I agree that the business numbers you put forth is a bad business. No one said that pricing at marginal cost makes a bad business into a good one. You are confusing two separate issues.

My point is that trying to charge for the content doesn’t magically make your bad business into a good one.

But trying to ignore the marginal cost in a competitive market makes a bad business into a dreadful one. If you *understand* the marginal costs, and the nature of the market, then you can try to put in place a business model that makes sense.

So, in the above example, you recognize the return on investment that you need… let’s say $750k based on your numbers. Then, you need to come up with a model that will let you get that amount. But that doesn’t mean you have to charge for content or that ads won’t work. It just means you know what target you have to hit.

But that’s a different discussion than whether or not ads scale or whether or not you can charge for content.

I’m not saying you shouldn’t understand your fixed costs. You absolutely need to. But the price of an individual good is NOT determined by the fixed or average costs in a competitive market. That’s because if you try to price based on your fixed costs, someone else will undercut you, and you’ll be in trouble.

Here’s how my fictional costs break down by month:

$100/mo for 500GB bandwidth, $0.25/GB beyond that (Rackspace)
Staff of 10 people at average of $50k/year, $500k/year, ~$41k/month

The bandwidth becomes a rounding error at this stage, but I’m going to assume I’m paying at least $300-$400/mo for the servers.

Now let’s assume I’m smart and I sell my ads CPM instead of CPC for an average of $12 CPM, which means a page view earns me 1.2 cents per ad. I get four ads on a page so I make 4.8 cents per page view.

Let’s say I’m doing really well and I serve 800,000 pageviews every month. At those numbers, I earn $38,400. I’m losing money, despite the fact that every extra pageview is “free to me.”

The other un-accounted for cost in this whole setup is that *generating* pageviews is not free either; this assumes I do no marketing whatsoever, pay no office rental, no equipment costs, no software costs, no taxes, and that the work of ten people doing 40 hour work weeks would generate enough content to earn 800k pageviews (which I’d be damn surprised if they could do that consistently).

I just don’t see how the math works. Marginal costs are great, except that the numbers going in and out of your bank account are based on average costs, so it seems dumb to build a business model that assumes the rest of the costs just don’t exist…

Thanks for the response…

I’m not sure I agree that the marginal cost is “almost zero.” Well… it really depends on the bandwidth contracts, but I’d argue in many cases it absolutely is zero. You visiting Techdirt doesn’t cost us anything extra (normally).

Definitely agree that subs won’t work as imagined now, but I think you’re still making an econ mistake when you say “They need to be priced so that they pay for the cost content creation,” That’s accounting issues, not economics. You’re too focused on covering the costs directly, rather than providing value combined with a complete business model that makes sense. Subsidized/bundled content production is a model that ‘s worked for ages if you know how to subsidize and bundle properly.

On the scale question, you still seem to be confusing fixed and marginal costs. Once the content is created it can be reused at an incredibly low (sometimes zero) marginal cost.

I’m aware that my econ is based on a course or two in college, but yes, I’m sort of intentionally confusing marginal cost and average cost. In a sense it’s irrelevant, because the marginal cost of serving another news article isn’t zero…it’s almost zero, so the price shouldn’t be zero anyway.

Two other points:

Why will subscriptions work now? – They won’t work as they are currently imagined. They need to be priced so that they pay for the cost content creation, and content should be distributed much more cheaply via the internet.

I’m actually agreeing with you that newspapers cant compete in the “google” environment when they have to pay for content creation, so they should enter a new businesses. Which leads me to point #2…

Scale -

Google works at scale because they don’t have to pay the cost of creating the content against which they serve ads. This is an excellent model, but one that does not apply to a professional publication that wants curated writing, pictures, video, etc. If you have to pay for content creation, then no scale, because every new page you can serve ads against costs you more to product than you can make from it in ad revenue.

Broadcast TV works because they’re still selling a scarce resource (air time) in a situation where people pay more attention (TV on a TV). Same for radio.

Scale doesn’t work when online ad space is essentially unlimited (so you can’t sell it), and you still have to pay to produce the content.

I’d argue a few points. Value is not what people will pay for it. That’s the market price. Value is what makes up the demand side of the demand/supply curve, but that’s only a part of the equation. If the supply is effectively infinite, value doesn’t matter.

Air? Incredibly valuable. But also abundant. So you don’t pay for it.

Second, you confuse marginal costs with average costs in your discussion on the cost of producing news. You are absolutely right that economics doesn’t care what something “should” cost — and I’m quite careful to make my point clear: I’m talking about what the market decides, not what should happen.

But you lump in the fixed costs and assume that said fixed costs preclude a price of zero. That’s incorrect. It’s the marginal cost — not the average cost — that determines where price will end up under competition. The mistake you’re making is looking too narrowly at the market and not realizing the power of bundling.

I agree that subscriptions haven’t really been providing the revenue for newspapers for ages, so I’m not sure why you think that will suddenly work in a MORE competitive environment. There are plenty of ways to make money. Trying to sell something that is abundant is not a good one.

Finally, you claim that selling ads on free to consumer content can’t scale. Tell that to… Google. Or broadcast TV stations. Or radio stations. It’s scaled for ages. I’m not sure why you suddenly think it no longer works.