Business models, scalability, and how advertising value is distributed from the head to the long tail

As now happens frequently, mainstream media has taken a blog discussion, written it up, and sparked off more interesting debate. Media symbiosis continues to develop. A blog post by Jeremy Liew of the VC firm Lightspeed Venture Partners on how to build online media businesses with at least $50 million in revenue triggered an article in the New York Times titled Popularity May Not be Enough. In essence, he says that there isn’t enough money in advertising for more than a handful of content businesses to make good money. Mainstream media can still price their advertising at a reasonable price, but not the emerging players. The piece explores some of the key issues, including other possible business models, with some interesting comments from Tim O’Reilly.

I think part of the point is being missed here. A VC may only be interested in businesses that earn $50 million annually, but other people will be very happy with a healthy personal income to effort ratio. The entire economy is being modularized, and we mustn’t forget that part of the fundamental dynamic at play here is the growth of many smaller businesses to complement the media monoliths. Allen Stern makes essentially the same point.

As such we are beginning to see how the head, the long tail, and what is in between becomes populated by media and content. A couple of years ago I used the following diagram in a keynote I did at a public relations conference. I’d probably create it differently now, but the point remains that there are different segments along the power law curve along which all media and content creators are distributed. Different business models will apply at different points on the curve.

Kyle Reddinger suggests creating “niche monopolies” is the go, which aligns with the “topic specialists” I proposed. Matt Terenzio says that we will move towards “true value” in how advertising dollars are allocated. It’s very hard to think why this won’t be the case in the long term. However Scott Karp seems to believe that value has got misaligned, with Google a possible culprit in driving down advertising revenue. Mathew Ingram thinks a “measure of engagement” will help identify the value of pricing. There is indeed great value in developing the mechanisms that allow us to understand how value is created in online advertising. But in the meantime there will be vagaries in advertising pricing. All the while new business models will emerge along the curve. VCs love “scalable” business models. However there’s no reason why all business models should scale.