A series of recent business moves—including a September 19 decision by the New York Times to no longer collect a fee for online access to selected articles, Internet service provider AOL’s ongoing push to garner revenue from advertising instead of subscription fees, and musings by Wall Street Journal owner Rupert Murdoch about eliminating charges for its online edition—appear to have upended a favorite saying of economists: TANSTAAFL, or There Ain’t No such Thing As A Free Lunch. But some faculty at Emory University and its Goizueta Business School say the role of advertising, Internet-related technologies, and the free market will eventually settle the issue of who pays for what over the Internet.

In addition, faculty note that despite the shakeups that the Internet has brought to the marketplace, most companies—other than information providers—will likely be able to avoid getting wrapped up in the Internet’s so-called free-pricing model; a model that, they explain, is really not free after all.

“The cost model for information production is unlike that of other industries,” says Ajay Kohli, a chaired professor of marketing at Emory University’s Goizueta Business School. “Consequently, the pricing model is different, too.”

For example, regardless of the level of efficiency attained by an automobile or other manufacturer or service provider, the production of each individual good or the rendering of each service for each buyer incurs incremental material and/or labor costs. Because these incremental costs are discrete, or may be traced to an individual unit of production or service, a manufacturer or service provider will generally cover them by charging each consumer a price for each unit of product or service. 

But when it comes to information or other digital content such as music or movies, the costs of production are generally only incurred a single time, notes Kohli. This makes it imperative for information providers to distribute their content to as many consumers as possible.

By distributing their content widely, they can amortize their production costs across a large number of fee-paying customers. Alternatively, if they choose to not charge a fee, their broader consumer reach makes them more attractive to advertisers, he notes.

“That is why, for example, television and radio developed as so-called free mediums,” says Kohli. “The cost for each unique show was only incurred once, during production. Their wide reach made them attractive to advertisers that wished to reach targeted geographic and demographic markets, and advertisers were willing to pay television and radio stations for access to their consumers (audiences).

“That’s why it is incorrect to say that the [pre-cable] television and radio business models were ‘free,’” explains Kohli. “The entrance fee may not have been denominated in currency, but it did require consumers to sit through commercials—at least until innovations like VCRs and, later, Tivo, enabled audiences to de-link their schedules from that of the broadcaster, while also giving them the ability to fast-forward through the advertising.”

Pricing is not an issue of brand strength

Kohli says these developments led directly to the no-fee business model that was initially followed by many newspapers that migrated to the Internet. Publications like the New York Times and the Wall Street Journal, which bucked the trend and charged for their content, may have believed that their brand strength would enable them to charge a premium.

“If so, that may have been a mistake,” he says. “Branding is not the primary issue here. Instead it is the extent to which people are interested in paying for information content. The fact is most people prefer not to have to pay for it. Increasingly, the mindset of the public is that information should be ‘free’ and available to anyone who wants it.”

Kohli adds that while some percentage of the population, particularly those whose bills are being picked up by their employers, may be willing to pay for news and other information, “the group that is unwilling to pay is much larger, so a publication like the New York Times is likely to make more money by not charging for its content and instead getting more advertisers.”

Greg Thomas, director of research and programs at Emory Marketing Institute, observes that currently, media websites find themselves in a case of the prisoner's dilemma—a game theory exercise involving two criminal suspects who are separately offered the same deal by police: if one testifies against the other, the betrayer goes free and the silent accomplice receives a full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence.

Each prisoner must choose whether to betray the other or to remain silent. But neither prisoner knows for sure what choice the other will make. So this poses the question: How should the prisoners act?

Similarly, “If all media sites work on a pay-to-play pricing model then consumers would pay for their favorite sites,” says Thomas. “However, when it comes to news there are a lot of third-party payer sites, where advertising provides the revenues. This allows people to read several media sources for free, and if one source is not free then it is bound to lose readership unless its content is highly distinctive. As a consumer, why should one pay for news content when nearly the same news content can be read for free?”

Kohli theorizes that some media may eventually adopt a menu-based pricing schedule.

“Conceivably, consumers could choose from content that is delivered fee-free but that contains advertising, while others would pay a fee for ad-free content. We’re already seeing some form of that with advertising-based ‘free’ radio and listener-supported ad-free stations.”

The danger in an advertising-supported model, Kohli says, is that a target audience may get turned off if the ads are too numerous or intrusive.

“Today, some news and other websites force a viewer to watch an advertisement before they can access the video content,” he says. “Because they can’t fast-forward or otherwise skip the advertisement, the viewer may develop negative feelings about the advertiser.”

Ramnath Chellappa, an associate professor of decision and information analysis at Goizueta, says that newspapers and other content providers will eventually develop multi-tier pricing plans that are even more sophisticated. Today, he notes, we are witnessing the beginnings of such systems being offered by cable radio stations.

“Currently, people tend to think of payments solely in terms of monetary exchanges,” he says. “But eventually they may recognize that advertising also extracts a payment, in terms of their time. Some cable stations [like XM radio’s music stations, and HBO television] recognized this and substituted a per-subscriber fee charge in exchange for the elimination of advertising.”

But Chellappa says the cable business model may still be evolving.

“The next step could be a menu of pricing models,” he says. “The concept extends beyond the simple choice of paying a monetary fee for advertising-free broadcasting or foregoing the monetary fee in favor of paying by accepting advertising. Instead, an additional premium may be charged—or not, depending on the consumer—for the choice of whether or not the broadcaster will collect information about the viewer or listener.”

He notes that today’s Internet-related technology enables broadcasters to potentially track the online browsing and purchasing habits of every member of the audience [unlike the sampling done by rating services like Nielsen, which use more tracking devices that are much more limited], and then sell that information to advertisers and other interested parties.

“Thus, individuals that are unwilling to pay any monetary premium for their digital content could choose an advertiser supported structure that also tracks their programming choices,” Chellappa says. “At the other extreme, people who do not wish to incur any privacy or inconvenience [i.e.: advertising interruption] costs would pay a monetary premium. The open question is the ability of firms to effectively segment their audience and their related content offerings and reach the appropriate markets.”