Mark Mulligan[Posted by Mark Mulligan]

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The web has always been about free: most Internet users will
not pay for content, it’s that simple. 
So it’s no coincidence that content owners of all shapes and sizes have
been ramping up their free strategies online over the last 18 months or so.
Most free initiatives have been pretty successful to date, ranging from the
BBC’s iPlayer, through Last.FM to YouTube. 
But ad supported free content strategies are facing their sternest
test yet.

Consumers are consuming more content in greater numbers than
ever before but the ability effectively monetize the growth in audience size
and engagement has not been keeping pace. 
Central to this is the fact that many online content destinations have
to pay a license fee every time an individual piece of content is
consumed.    So content owners see all of
the growing consumer usage and expect to see appropriate increased
compensation, but the sites themselves are often not seeing their ad revenues
go up accordingly.  So you end up the
situation where some ad supported content destinations are beginning to face up
to the reality of not being able to afford to grow their audiences.  

The problem is compounded by the softening effect the
economic downturn is having on the online ad market.

Content providers are caught between rock and a hard
place.  If they don’t grow audiences and
engagement they weaken their chances of growing ad revenue.  But if they do grow their audiences they
threaten their financial viability.   

We’re already beginning to see the manifestation of these
dynamics in the marketplace:

Last.FM recently announced it plans to start
charging listeners for access in markets where it doesn’t have strong ad

Original ad supported music start up Spiral Frog
recently closed down its service.

YouTube is currently in dispute with  UK rights body
PRS for Music over terms for streaming    
            music video.

Also in a related trend, some TV broadcasters
are pulling content from online sites, typically to protect TV ad revenues,
which are implicitly weakened by the audience fragmentation that online sites
facilitate.  (see James McQuivey’s
fantastic report ‘Preparing For The
Coming Online TV Backlash’
for more on this) 

The trend is not about to lessen.  As the economic downturn bites more consumers
will seek out free content, thus driving up online consumption, but at the same
time weakening ad spend will limit the ability of content providers to monetize

It’s beginning to look like the current economic climate is
creating a unique period for the ad supported content sector that will require
a similarly unique framework of understanding between content owners and
providers.  It’s in the interest of both
parties that workable solutions are reached. 
The alternative is ceding more ground to the illegal sector.

Forrester is soon to publish a report on this topic.  Watch this space for more detail.