A quest for sustainable content creation: from transactional, to ads, to subscriptions, to tokens.

In The Rationalization of Publishing, Ev Williams (founder of Medium) audaciously declared the advertising-only model for online monetisation dead. He first recalls the eureka moment when one realises the weakness of pay-to-consume fees (e.g. buying newspapers) in face of zero marginal distribution costs:

With no printing costs and the ability to reach a much larger audience, publishing could be supported by advertising alone. If so, it would be a huge win/win: free information for the world and strong businesses with global reach.

The advent of the web (and later on of cookies) unbundled context from audience, in the perspective of the media industry, allowing for much more granular targeting. Earlier, you went to an agency and brainstormed about your next campaign before “guessing” efficiency by looking at sales figures in the next quarter. Now, you could know the age, sex, income and location of whoever was looking at your ads, and fine-tune criterion practically in real time.

Arguably, the web’s first banner ad.

One of the first banner ads had a click-through rate of 78%. Publishers went all in online, rejoicing on a sprawling business that brought in as much revenue as they were willing to invest to get.

1. What did we do to ads?

The last decade saw the emergence of a wave of ad-tech businesses that would be unimaginable in pre-internet eras. The digital media supply chain grew increasingly complex.

However, this abundance is not directly correlated with system-wide cost-effectiveness. Today, the average CTR is almost three orders of magnitude lower than that of the first web banner. Don Marti, a data researcher, used a set of Facebook earning numbers to show that newspapers make roughly four times as much money in advertising as Facebook does in the US — despite capturing much less “attention minutes” per day.

He argues that advertising in a public place (e.g. a newspaper) builds brands in a way that differs structurally from what private, targeted ads can do. Ethan Zuckerman called this the print dollars, digital dimes” paradox, and suggested it’s mostly a legacy effect, hinting at the prediction that print ads tend to fall in price as online targeting covers more broadly entire markets.

Both arguments constitute parts of a larger phenomenon. It’s not only online ads that are getting cheaper, nor legacy formats which are primarily going to lose market value. Ultimately, what the web did was to unleash access to a never before seen supply of attention, essentially crashing the market for it. Although some research suggests ads haven’t really lost their value capture properties, at least in some mediums, the trend tends to get bolder as unified measurement metrics show that targeting efficiency is lowering, historically.

2. What did ads do to us?

In its attempt to save what appears to be a microeconomical catastrophe, the media industry turned to segmentation as a way of discerning different types of attention and justifying charging higher prices for some of them.

It’s been almost four years since Ethan Zuckerman published the seminal The Internet’s Original Sin, pointing to the long-winding consequences of relying on an ad-only supported model to ensure the web’s growth and accessibility.

Since then, the issue of digital-surveillance-by-default has only grown its mindshare in the sphere of public debate. Leaks of private information, shady permission policies and general disdain for users’ data has pushed social networks to public scrutiny… but that hasn’t really done any effect.

The digital media business ultimately depends on ads — and we, as internetizens, are mostly fine with that. We’re bad at distinguishing free from freedom, in the web. Nonetheless, most of us are online after the former. Convenience, it turns out, is market force #1.

Chart and data by James Wang of Ark Investments

Zenith, PWC, eMarketer and other market research firms have all predicted the growth decrease of ad revenues online, but have been missing forecasts consistently. At the beginning of 2018, they forecasted for 10–15% growth — in Q1'18 alone, Google grew ~24%, and Facebook grew ~50% (both make up 80%+ of the Western market).

This ghost of a business model propels us to ever greater extremes of surveillance. If the algorithms don’t work, that’s a sign we need more data. If the algorithms do work, then imagine how much better they’ll work with more data. There’s only one outcome allowed: collect more data - Maciej Ceglowski says.

Publishers, who traditionally differentiated on brand, quality, and audience, entered a spiral that ultimately commoditised content, and got eaten by software and scale.

3. Who’s making money, then?

The realisation that content making has become generally unsustainable is a bit shocking. Currently, this is a high risk, high reward system, where winning is recognition that grows on interest, and the majority accepts a suboptimal quality of life trying to get there - like in sports.

