Umair Haque Answers Scott Karp

Scott Karp asks a good question: What If Media 2.0 Is Less Profitable Than Media 1.0? He uses the example of MySpace, now in the hands of a Media 1.0-ish company. Will they actually get the returns they seem to expect? He suggests that the answer is maybe not.

But what happens if big company brands realize that they no longer need a media middleman to connect with consumers? Why, for example, does a brand need to set up a page on MySpace in order for MySpace users to link to that brand’s online presence? If a brand succeeds in creating compelling and entertaining content that speaks directly to consumers and creates immediate value for them, why not just set that up “for free” on their own site and use the viral power of social networks to spread the word?

As Pete said, “there may be profitable ways to leverage the community itself” — but what if those profits go directly to brands and not to the owners of the network where the community exists?

Even for Google, the implications are great — big brands my spend more on search marketing than small companies, but that delta may be far less than in the world of traditional media, where big brands spent billions and many small companies couldn’t afford access to mass media advertising.

Now, I’m not suggesting that there’s no money to be made in 2.0 — I’m speculating that for media companies, it’s a whole lot less than what they enjoyed with 1.0.

I’m speculating that in a 2.0 future, total spending on marketing and advertising will shrink as marketing 2.0 proves to be far more cost efficient than marketing 1.0 — and big advertisers start pocketing that half of their advertising costs that were previously wasted.

Umair Haque picks up the question, and answers it unequivocally: Media 2.0 will be less profitable for all involved, because value migrates to the edge -- to the individual:

[from Bubblegeneration]

Now, that begs the question: for average players, do profits rise, or fall?The answer is so obvious everyone (really, everyone) overlooks it - the evidence is already voluminous.There's no middle ground. Those players who stick to yesterday's models - whether content creators, distributors, publishers - get hypercommoditized. This should be crystal clear: just think of the huge number of media players getting killed, from newspapers like NYT and WPO, to magazines like Meredith, to broadcast networks like Sinclair, etc.

OTOH, those players who leverage the edge - who learn to create and capture value from the new forms outside the boundaries of the firms, like markets, networks, communities, commons - will capture the lion's share of returns. This should be crystal clear: think of players as different as Apple and Google, both of whom are turning the media industry inside out by using markets and networks.

There's another, simpler way to see this. It is a great economic discontinuity, which is already flowing like an avalanche across the economy: value will shift outside the boundaries of the firm, to more economical modes of coordination; it is those players who own or leverage them - who learn to build strategy and advantage around them - who will earn supernormal profits.

Yes, the ones who figure out how to make the new market -- where control of whatever is illiquid is made more liquid, and where control shift to the individuals at the edge -- they will make real bank. But simply trying to stick media 1.0 advertising models into a media 2.0 context -- like MySpace -- will just degrade the experience, and provide an opportunity for upstarts to come along and prove the purchase was overpriced.

tags: umair+haque, scott+karp, myspace, media+2.0, media+1.0, the+edge+dissolves+the+center, social+media

Comments

[Scott Karp]

Stowe, my response to Umair, which I posted in an Update:

CPM will continue to be the principal metric so long as everyone is focused on measuring the scale of MySpace in 1.0 terms — virtually every mention of MySpace comes with an obligatory reference to the total number of MySpace users and the total number of MySpace page views, along with a comparison to Yahoo’s scale.

But in 2.0 terms, the value of MySpace is in the network effect, i.e. the interaction among users and their ability to propogate information, including brand messages. But it’s very 1.0 to assume that the owner of the network platform is in the position to monetize this value — brands may discover that they don’t need to pay MySpace a dime to leverage the network of MySpace users.

The real risk to MySpace is not in applying a 1.0 advertising model but in assuming that there's any money for THEM to make if brands can leverage their network directly.

[Lars Plougmann]

"Media 2.0" is a new way of generating value and it is crowding out "media 1.x" initiatives. What the 1.x initiatives were very good at was *extracting* a good fraction of the value they generated while value extraction is still not a well-honed discipline for the 2.0 services. New models for value extraction (e.g. "freemium") are emerging and will either be adopted by the market or fall by the wayside in a Darwinian fashion.
It is probably interesting to note that the barriers to entry of creating a 2.0 service are low in terms of financial investment. That is why we will see myriads of new services spring forth, each with much lower requirements for absolute profits than in the previous century.
This of course suggests that few "Media 1.x" companies will be able to restructure themselves into generation 2.0 organisations.