Monday, December 18, 2006

Web seen as gradually killing the "bundled sale"; newspaper as "information valet"

The principal argument of media against micropayments has always been that selling items "by the drink" rather than by the box or bottle or case is less profitable than forcing people to buy a bundle of things they don't want in order to get what they do want. That's the principle behind cable tiers. But in this Wall Street Journal column, William M. Bulkeley argues the Internet is gradually trashing the bundling business model. This suggests newspaper companies must become adept online to referring their users to information from anywhere -- and providing a mechanism to charge them for it. Does this make the newspaper an "information valet"?


The Internet Allows Consumers to Trim Wasteful Purchases

November 29, 2006; Page B1

Photography and publishing companies shouldn't be surprised when digital technology upends their industries. After all, their business success relied on forcing customers to buy things they didn't want.

Photo companies made customers pay for 24 shots in a roll of film to get a handful of good pictures. Music publishers made customers buy full CDs to get a single hit song. Encyclopedia publishers made parents spend thousands of dollars on multiple volumes when all they wanted was to help their kid do one homework paper. The business models required customers to pay for detritus to get the good stuff. Inevitably, their industry revenues are shrinking now that consumers can use digital technology and the Internet to select only what they want.

Marketing 101 says success comes from selling things people want. But advanced marketing calls for companies to leverage the relationship to get the buyer to pony up for other products -- or at least for extra product. When customers find a way to avoid buying the excess baggage, they change quickly.

Take the film business. Eastman Kodak and Fuji Photo Film had a highly profitable duopoly for 20 years before digital cameras came along. They never dreamed customers would quickly abandon film and prints. But customers are happy to pay for new digital cameras because the cameras let them pick the good pictures without having to pay to print out a roll of mostly mediocre shots. Now film sales are dropping 20% or more a year and Kodak has reported losses for eight consecutive quarters while closing plants around the world and laying off thousands of people.

Manufacturers have misunderstood this frustration with waste in their sales. The film industry's photo-processing partners, like Walgreen, even gave away a second set of prints for sharing -- although the average roll of film contained few shots that anyone wanted. When printing a snapshot was the only way to see a picture or share an event, customers seemed happy with the system.

Now, it turns out customers really didn't want all of the little four-by-six prints they stuck in shoe boxes. Shutterbugs today store their pictures in computers or post them on MySpace without ever printing them out.

Frank Baillergeon, an Eagle, Idaho, photo-industry consultant, says prints will never come back in fashion because people prefer digital images directly implanted on coffee cups, photo books, personal calendars and the like. Kodak is scrambling to find new revenue sources in the digital era.

Music buyers have made a similar conversion. Compact discs, which usually contained eight to 12 songs, are losing customers to listeners who download one song at a time. "When there are new releases, you can just buy the songs that you want," says Emily Schlossman, a 14-year-old from Newton, Mass., who buys almost all her music from iTunes.

Buyers' newfound ability to avoid paying for things they don't want helps explain the drop-off of advertising for traditional media. John Wanamaker, the 19th century Philadelphia department-store magnate, once said, "I know half my advertising money is wasted, but I don't know which half." The newspaper, radio, television and magazine industries have thrived on advertisers not being able to know.

But when Bill Gross pioneered search-related advertising in 1998, where advertisers only paid when a customer clicked through to their site, advertisers started to change strategies. Now, virtually all mass media face declines as both consumers and advertisers shift to digital technology. Readers get what they want by selecting articles or time-shifting shows. Advertisers get what they want by paying only for searches. Some readers still want everything in the newspaper and some advertisers still will spend a lot to build their brands. But the numbers are smaller than they used to be.

So far, the Yellow Pages industry is holding on. Companies that publish these local business directories collected $14.5 billion last year in the U.S., charging tens of thousands of dollars apiece to businesses that only reached a fraction of the hundreds of thousands of people who have the book in their homes. Most businesses have to buy ads in two or more local Yellow Pages because they don't know which one their customers read.

Neg Norton., president of the Yellow Pages Association, says its surveys show that the number of Yellow Pages searches in the U.S. has held steady in recent years, dropping less than 3% since 2003, to 14.5 billion last year.But some advertisers are defecting to the Internet to get a more targeted way to reach their audience. Greg Keane, president of Titan Moving and Storage, in Allston, Mass., says he has cut his Yellow Pages ads to one-quarter page from a full-page. "It has become clear that someone who wants to find my company just clicks on the computer," he says. He says he knows that all the money he spends now on his Web site reaches viewers who want movers.

Email comments to . Lee Gomes is on vacation.


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