The fact is that self-publishing applications often “don’t need to care” about creators, since they optimise for traffic and for collecting more data. Even if content makers are underpaid, and audiences are economically exploited, the market remains efficient in the eyes of investors, who pour money into companies doing cutting-edge data manipulation, and see their value increase with the power of investor storytime. Investor storytime is when we seem to be building a product for a userbase, but end up building a product for investors.

How much Facebook reads of you, along time. The next day, you wake up, WhatsApp is bought for 19 billion dollars with no significant revenue model, and you start getting ads for keywords you spoke with your dad on the phone.

Some years ago, Quora raised $80 million in funding at a $900 million valuation. The stated reason for taking the money was to postpone having to think about revenue. That’s the power of investor storytime.

It only works, though, if you can argue that advertising in the future is going to be effective and lucrative in ways it just isn’t today. We’re addicted to ‘big data’ not because it’s effective now, but because we need it to tell better stories — not well-crafted narratives, but those of the type investors rejoice on. A 10x ROI, of course, is a story to rejoice on.

The dynamics not only overlook content providers, they are also unwelcoming to smaller challengers to incumbents. Facebook owns a digital model of our relationships, shaped by and fed into its social graph. Google owns the browser, emails, video consumption habits, and, most importantly, over 3/4 of daily search engine traffic. Both are pushing for separating definitively web content from publisher-owned sites (at least on mobile - e.g. Instant Articles and AMP).

“Advertising giants leave little room for adtech startups, and VCs are noticing” — via @TechCrunch

The trend is clear. Web content monetisation is not only tied to the dominant ad-driven framework; it also makes for an industry where success is reduced to two basic outcomes (see chart on the side).

Structurally poor margins perpetuate over time; money required for customer acquisition increase funding needs and bury engineers under liquidation preference; there’s no premium public market multiples due to dependencies and competitive dynamics. If you belong to a team venturing into this land, consider twice whether to pursue the dominant ad-driven model or to bet on an alternative one.

4. From ads to paywalls to subscriptions

So this internet advertising thing is still on the rise. We have more content creators than ever, and content creating is on average likely as poorly rewarded as it has ever been. Facebook, Google, and the eventually successful startup (along with their investors) are doing fine — creators and the content market as a whole are not. Which models have risen as alternatives?

Not many. In the end of the day, we can still classify most as either consumer-paid (e.g. micro-payments, subscriptions), funded (e.g. ad-driven) or hybrid (e.g. freemium). Innovation has happened in the form of selling hardware for the better consumption of content (e.g. Kindle), and in more or less dynamic pricing mechanisms — but there’s a notably persistent market advantage in favour of ads.

They’re very efficient at value extraction, since, as Vitalik Buterin suggests, ads accomplish near-perfect price discrimination. “Viewers are paying with annoyance of watching them, and creators are paid by advertisers who are in turn paid by viewers who become product buyers; both are roughly proportional to the viewer’s income. That is, if you earn 2x more, annoyance is 2x more costly for you relative to money, and advertisers get 2x more dollars from the possibility that their ads will cause you to buy their products”.

Adapted from Sarah Rotman Epps with Mark Mulligan, Erik Hood, “Eight Models for Monetizing Digital Media”, Forester Research, 2009.

The model accommodates different profiles of audiences and advertisers, matching them in a single environment, where some pay more, others less. With simple payment-for-access, a price is set, some people able to afford it will pay, but others will pay zero (and maybe go seek the content elsewhere).

In contrast, micro-payments have been a thing for almost two decades. Nick Szabo famously pointed to associated cognitive costs as a reason for their non-success. In short:

(1) Paying online is not fun or smooth;
(2) Implicit contracts make it scary;
(3) Uncertain cash flows leads to incompleteness in deciding how to normalize preferences between two time periods, e.g. when to buy what;

It’s peculiar how he suggested, decades ago, that interactive contracts could lead people to think outside stereotyped conditions of “payments in dollars, investing in stocks”, freeing room for alternative contractual structures like “personal yield curves”.

