'fame' and your area of focus (the type of market you have).

But let me give you a very typical example.

Kurt Mac is one of the many Let's Play personalities. He has just short of 400,000 subscribers (i.e. not enough for making a living from advertising), and he too has turned to Patreon to ask for people's support.

 

Like so many others, out of those 400,000 subscribers, only 477 people have decided to support him. This gives him a total revenue per month of $5,147, from which Patreon takes 9% to cover their costs. That leaves Kurt with a monthly income of $4,684.

If you are a traditional media company, that is so little money that it isn't worth talking about. But for an individual, it's an annual salary of $56,000, which is quite good.

Obviously, with this money he now just has to pay himself so that he can pay his bills, have a home and family and put food on the table, but he also has to cover the production costs of making the videos (and buying the equipment he needs for that).

Not with $56,000 per year. He can easily afford to buy a very decent computer, a semi-good camera, and some sound equipment. He won't be rich, nor drive around in an expensive Lamborghini, but he will be happy.

But when we look at what people are willing to pay, we see an interesting pattern.

Of those 477 people who have decided to support him:

What's interesting to note here is that the 19 people combined who pay more than $40 per month, makes up $1,300 in total income. Compare that with the 244 people combined who pay less then $10, who only make up $880 in income.

And this is a typical pattern that we see with so many crowdsourcing projects. It's really a mix of many less loyal people who just want to contribute a little bit, with your super-loyal audience who pays a lot of money.

This is a very interesting dynamic.

But, it's important to know that this fluctuates widely from person to person.

CPG Grey, for instance, has:

So again, CPG Grey is making more money from those paying $10. Actually, if you account for the fees, he is making 3.5 times more from the 144 people paying $10 than from the 560 people paying $1.

This is the reality of these individual media companies. It's not a gold mine, but it's enough to get by.

Crowdsourcing, with a twist

Another interesting trend at the moment is when you are doing crowdsourcing based on a promise for the future. Unlike what CPG Grey and Kurt Mac are doing above, where they are asking people to support what they are already doing. We are starting to see media people asking their audience to show their support for a future cause.

One example is Huffington Post, who launched a 'Beacon campaign', in which they promise to do far more extensive coverage of Ferguson next year, by asking you to support the training and hiring of a local journalist.

The idea of this is very interesting. Not just because of the way it is funded, but also because it's based on a promise. They are saying: "Give us your support, and we will do this."

Another example is how TechDirt has turned to Beacon to get support for their special coverage of the very important issue around net neutrality. A crowdsourcing campaign that succeeded and they have now raised $68,000 to do this, $1,185 is in the form of recurring monthly income. It's not enough to pay a journalist full time, but it is enough to dramatically increased their focus on this issue.

It's a fascinating way to do things for small individual media companies. And, again, it's based on the promise of value they intend to deliver in the future.

We also see the same dynamics.

TechDirt is making all that money from only 478 backers. Can you imagine a traditional media company doing this? Can you image starting a project based on the backing of only 478 people?

TechDirt has 1.2 million unique visitors per month, but only 478 decided to back this project. Any traditional media company would never even consider this. They would define it as a failure. But if you are an individual media company, it's $68,000, which is a lot of money.

Churn rate

We also need to talk about churn rates. One of the biggest mistakes an individual media company can make is to focus only on building up momentum and excitement around their channels. They then use this to launch a Patreon (as an example) causing 0.1% to start paying them, but then they just go about their business.

A few month later, people start questioning if it's still worth paying for every month, and over time people will drop out. This is perfectly normal and it's what we in the industry call 'churn rate' as in the rate of people that stop supporting you.

So as an individual publisher, it's vital that you keep building up momentum and keep attracting a new audience, as well as continually nurturing your existing supporters. And this is very hard work.

But if you don't do this, your churn rate will cause diminishing returns until suddenly you no longer have enough to run your business.

So many people forget about this.

The premium content model

Another proven and very successful model for many individual media companies is the premium content model. A good example of this is just to look at FStoppers.

FStopper is a wonderful site about pro-photography, and like so many others they also have this truly amazing YouTube channel with videos like the one below:

 

However, the problem with sites like FStoppers is that, in order to deliver enough value, they have to go into a serious amount of detail. The thing that makes you a pro-photographer is exactly correlated to how much effort you put into things.

