In a Vanity Fair article, http://www.vanityfair.com/news/2016/05/new-york-times-leadership-succession?mbid=social_cp_fb_tny, the author was commenting on the failing finances of the well-written, reputable newspaper, the notable New York Times, and how this new digital economy has not been so kind to them. The NY Times has not adapted well; the Internet has changed the economic and content models. Then, while reading the article, I thought of how Metcalfe Law of Networks impacted classical business models. Metcalfe law states that the value of a telecommunications network is proportional to the square of the number of connected users of the system (n2).
Standard content in a newspaper had been designed for all sorts of interests and readerships to be contained in one daily issue. Some content is catered for women, such as wedding announcements (or as someone joked: the sports pages for women.) Other sections can be dedicated to the arts. Other, for sports. So one newspaper issue, priced accordingly, covered wide variety of interests and readers by topics and geography. With pricing around $2.50, the newspaper could cater to a large audience.
But should a digital version of the newspaper should be identical in format and distribution to the standard newspaper? I would answer that it should not. The Metcalfe law already suggests that the connected users are individually connected. And the Internet has information about its users. Otherwise, how does Google make its hundreds of millions of dollars every month? Unlike a newspaper paper rendition that contains every piece of information for a rainbow of readers, the newspaper digital content can be apportioned and catered to the background and interest of each reader at every node of the network. Most of the background information on the potential readers can be identified as the byproduct of big data analytics. So, if the user is a male, aged 20-35, the publication can isolate the content or article related for that reader and transmit it accordingly to the specific node on some platform.
And rather pricing the publication to dollars, it can be done in cents. The Metcalfe Law has proven that there is a growing spider web of content distribution so that potential readers that can be profiled. It is more granular and more specific. Plus the cost of transmission of the content is miniscule, unlike newspaper printing costs and delivery. Therefore, the idea of purchasing a newspaper at a newsstand is being made obsolete.
Another change in the business model revolves on pricing. Can charging a few cents for distributed content be sufficient enough to cover the operational costs of the NY Times? Then I thought of a penny doubled every day for 30 days generates $10.7 million. The origin might be apocryphal but apparently the inventor of chess requested from the Indian Emperor that his compensation for his work would be a grain of rice doubling for each 64 squares on the chessboard. The treasurer informed the emperor that the inventor’s multiplier compensation would empty the rice coffers in India. As I recall, the Emperor simply executed him rather than paying him. So, if the Metcalfe Law is doubling for every user, so would the potential revenues for such network users. Just like grains of rice can add up substantially.
This model implies that Internet pricing can be miniscule and yet reap great rewards at the end. And in some fashion, I do believe that high pricing is not best approach to generate the best revenues from certain Internet business models. An entrepreneurial friend related to me about his startup charging $200 per legal document in trust and estates. I thought that was too high per transaction. The Internet business model must take into account the compounding effect and keep the prices low in order to generate maximum revenues. That law related startup was short lived.
On the other hand, over a recent conference call, I was discussing with founders about their pricing model for a ride sharing platform. They hadn’t established any. If the surcharge was too high, that would discourage any potential users. With the app, users would share ridership with the lead driver and share operational costs. And we are talking about the division of only a few dollars per ride. But with the Metcalfe Law, I concluded that any low pricing through every transaction, even less than 1%, was capable of generating substantial revenues. As more users registered with the app, revenues would explode simply from the multiplier effect – however small the surcharge.
As a religious reader of the NY Times, I would hope that they are able to adapt to this new world order in content distribution. But if done right, they might well make more money than they have done so far with the print edition. If one considers the written word has progressed from cavemen wall paintings, hieroglyphics on papyrus, to the Guttenberg bible, to church stained glass windows, and to newspapers, content now has the flexibility to be faster, instantaneous, and directed to readers through Internet portals. We are now looking at a new business model created by the Internet.