Analog Dollars, Digital Dimes

Over the years I have on occasion likened the competitive telecom industry's structural issues to those of the airline industry, with one overriding main conclusion: there are some businesses that seem to be structurally incapable of making money; and that the airline industry seems to be one of those instances. I have never found the analogy to be so apt that the same conclusion could be reached about the communications business.

First, it is historically untrue that the communications business "cannot" make a profit. It has, and does. The question many have, though, is whether that will always be true, or the extent to which it will prove to be true if the industry changes rather significantly.

The other analogy that has made sense when looking at broadband and voice products sold in a "digital" context is media. Content owners starting with music and print, and now video, have had to grapple with some clear revenue implications of the Internet and the web. The notion of exchanging "analog dollars for digital dimes" captures the dilemma. As a rule, digital versions of print products cannot garner the same advertising rates as analog products once did.

As the Super Bowl ad rate suggests, there now are so many different media channels that each discrete channel is "devalued" in terms of ability to command a premium price.

"Let’s assume the Washington Post decides to put up a paywall and assume it has a meter such that once a reader reaches a predefined limit on articles per month the reader needs to subscribe," says Scout Analytics. " As a result, only fans of the newspaper will purchase an online subscription."

"Our studies have shown fans make up about five percent of the audience," Scout Analytics says. For the Washington Post, they would have had 1.19M fans in 2009. Assuming the paywall has the same rate as the print product $280 per year and a 50 percent of fans convert to a subscription, the revenue from the paywall would be $167 million, which would require $229 million in ad support. But ad support would come to about $70 million, leaving a shortfall would be $159 million.

Some will note, as does Scout Analytics, that these revenue assumptions are likely too generous. The point is that it remains difficult to achieve the same level of gross revenue and profit margin with digital versions of analog products.

Some of you instinctively will think of VoIP, global capacity pricing, mobile voice, text or broadband pricing, and even consumer broadband access services as examples that illustrate the same process at work in communications.

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