Gregan McMahon & Associates

Walled gardens are a funny old thing.

They’re fairly roundly disparaged by most observers of the Internet. After all, content consumers don’t want to be told what to consumer they want to be free to choose. Right?

History lesson

But since Quantum Link changed its name to America Online (AOL) in October 1989, walled gardens – and their wall-less equivalent, the portals – have had a big impact on how digital content is consumed.

I’m not calling “lights out” on Google and the use of search engines and social media to access content.

I do, however think its worth remembering that historically the companies who controlled the “pipe” through which content is accessed had a big first mover advantage when it came to monetizing this content.

The issue is not that “pipe” companies haven’t been able to capitalize on this advantage – they just haven’t been able to hold on to it.

I’m not going to turn this into a history lesson – we all know what happened to AOL. My point is that the model has been replicated in the Australian market a number of times since.

Life in the old walls yet?

Mobile value added service

When Hutchison Telecommunications – launched 3 Mobile in 2003, Australians got their first real taste of commercial 3G mobile internet. And the content model was a walled garden.

Telstra had at least three failed attempts to crack the mobile content market, Telstra MobileLoop, Telstra i-mode and Telstra Active, were all services that came and went before the launch of NextG in October 2006.

And while some content remains free to browse on Telstra NextG – content sales have become an increasingly important part of the NextG revenue proposition.

Mobile Hybrid Models

One thing that all walled gardens seem to have had in common is an internal tension between content transaction revenue (user pays) and advertising revenue (advertiser pays).

The advertising folk want unfettered access ot consumer for all content so that they can monetize inventory. The transactional folks want nothing shown to anyone unless they have coughed up their hard-earned.

In the mobile space this is exacerbated by the fact that transactional and subscription revenues still dwarf advertising revenue in virtually every market I can think of.

The App Store effect

One of the most recent and widly successful walled garden models I’ve seen is the iTunes and App Store.

I think many app publishers (and music publishers for that matter) would agree that the service Apple has set up isn’t as publisher friendly as it could be.

Apple staff scrutinize which apps go where, and when they are made available. Apps can be removed at any time without much in the way of recourse. And trying to make your app easy to find isn’t the simplest task in the world given the clunky search service that is App Store on the iPhone.

But they still managed to hit 1.5billion downloads after a single year in operation.

So another walled garden which seems to be making inroads – despite the fact that this model has been written off by all and sundry in the last 10 years.

A new approach?

So what’s a poor telco to do? Since day one, the phrase that has struck fear into the heart of every carrier is “dumb pipe”. They are terrified of watching the high margin content and advertising businesses slip through their fingers and being left with the low margin, commodity business of allowing access to digital content.

But they do have a couple of weapons in their arsenal. I believe the smart ones will use these to ensure they can keep the “dumb pipe” scenario at bay.

1. Billing

Telcos have a huge potential advantage in the content sales business. Not necessarily as a retailer, but as a billing partner. Allowing the long tail of specialist content retailers (both online and mobile) to use a simple, trusted, seamless process (ie your phone bill) to pay for your content is an opportunity on both sides.

2. Personalization

When you use your mobile or wired computing device to access the internet, your service provider knows you are doing it. They should know enough about you to make your content and advertising experience a better one.

Working with their own and other advertising networks, carriers should be able to ensure that the advertising you receive is of the highest value to you, the consumer. In theory they should be able to ensure you see ads that have you saying to yourself: “Now that’ just what I was looking for”.

Apple can do it.

Rupert wants to do it.

The world-wide music and movie industries are desperately searching for a model that will work for everyone.

Even the SMH’s Richard Glover seems to think it’s a good idea.

User pays content is back in the news. In the crazy days when digital advertising was growing at 50%, 60%, 100% per annum inventory was king. Get the content up there – get the eye-balls viewing it and damn the torpedos.

In our post-GFC world some of the shine seems to have come off this approach. Sure, people are still making money from advertising and revenues are still growing. But the argument for “pay to play” content is that we pay for everything else we consume – someone has to be paid to create it after all – and if the producers can’t make the right margin, the quality will fall.

The vanguard of the fight for user pays content are the music and movie industries. At least they have the benefit of having had a clear user pays model for the content they produce from day one.

Money for nothing?

CDs, DVDs and trips to the multiplex were never free.

The newspaper and magazine industries however, bought into ad supported model in a big way. The mantra between 1997 and 2001 seemed to be “build it and they will come” – and while they are here we can at least throw some ads at them.

The issue is that many of the costs of producing quality content (music, journalism, TV, art – whatever) are not subject the one of the central tenets of the web-based economy: that it reduces costs of creation and distribution, and therefore, the cost of the content to the consumer can be reduced to near zero – and advertising will provide the revenue.

But advertising revenue isn’t growing at the stunning rates it has been in previous years. For the 2008 calendar year US internet advertising grew only 10.6% (to US$23.4bn) according the the US IAB. Australia fared marginally better in FY08/09, growing 18.5% to AU$1.8bn, according to the local chapter of the IAB.

Compare this to the growth of 61.5% for calendar 2006 and 34.5% for calendar 2007.

So what does this all add up to?

In my view the time is ripe for the digital media industry to move to the next level. Advertising is not going away – but it is not the “golden hammer” that will allow content to be free. New commercial models are needed – models in which some hard decisions are made about content quality, access and pricing.

I believe that consumers will pay for content – as long three key conditions are met:

1. Simple, low cost subscription pricing models
2. High quality, differentiated content – personalized, localized and in real time
3. Some means (technological, legal or moral) of discouraging consumers from accessing this content without paying something for it.

And when these are in place I believe we see some enormous leaps forward in the ways in which content is created and consumed in the digital world.