Online content: to charge or not to charge?

When should you charge for online content?

The decline of print advertising in the past decade has put the media industry into a perilous state. And, with slow uptake of online advertising revenues, the future of the media industry looks uncertain.

Companies are desperately trying to monetise content online, yet charging customers for online content is difficult to get right. Managers of many online news outlets have responded with the introduction of a paywall. But paywalls can decrease viewership and, as a result, damage advertising revenues.

The demand for news also varies throughout the year – it is highly cyclical. In business, the cycles are quarterly as they relate to earnings reports; in US politics, the cycles are four-yearly to coincide with the US presidential elections; in sport, demand is unequivocally higher when it is “in season”.

In fact, the number of unique visitors to relevant websites more than doubles when a sport is in season, that is during the time period when games are played, as our research shows. Interestingly, when the sport is not in season, the number of unique visitors to a website drops by about 50 per cent.

Sports seasons

Let’s look at a baseball buff, eager for baseball news all year, and then the occasional fan who only gets excited when a sport is in season. It’s no surprise that the demand from the occasional fan shifts more strongly as a season starts than that of the baseball buff.

Classic economic theory suggests that increasing prices during periods of high demand should be the most profitable approach to charging for online content. In reality, this may not be the case.

Customers typically sign long-term contracts when they pay for online content, such as an annual subscription fee. Many online content providers offer a fixed number of articles per month for free before starting to charge. While such policies are an advantage, the inflexibility to respond to demand shocks in the organic news cycle can be a setback for a company’s bottom line.

Fee or free?

When it comes to charging customers for online content, research I worked on with Kanishka Misra, the assistant professor of marketing at the University of Michigan’s Ross School of Business, suggests that it may be optimal for providers to offer more free content during periods of high demand, rather than increasing the paid content at that time.

Providing more free content when there is more demand can help balance the trade-off between subscription and advertising revenues. It allows a company to gain subscription revenue by attracting high-value consumers off season – the baseball buffs, while not alienating low-use consumers, occasional fans, during the season. ESPN follows this pattern. Our research shows that the number of paid articles available on the site varies across days and sports. When demand is high, on game days for example, ESPN reduces the share of paid content available on the site.

This “countercyclical” revenue model relies on the fact that when a sport is in season there is a large share of consumers willing to visit, though still unwilling to pay for access to content. This presents a window of opportunity for businesses to generate more advertising revenue, rather than subscription revenue, thanks to high viewership.

On the money

Responding to an increase in demand by offering more free content can be a profit-maximising approach for online content providers to follow. Importantly, a company does not need to be able to predict demand in the long run. Digital technology means that content providers can flexibly assign any new piece of content to be free or paid.

Managers should broadly identify their own cyclical demand shocks so that they can adjust their share of free and of paid content.

Anja Lambrecht is an assistant professor of marketing, London Business School