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What the Bull Market in Digital Content Means for Consumers (Hint: Get Your Wallet Out)


After 15-plus years of getting information on the Internet, 2012 will be the year where all content merges -- and consumers better get used to paying for it.

We're finally there. After 15-plus years of getting information on the Internet, 2012 will be the year where all content merges thanks to the Apple iPad (AAPL). And we'd better get used to paying for it.

As with many things involving digital media, we can partially thank (or blame) Steve Jobs for this. The iTunes music store launched in April of 2003, the first platform on which many of us bought digital media. Paywalls for the Wall Street Journal and ESPN Insider began around that time. Until the introduction of Amazon's Kindle (AMZN) in late 2007, these were basically the only ways to buy content online.

Fast-forward to 2011. ESPN insider has several hundred thousand paying subscribers. The Wall Street Journal has over a million. As of this month, the Financial Times has over 250,000 digital subscribers, a figure that is up 30% in the past year. Apple, in its recently released 10-K, announced combined revenue for iTunes, the App Store, and the iBookstore hit $5.4 billion in its just-completed fiscal year, up 33% from 2010. And there are many other companies with large digital content revenue streams now.
We've come to expect that music, movies, TV shows, magazines, and books will be available for digital consumption. And we know they're not free.

What's really exciting are three changes that are likely to occur over the next few years.
1. More and more live television streaming, especially for tablets. This month Bloomberg TV began streaming on its iPad app for free. WatchESPN, formerly known as ESPN3, allows subscribers of many Internet providers to watch live sports like college football and basketball online. I'm sure these won't be free forever. This trend is likely to accelerate and raise questions about whether traditional television subscriptions are the next industry to be disrupted by the Internet.

2. Online content distribution leaders invest heavily in original programming, competing with television for revenue. YouTube has set aside $100 million to invest in original content. If this succeeds, look for Hulu and Netflix to follow.

3. Online-only news organizations start charging for content. Until now the only news organizations able to charge for news have been "old world" brands like the New York Times and Wall Street Journal. This is likely to change for a couple reasons. First, eyeballs, mindshare, and advertising and subscription revenue continue to move online. There's no inherent reason why only news sites that also have physical newspapers should be able to charge for content. Second, as companies ranging from Square to Apple to Facebook work on improving digital and mobile payments, it's likely someone will figure out how to charge a "toll" for viewing a single piece of content. In 2014 perhaps we'll stay logged into Facebook while doing anything on the Web, and viewing the latest Lady Gaga video will cost a quarter, a post on TechCrunch will cost a nickel, and a generic story from the Associated Press will remain free or cost a penny.

It's that last possibility which will really be a game changer. A lot of people are frustrated by blogs known as "content aggregators" or "content farmers" that try to host as much content as possible since revenue is typically based on how many clicks a site has gotten, regardless of what article was clicked or who clicked it. Once the market recognizes that not all content is worth the same, and not all viewers are worth the same, you can rest assured that advertisers will adjust as well. What's more valuable to an advertiser, 1,000 clicks on an article viewed by people who paid nothing for it, or 1,000 clicks on an article viewed by people who paid $1 for it? As data trails and analytics become even more robust, the model could become even more sophisticated – a click from someone known to spend thousands of dollars a year on content might be worth 1,000x a click from a freeloader.

This will be a win for everyone involved. The incentive to produce high-quality content that people will pay for will surge. Producers of said content will earn real money from creating it. Sites that host premium content will have a lucrative new revenue stream, perhaps creating their own iTunes model where they pay content producers 70 cents of every dollar and keep the other 30 cents. Advertisers will have more choice and information about who to target. And consumers will get access to more high-quality content.

We're probably one to two years away from the growth in Internet content revenue more than offsetting the decrease in traditional publishing revenue. In fact, music album sales are on the rise for the first time since 2004. It might not be much solace to the former employees of Tower Records, Borders, or a newspaper news room, but it'll be one more sign that we're slowly, methodically working our way toward the end of this secular bear market.

Twitter: @conorsen

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