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Who Are the Five Percent Who Will Pay for News?

In the good old days of Dialog Information Services, LexisNexis before the New York Times broke its exclusive deal, and SDC, user behavior was known. Let me give you an example. The successful commercial databases on the Dialog System derived the bulk of their revenue from the Federal government, well-heeled consulting and knowledge-centric service firms, and the Fortune 1000. How much money came from these big spenders? I don’t have the Dialog reports for ABI /INFORM, Business Dateline, and Ziff Communications’ commercial databases any longer. I do recall my fiddling with the green bar reports and pokey 1-2-3 and Excel worksheets, trying to figure out who paid what and what the revenue splits were. In the course of these fun filled excursions into cracking the code on usage reports, I remember my surprise when I realized that online revenue was like an elephant standing on its trunk. I used this metaphor is a couple of journal article because it captured how a thin column of companies supported the bulk of the revenue we received from the dozen vendors distributing out products. The way the revenue share worked in the good old days was that a database producer received a percentage of the revenue generated by a particular database (called a file). If you were a good little database producer, the vendor like Dialog or LexisNexis would give you a percentage above 10 percent. If you were a top revenue producer, the vendors would reluctantly up the percentage paid. One of our databases made it possible to squeeze 50 percent of the total revenue generated from the file from Dialog and LexisNexis. We were in high cotton, but my worrying the green bar reports revealed a big surprise: About 90 percent of our revenue came from about 10 percent of the total number of file users.

This means that our top producing database in 1981 would attract about 10,000 users in a 31 day period. The money were were paid came from about 1,000 of these users. The other 9,000 users spent pennies, maybe a dollar to access our hand crafted, high quality data. The particular file I am referencing was in the 1980 to 1986 period viewed as the premier business information database in the world. No joke. Our controlled vocabulary was used to index documents at the Royal Bank of Canada and used as an instructional guide in library schools in the US and in Europe. (Keep that in mind, taxonomy newcomers.)

I spoke about this “elephant standing on its truck” insight with my colleagues, Loene Trubkin (one of the founders of the old Information Industry Association) and Dennis Auld (one of the original whiz kids behind the ABI / INFORM database). I recall our talking about this distribution. We knew that the “normal” distribution should have been an 80 – 20 distribution, following everyone’s favorite math guy Pareto. The online sector distorted “normal”. Over many discussions, at the Courier Journal and later at Ziff Communications, the 90 – 10 distributions popped up.

I don’t want to dig into the analyses my teams and I ran to verify this number, but I have noticed since I became a consultant, a slow, steady shift in the 90 – 10 distribution. Recent data sets we have analyzed reveal that revenue now comes from a 95 – 5 distribution. What this means is that if one looks at who spends online, the top five percent of the user base accounts for 95 percent of the revenue.

The shift has some interesting implications for those who want to make money online.

First, the loss of a single customer in the top five percent category will have a significant impact on the top line revenues of the online company. The reason is obvious. When a government agency shifts from for fee information to Internet accessible “free” information, the revenue to the online company takes a hit. To get that revenue back, the online vendor has to acquire sufficient new accounts to make up the short fall. With budgets tight, online vendors have to raise their prices. The consequence of this nifty trick is to discourage spenders in the lower 95 percent of the customer base from consuming more for fee online information. The big companies like the Fortune 1000 firms and the top 25 law firms can keep on spending. The result is the “softness” in the top line figures reported by the publicly traded online vendors. These outfits have either crashed and burned financially as Dialog did under the Thomson Corporation’s management or the online segments have been fuzzed and merged into other revenue line items. Pump up or hide the revenue is a time honored method of disguising the vulnerability of the elephant to falling on its rear end.

Second, customers who find the commercial online services too expensive become a hunter of free or low cost information with an appetite that is growing. The commercial online vendors have been mostly unable to cope with the surge of information available from addled geese like me who write a “free” Web log that sometimes contains useful information such as the list of European search system vendors, Web sites pumping out content via RSS, and individuals who generate Twitter messages that can be surprisingly useful to marketers, law enforcement, and analysts like my team at ArnoldIT.com. The efforts of the commercial online vendors are oddly out of sync with what former customers used to do. One example: small law firms go to law libraries and get a law student to look up info, use Dot Gov Web sites for information, or click to Google’s Uncle Sam service. For certain types of legal research, these services are quite useful and what paralyzes the commercial online services is the fact that these services are improving. The commercial online vendors have created a market for lower cost or free online information and boxed themselves into a business model that ensures a long, stately decline into a sea of red ink.

Third, entrepreneurs looking for a way to put food on the table look at the current state of the commercial database industry and see opportunity. One example is the emergence of real time information services. I document the services I find interesting in my monthly column for Bizmedia’s Information World Review, published in the UK. The commercial database vendors know about these services, and some of the tech savvy people at these companies have the expertise to offer somewhat similar services. The new services from commercial database vendors don’t get the traction that the churning ecosystem of the Internet generates. The pace of innovation is too fast for the commercial vendors. After a couple of tries at creating a more hip Web service, the commercial database vendors stand like a deer in my headlights on Wolf Pen Branch Road. Most of the deer get hit by my neighbors. (I brake for animals. My neighbors just roll forward en route to the new Cuban restaurant or the car wash which still uses humans, not machines to bathe Mercedes and Porsches.)

In this context, the fact that Rupert Murdoch’s pay-for-news plan appeals to five percent of those in a survey sample is no surprise to me. I would wager that Mr. Murdoch is not just surprised. He is probably setting lose survey companies to conduct “more accurate” studies, a practice much in favor at IBM, Microsoft, and Oracle. The irony of this five percent is heighted for me because I read about the five-percent study in the UK newspaper The Guardian. You should read the story “Murdoch’s Digital News Cartel Will Not Persuade People to Pay for Content.”

Let me wrap up with three observations:

1. Some people will pay for Murdoch content. The problem is that these folks may not be willing to pay enough to keep the enterprise solvent. Other revenue streams will be needed which will lead to the fuzzing and merging of financial information to make it tough to figure out how big a loser this effort really is. A precursor is the handling of the Factiva unit by Dow Jones.
2. The 95 percent who won’t pay become a ready made customer base for an entrepreneur who can implement a different business model. I nominate Google to be a player in this ready made market. Others will find a foothold as well. I know one thing. Traditional newspaper companies will have a tough time when these upstarts get their systems in gear.
3. The problem is not limited to Mr. Murdoch’s organization. The disruption of the skewed curve is, based on my team’s research, operating across a number of business sectors where analog services are being replaced by digital services.

In short, the 95 – 5 curve is the new Pareto curve. Get used to it.

Stephen Arnold, September 22, 2009

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