Open Access News

News from the open access movement

Wednesday, October 24, 2007

More on the economics of distributing information

End of Paying for Information on the Net? Knowledge@Wharton, October 10, 2007.  (Thanks to Subbiah Arunachalam.)  Excerpt:

...“The cost model for information production is unlike that of other industries,” says Ajay Kohli, a chaired professor of marketing at Emory University’s Goizueta Business School. “Consequently, the pricing model is different, too.”

For example, regardless of the level of efficiency attained by an automobile or other manufacturer or service provider, the production of each individual good or the rendering of each service for each buyer incurs incremental material and/or labor costs. Because these incremental costs are discrete, or may be traced to an individual unit of production or service, a manufacturer or service provider will generally cover them by charging each consumer a price for each unit of product or service.

But when it comes to information or other digital content such as music or movies, the costs of production are generally only incurred a single time, notes Kohli. This makes it imperative for information providers to distribute their content to as many consumers as possible.

By distributing their content widely, they can amortize their production costs across a large number of fee-paying customers. Alternatively, if they choose to not charge a fee, their broader consumer reach makes them more attractive to advertisers, he notes.

“That is why, for example, television and radio developed as so-called free mediums,” says Kohli. “The cost for each unique show was only incurred once, during production. Their wide reach made them attractive to advertisers that wished to reach targeted geographic and demographic markets, and advertisers were willing to pay television and radio stations for access to their consumers (audiences)....

Kohli says these developments led directly to the no-fee business model that was initially followed by many newspapers that migrated to the Internet. Publications like the New York Times and the Wall Street Journal, which bucked the trend and charged for their content, may have believed that their brand strength would enable them to charge a premium.

“If so, that may have been a mistake,” he says. “Branding is not the primary issue here. Instead it is the extent to which people are interested in paying for information content....”