• by Diane Mermigas , August 7, 2009

While plodding through the recessionary sludge of the past year, consumers have unwittingly crossed the digital divide, leaving many media companies scrambling to catch up. 

Nearly three-fourths of all U.S. homes are now broadband-users; mobile phones have become the universal screen of choice and a computing lifeline for all age consumers. Even the lowly television has been forced into a digital conversion. Nearly half of all Internet users are using online video-sharing sites as an alternative to television, according to a new report from Pew Internet & American Life Project.

By comparison, many media companies continue to depend on operations, platforms, processes and revenue sources that are far from digital. Consider that the traditional media conglomerates depended on their cable networks and overall cost-cutting for growth against declining revenues in the most recent quarter reported. There was scarcely a trace of digital gains.

In fact, much of this country's established media is like the U.S. Postal Service:  shuttering 3,200 of its 34,000 locations due to declining mail volume and a multibillion-dollar deficit blamed on increasing Internet use for online banking, bill paying, income taxes and even buying electronic postage stamps.

The same legacy squeeze is sneaking up on companies that own costly newspaper and magazine publishing plants, TV stations and old-time movie studios. Facing a potential economic collapse, not unlike the music industry, these media players are being overwhelmed by online activity before they can morph their physical plants into digital distribution centers.

That's what makes News Corp.'s all-encompassing pay-for-content plan so perplexing. It is the quintessential traditional gatekeeper response to a free-wheeling digital world that can't be tamed.

Based on the iTunes and pay TV success, News Corp. can expect many consumers and advertisers to pay a premium for some of its content and the convenience of instant access -- but not all of it. News Corp. already is hearing from angry readers of its newspapers in Australia and the UK, although rivals such as The Financial Times and The New York Times also have been quick to ponder the notion of establishing micro-payments or a pay wall for its content.

But News Corp. and its peers need pragmatic expectations in the context of what digital consumers and advertisers want. Anything that smacks of an all-pay approach would surely result in declining support from consumers and advertisers in general. News Corp. runs the risk of alienating many constituents, even in the experimental stage. Digital consumers and advertisers with endless other options will only pay a premium when there is a demonstrated value proposition.

It also is unrealistic for media companies to say they will devote costly time and resources to track and prosecute every text and video copyright violator. It is foolhardy for them to discount the proven marketing advantages of utilizing some free product to achieve broader market reach.

In fact, the math of an all-pay content plan might not add up.

Goldman Sachs analyst Mark Wienkes estimates that News Corp.'s loosely proposed paid-content plan will generate a mere $200 million in incremental revenues compared to $6 billion generated by News Corp.'s global newspaper properties. Unlike most newspapers, The Wall Street Journal has a unique brand attraction that commands an overall premium payment that readers might otherwise make for only one columnist or coverage area, like sports and lurid tabloid photos in other print media. At the very least, uniform online content payments will result in plummeting page views, advertising rates and revenues, Wienkes observes.

Perhaps most important, News Corp. ignores the money it continues to lose maintaining outmoded, expensive legacy operations supporting physical content production and distribution. Not even partial pay models combined with a rebound in advertiser spending -- which will never again see former highs -- can make traditional media companies financially whole without radical changes to their infrastructure.

Simply charging for content fails to go to the heart of media's legacy issues. There will be fewer television networks and television stations sharing core operations and personnel, and there will be fewer surviving newspapers and magazines, as most of their peers shift to the Web. The form and function of all media will be dramatically reshaped by social networks, sharing, storage and transaction-based advertising -- all dictated by the preferences and habits of digital consumers.

Still, News Corp. is starting to take digital consumers to the mat over threats to its old business models. For instance, News Corp. recently indicated that it will delay the release of new movies to Redbox's $1 rentals, which are infringing on the film industry's faltering DVD business. Retailers are increasingly giving away the service for free as a way to drive consumer traffic. I am guessing that digital consumers will most likely will win this one, as well as other evolutionary digital media battles on the horizon.