The Fallacies of Arnon Mishkin

Arnon Mishkin wrote an interesting piece about the fallacy of the link economy (http://paidcontent.org/article/419-the-fallacy-of-the-link-economy/).  Here’s one of the few pertinent facts cited in his article:

The vast majority of the value gets captured by aggregators linking and scraping rather than by the news organizations that get linked and scraped. We did a study of traffic on several sites that aggregate purely a menu of news stories. In all cases, there was at least twice as much traffic on the home page as there were clicks going to the stories that were on it.

There are a few fallacies in there.  First is the notion of value, and that phrase, “vast majority”.  Value online means selling ads, and there are premium ads, and there are remnant ads.  Aggregators get low-value remnant ads, but publishers get premium ads in some cases.  A page view for a publisher is on average more valuable than a page view for an aggregator.  How much?  The number Jarvis and his group at CUNY came up with was $5-7 RPM for a small publisher, , and for an aggregator you’ll get less.  In the case of Digg, say around $2 RPM based on numbers from Silicon Alley Insider (http://www.businessinsider.com/2008/12/diggs-miserable-business) at 400 million pageviews per month.  That’s probably on the high end for aggregators, most are getting less.  Lets say publishers have three times the revenue per view than aggregators, which I think is conservative.

Second, there is his claim that “twice as much traffic on the home page as there were clicks going to the stories”.  This is misleading.  He’s comparing pageviews with visitors.  But a visitor generates at least one and often more pageviews.  Lets say each visit leads to an average of 4 page views, that’s about average for news publishers.  Cranking through the numbers, that’s 4*(1/2)*3 = 6 times more revenue for publishers than for the aggregator.  So where is his “vast majority”?

There’s another fallacy buried in there:  that this is a zero-sum game between aggregators and publishers, and demand is constant.  You might conclude from the above numbers that aggregators are taking one-seventh of the revenue away from news publishers.  But demand for news is elastic.  Its conceivable that aggregators are driving more traffic to publishers than they would get without them.  Not likely in my opinion, but the point is that if they’re taking one-seventh of the revenue, they’re probably creating some new revenue as well by increasing demand for news.

So Arnon’s facts just don’t support his claims, and his reasoning is flawed.  But lets not stop here.  Look at the balance sheet of aggregators.  They’re not getting rich, and perhaps only a few fools went into this industry thinking it would be lucrative.  I certainly didn’t have any illusions about lucrative pay.  Some companies have had lucrative buyouts, but then some handsome fees were paid to purchase newspapers a few years ago.  Everyone industry has their bubble.  You can point to Google, but Google makes their money elsewhere, not aggregating news.  They’re barely running any ads.  Digg as I posted before isn’t doing well, although probably because their costs are out of control. (http://www.businessinsider.com/2008/12/diggs-miserable-business)

All that being said, I still agree with his final three points.  However reclaiming value from aggregators isn’t going to help them much.  They need subscribers and a pay wall.  Not an iron curtain, but a permeable pay wall along the lines of the Wall Street Journal.  There’s no pot-o-gold out there in the hands of aggregators to help you pay for all that good journalism.

Arnon Mishkin wrote an interesting piece about the fallacy of the link economy.  Jeff Jarvis already responded in detail, but he’s a bit too congenial.  I’m a numbers person, so I’m more blunt.  Here’s one of the few pertinent facts cited in Arnon’s article:

The vast majority of the value gets captured by aggregators linking and scraping rather than by the news organizations that get linked and scraped. We did a study of traffic on several sites that aggregate purely a menu of news stories. In all cases, there was at least twice as much traffic on the home page as there were clicks going to the stories that were on it.

There are a few errors in there.  First is the notion of value, and that phrase, “vast majority”.  Value online means selling ads, and there are premium ads, and there are remnant ads.  Aggregators mostly get low-value remnant ads, but publishers get premium ads in some cases.  A page view for a publisher is on average more valuable than a page view for an aggregator.  How much?  The number Jarvis and his group at CUNY came up with was $5-7 RPM for a small publisher.  For a major aggregator like Digg, its around $2 RPM based on numbers from Silicon Alley Insider, at 400 million pageviews per month.  That’s on the high end for aggregators, most are getting less.  So lets say publishers have three times the revenue per view than aggregators, which I think is conservative.

Next, there is his claim that he saw “twice as much traffic on the home page as there were clicks going to the stories”.  This is misleading.  He’s comparing pageviews with visitors, and those aren’t equal.  A visitor generates at least one and often more pageviews.  Lets say each visit leads to 3 page views, that’s about average for news publishers, although you might argue that traffic from aggregators is less likely to stick around.  Also, news outlets generate their own traffic, it doesn’t all come through aggregators.  For the NYTimes about half comes from other referers, only some of which are aggregators.  So there’s another factor of two.  Cranking through the numbers, that’s 3*(1/2)*3*2 = 9 times more revenue for publishers than for the aggregator.  So is that a “vast majority” of the value?  To me a majority is more than 50%, lets peg a “vast” majority at somewhere in excess of 75%.  Even allowing for some errors, and I’d have to be off by a lot, aggregators aren’t getting anywhere near 75% of the revenue from online news.

There’s another fallacy buried in there:  that this is a zero-sum game between aggregators and publishers, and demand is constant.  You might conclude from the above numbers that aggregators are taking one-tenth of the revenue away from news publishers.  But demand for news is elastic.  Its conceivable that aggregators are driving more traffic to publishers than they would get without them.  Not likely in my opinion, but the point is that if they’re taking one-tenth of the revenue, they’re probably creating some new revenue as well by increasing demand for news.

So I don’t buy Arnon’s argument.  But lets not stop there.  Look at the balance sheet of aggregators.  They’re not getting rich, although perhaps a few fools went into this industry thinking it would be lucrative.  I certainly didn’t have any illusions.  Some companies have had lucrative buyouts, but then some handsome fees were also paid to purchase newspapers a few years ago.  Every industry has their bubble.  You can point to Google, but Google makes their money elsewhere, not aggregating news.  They’re barely running any ads.  Digg as I mentioned earlier isn’t doing well, although probably because their costs are out of control.

All that being said, I still agree in principle with his final three points.  However reclaiming value from aggregators isn’t going to help publishers much.  They need subscribers and a pay wall.  Not an iron curtain, but a permeable pay wall along the lines of the Wall Street Journal.  There’s no save-my-business-model pot of gold out there in the hands of aggregators to help you pay for all that good journalism.