The media mix: how to make money from paid-for media content

What will people pay for online? The received wisdom is not very much, if anything at all. But there are beginning to be chinks in the "no-pay" armour, led by better-targeted services like Apple's iTunes and paid-for iPhone apps.

But for media companies especially, there is still no guaranteed business model for making money from their content, be it music, video or information. Look at the newspaper business, which after embracing the free, ad-supported model online is now putting pay walls in place. The former proponent of free news online, Rupert Murdoch, now proposes that his News Corporation introduce pay walls for all of his papers – including The Sun and The Times – to be in place sometime next year, essentially following a model he inherited from Dow Jones when he purchased the Wall Street Journal.

Apple's iTunes has proved that some people do pay for music, and some will watch an advertisement before seeing an online video. And witness the success of online TV site hulu.com in the US, which offers TV shows from the biggest broadcasters online supported by advertisements.

But moving online users accustomed to "free" access is not proving easy. And there is a big gap between the amount of money being earned online versus offline. How that gap is going to be filled is still unclear. "For a lot of legacy media companies it's a question of how quickly they are willing to move from the old model to the new, digital model, because for most of them it means a significant drop in revenues – at least initially," says Tudor Aw, media partner at KPMG.

The most pertinent advice seems to be: build a large audience of users with a free-access principle supported by advertising and sponsorship and then find ways to charge for added-value services.

This is what online music service Spotify is all about. The music website acts like a sort of online radio station, offering "free" music if users listen to advertisements. Spotify chief executive Daniel Ek says that the plan is to move online music lovers away from pirated music into a "legal environment" as a first step. "Younger users, especially, are used to downloading illegal content, and they are comfortable with sharing content with their friends," says Ek. "They are happy to spend $10 a month on World of Warcraft (the online game) but they won't spend anything at all on music unless it is a concert ticket or something unique."

The key to how much can might be charged users is directly linked to how attractive, accessible and relevant the product or service is to a particular audience, or digital tribe. In fact, KPMG has identified twenty attributes that the consultancy calls "digital value propositions" that include attributes such as "compelling content", "convenience", "choice", etc.

In the case of Spotify, Ek believes that he will only make Spotify's business model work if he appeals his users by packaging a good online music experience, supported by advertising, combined with unique paid-for products and services like Spotify's premium, ad-free subscription, plus other paid-for items, including tickets to live concerts and special CD sets. ". "If you look at the two sides of my business in isolation, the ad-supported side and the subscription or premium side, they don't work. That's because the [average] revenue per user (ARPU) is high enough on the subscription side, but there is not enough of the ad-supported side, where there is a lot of traffic but not enough revenue," explains Ek. "Only [by combining the two] and adding ticketing and other things can you get the volume as well as the revenues."

A big part of creating enough revenue is creating an attractive online proposition and putting it where users are congregating. ITV's The X Factor is a prime example. On television, the talent show attracts upwards of 14 million viewers, but now it is also attracting a substantial online audience – principally on Facebook and Twitter. Nearly 865,000 Facebook users have become fans of X Factor on the social network site and the number is expected to hit 1 million by the end of the series. All of these fans receive the updated X Factor content in their Facebook live feeds, and some 30,000 Facebook fans have also added an application to say which contestant they support. ITV has also created a "supporter" called Twibbon on Twitter, which has been downloaded on to 11,000 Twitter profile pictures. The company says this exposes the X Factor brand to around 840,000 Twitter users.

"We are taking a lesson from Facebook and going for scale," says Ben Ayers, social media manager at ITV.com. "Rather than obsessing on making money from fans we should obsess about building the relationship and building scale. That's the way agile web businesses work, and that is a lesson we should learn. I know the end game is to make money. But as we get to know our fans we will learn more about what they want."

Meanwhile, advertising through big search engines and online advertising suppliers such as Google is also getting more sophisticated, both on the web and on mobile phones, with better tracking and targeting tools that deliver more relevant adverts – which brands are willing to pay more for.

"The key to monetisation is customer insight," says Jay Fulcher,chief executive of Ooyala, a service that manages online video streaming and counts Arsenal football club as a client. "We have built an engine that tracks how consumers interact with content so we can personalise their experience and target the ads."

Google and Channel 4 in the UK are hoping to capitalise on a recent deal that will put all the broadcaster's TV shows on Google once they have aired on the TV, with Channel 4 responsible for selling the advertising using Google's highly developed web analytics.

Meanwhile, FremantleMedia is exploring sponsorship deals to pay for creating original programming for the web. A recent online drama called Freak had more than 1m views on MySpace, and was sponsored by Red Bull and Pearl , a feminine hygiene product. The community for the drama was very active, with more than 9,000 original music tracks being submitted by MySpace users for use in the drama. "This wasn't like a sponsored bumper on TV, it – it was about social engagement with the audience," says Claire Tavernier, senior executive vice-president of FMX Worldwide, the digital unit of FremantleMedia. The drama, about a teenage girl who feels sheis a social outcast fits well with the target audience for Red Bull, which is seen as edgy, young and about taking risks.

Tavernier admits that Freak will not be a "significant contributor" to FremantleMedia's profit, but that the brands were pleased, as was MySpace. "This was a good learning experience, but I am sure there won't be enough funding from sponsorship to fund a lot of online content creation," says Tavernier. "It will have to be a mix of subscription and micropayments and free with ads and sponsors. That is the mixed business model that we all should aim for."