Alternatives are needed in face of the harsh reality behind ads. If one doesn’t run an own ad network, it’s a scary business. User data is brought to the altar and sacrificed to AdSense. If the AdSense gods are pleased, they rain earnings down. Users, inevitably, hate ads. To keep revenue from falling, the approach has to be changed consistently: one tries mobile, contextual, inbound, in-game or even sponsoring a mention in the latest Kanye West song. Advertising is like the flu: if not constantly changing, people develop immunity.

That’s why Netflix and Medium went all in subscriptions, selling bundles that best adjust between (A) what creators want to get paid for and (B) what consumers can pay for.

5. Enter the “crypto” alternative

It’s often hard to imagine making deep, structural changes to the web, assuming that aspects of its architecture and business model are inevitable. Nihilists would add that it’s also often hard to imagine the internet making deep, structural changes to society (see below).

With the right tools and timing, though, we may be able to correct some sins of the past. More importantly, stumble on models for value creation and capture that are completely novel, along the way. Paratii was born to seek after these, under the belief that, in the context of monetisation, cryptocurrencies can help achieve:

(1) more granular/efficient price discovery;
(2) “microeconomic fairness”, or “re-distributiveness” (practically any agent can earn some value from what it provides the network).

6. The next leap in monetisation: from web 1.0 to 2.0; from web 2.0 to 3.0

When the internet appears, the marginal cost of distribution goes to zero, and “free content” (AVOD) becomes the next great business model. Before, in the analog world, rentals or sales (transactional) worked as the de facto scalable framework for video distribution. With the advent of streaming (in what we call web 2.0), and the ability to sell flexible bundles, it was subscriptions (SVOD) that blossomed. In recent years, crowdfunding and recurrent financing (e.g. Kickstarter and Patreon) paved the way for a type of value exchange around web content.

Technology drives paradigm shifts when it comes to the way content is consumed and paid for. Cryptoassets may mark the shift towards models that are neither purely consumer-paid nor funded, but that are “redistributive”, including audiences in the value equation and providing economic reason to pay attention (or a couple bucks). Among properties that facilitate this shift are those of fractional ownership, liquidity and programmability of crypto-assets.

There has been a ton of experimentation here, but most of it comes down to enabling consumers to share earnings of given systems or content owners. Below, we outline a few models being researched:

  • Tip-to-share-earnings: picture a 4-episode web series. As its creator, I ask people to tip U$1 (in ether, say) after they watch episode 1, if they like it. In episode 2, I do the same — but now 50% of what I get go to addresses that tipped the first episode (if twice the amount of people tip in the same quantity, every early tipper gets the money back. Four times more people means doubling the money). In the third episode, 50% of what I get are shared among 1st and 2nd episode tippers. And so on. This way, both incentives for paying and for sharing are intertwined, and serial content can come to have a life of its own.
  • Dynamic pricing with bonding curves: one must pay an access token to watch each video of a given creator. Let’s say we’re talking a magician. He’s been performing tricks in an open channel, and selling their explanations (separate, private videos) for fans who hold and spend these tokens. Their price grows and decreases according to a bonding curve imposed by a market maker contract— the more tokens outstanding, the more expensive they are. $$ spent to buy tokens is transferred from this contract to the content creator, while a part of the revenue can be kept in a pool that buy back tokens from the market. Surfing on the popularity of artists becomes a way to earn money for watchers.
  • Common content pools: think a curated registry for high-quality, properly attributed, licensable stock footage (e.g. one that only holds unused footage from Hollywood movies). Film production studios with idle, unused “film rolls” on their archive can bootstrap a common pool for licensing such material to documentarists, amateur filmmakers or any kind of creators worldwide. Two or three studios gather, issue a token, and let anyone else add content to their pool by paying an application fee (to be redistributed to token holders) and becoming subject to a distributed curation game. Participants of the common pool earn payment instalments as licensing revenue kicks in, early supporters also see their assets appreciate as more content owners join the pool.