The video above, for instance, is a truly remarkable video about how to take photos for real estate agents.

And not only is this video of very high value, it's also extremely niche. Only a very few people need this information. So, while FStoppers has 82,000 subscribers on its YouTube channel, the video only reached 15,000 views. It's just too narrow a niche. And as such, it's impossible to monetize this type of value using advertising or even crowdsourcing.

The market is simply too small.

The only other choice is to do it as premium content, and that is exactly what FStoppers is doing. They are using YouTube and their other channels to talk about why people need to know this, and then they are selling it as high-value video tutorials.

As you can see, we are talking really high-value. It's an 8-hour tutorial, priced at $299, and the amount of effort they have put into this (and the knowledge you gain for it) is just insane.

This is a very well known model that has proven to work for individual media companies. And this is the way to go if your market is so specific that you can't do it at scale.

The traditional subscription model

Finally, we have the more traditional subscription model in which you simply ask people to pay a fixed monthly subscription price. This, for instance, is what I do with Baekdal Plus (what you are reading now). I ask people to pay a fixed price and in return you get 30-35 Plus reports that help you understand the path leading to the new world of media.

"But why," you ask, "do you do this as a traditional subscription model and not as a form of crowdsourcing?" And that's a very good question.

The advantage of crowdsourcing platforms, like Patreon, is that it gives you a great level of flexibility and a ton of energy. With crowdsourcing you can create 'tiers' from which people have several choices of commitment depending on how loyal they are or how much they need you.

And because you are giving people this choice, it's much easier to convince them to subscribe, because people can choose only the level of support that suits them. And this is especially important when we are talking consumer-level forms of media, like if you are a DIY channel or if you are a 'Let's Player'.

The problem with the crowdsourcing model, however is that you are giving up control, as many crowdsourcing channels place themselves in the middle of things. For instance, when TechDirt turned to Beacon, people don't actually subscribe to TechDirt, they are subscribing to Beacon.

This is problematic for many reasons. For one thing, it locks you into the Beacon platform.

The other problem with crowdsourcing is that it's a much less predictable form of income, and your monthly revenue will often fluctuate. The reason is all about churn rates.

If you run regular subscriptions, like I do, where each person pays the same as anyone else. You know that if you lose X people per month, you also need to gain the same amount of new subscribers to keep going.

And this is perfectly normal behavior. Every month some people will cancel their subscription, and every month you will gain new ones. And you can predict this flow by looking at churn rates and conversion rates over time.

But with crowdsourcing, you have no idea because people don't pay the same amount. Imagine that you lose two people, one of them paying $40/month, another paying $10, how many new supporters would you need?

You don't know, because you might gain 8 new supporters, but each of them is only paying $3. That leaves you short $26. So even tiny changes in your focus can change your level of income in ways that is almost impossible to predict.

So, from a business perspective, it's more reliable to monetize via the more traditional subscription model than it is to do it via crowdsourcing.

However (and this is important), It's much harder to earn money via subscriptions, simply because it lacks the energy and flexibility. And the more 'consumer' your focus is, the harder it will be.

So, it's not one or the other, and it very much depends on your type of business. If you are aiming at a pro-audience, like I am on this site, the subscription model is probably the best option. If you are running a channel about making cupcakes, crowdsourcing is the way to go.

If your market is very specific, with a very high-end focus. Premium content is the best option. And if you manage to get really famous, advertising is still an option.

These are the economic realities of the future of individual media companies. And the truly fascinating thing about this trend is that it will dominate the type of media people will consume in the future.

Unlike the old world where our media was dominated by a few really big companies, the future of this trend is having thousands of small independent people creating amazing content. A few will get very rich, but most of them will just make enough to make them happy.

In other words, we are moving from a packaged mass-market world of media and into an atomized world of many smaller individual media entities. And during this transition, every model is flipped upside down.

It's not just a future trend. It's already here.

-

Remember, if you haven't read it already, head over to the first part of this report to learn much more about the dynamics of this trend, the efforts you need to put into making it work, and how different it is from the traditional world of media.

Enjoy.

 
 
 

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Thomas Baekdal

Founder, media analyst, author, and publisher. Follow on Twitter

"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made ​​himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé

 

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