None of these models have established interfaces or have been deployed in scale. At this point, they are no more than speculative bets. Worth noting, the two latter examples above feature tokens, but the first does not. Programming “money flows” is what enables more distributive value exchange frameworks, not tokens themselves.

7. When #DAOs?

Extrapolating the definition of a “redistributive” monetisation model, one realises the potential of self-sustainable content communities as a business model. Despite alternatives for “having stakes on content”, and for more “distributive value exchanges”, we are still far from having autonomous media apps (a.k.a. the decentralised YouTube).

In the context of video, specifically, we need reliable decentralised transcoding (Livepeer). We need incentivised bandwidth allocation (Filecoin, Swarm). We need decentralised querying (The Graph). We need permissioned storage (Lightstreams, Unlock). We need token abstraction (0x). We need app-to-app, or even vertical-specific relayers (Amadeus). We need global identity standards, and we need scalability.

We can already say we have peer to peer storage and delivery (IPFS), plus a bare identity backbone and a decently automatable payments infrastructure (ethereum). If that all sounds too otherworldly, bear with us: it means there’s a clear path to decentralisation in the field, although self-governing media applications are not around the corner yet.

8. Down to #earth

We wrote last year about the state of the decentralised video landscape. It has matured considerably. There are both main net and test net applications being tried. Utility starts to be perceived at the peripheries.

An already outdated map of the space :)

Regarding infrastructure, Livepeer is slowly flourishing as an alternative in the expensive field of video transcoding — 10 transcoders working live, and 20 candidates, on the Ethereum main net. Services to facilitate the deployment and use of state channels are on pilot phases, seemingly finding their own business models. When it comes to the “application side of things”, Spankchain’s beta has had over 20 performers, ~30 ETH tipped, and ~700 wallets created, in a month. Judging from the movement we’ve been witnessing in the backstages of the space, it’s reasonable to expect a handful of protocols and apps debuting on main net until the end of this year.

The emergence of a decentralised media stack — and the properties of crypto-assets already mentioned in this text — empower developers to question legacy models and seek for the monetisation frameworks of the future. Today, we’re still at ‘newspaper on the iPad’ stage. Clunky UX, abstract concepts, a constant struggle to bridge scientific research with technique and implementation (the usage rate for the first TCR live on Ethereum is close to negligible, so far).

The ‘newspaper on the iPad’ stage, as put by Maciej Olpinski.

Teams will get this wrong a thousand times. Then, when the “Gangnam Style of crypto-video platforms” happens, puts in practice a redistributive model that works, and enriches those who spotted the content early on, many will ponder: “how haven’t I thought of this earlier!?”.

Well, few believed the internet would ever handle video, in the beginning, and here we are, a couple decades later, discussing its intersection with crypto-assets. Industry-wide shifts are usually unclear until they do come to fruition.

I believe that the trend towards self-sovereignty, privacy and “user-generated-work” means institutional investors are losing the power to dictate the direction of content monetisation as a whole. The monopolies in the space have already been making it unattractive to VCs. Social consequences of “surveillance-by-default” are becoming clearer to all. In the end of the day, “redistributive” models basically recognise that consumers who’re sovereign over their own money, attention and data are, in practice, investors themselves.

We don’t need to play investor storytime with them. We need to get them to play the investors in content platforms we come to build. If it sounds too far off, still, make an effort to believe: with a little bit of imagination and courage, it becomes conceivable that ads or subs are not all that’s left for content makers.

9. References


Paratii is building a P2P network for video curation and monetisation. Feeling like an early-adopter? Upload your videos to the Paratii alpha Portal.

Join us on Telegram (BR here 🇧🇷, ENG here🇺🇸) or on reddit to get first hand updates and learn how to get test PTI tokens.

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Paratii

Decentralising video and putting revenue in control of content producers.

Felipe Gaúcho Pereira

Written by

Partner @ Paradigma Capital; co-founder @ Paratii

Paratii

Paratii

Decentralising video and putting revenue in control of content producers.

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