The advent of the internet and information technology has led to the digitisation of content and this, in turn, has transformed the distribution and consumption of goods like newspapers, books, CDs, and DVDs. Traditionally, consumers have purchased content in a physical medium. Today, an increasing number of consumers buy and consume digital content such as newspapers, eBooks, album and video downloads, etc.
Digitisation can potentially expand the consumer base by providing additional convenience and ease of use through anytime-anywhere access. On the other hand, digital products may serve as substitutes for physical ones, thereby cannibalising physical sales. In addition, pricing of content over the two mediums, digital and physical, varies both within and across content industries. For example, both The New York Times and The Los Angeles Times offer a choice of home delivery + digital or digital-only access, but they do not offer a home delivery-only option. In contrast, The Washington Post offers only digital access but no bundle of the print and the digital. Game Informer magazine offers print-only and digital-only options separately. Warner Music sells digital-only albums as well as CDs that come with a digital copy. Independent record labels such as Soulection and Triple Pop offer only digital albums and tracks. An important question for content publishers is to determine the optimal content pricing strategies over dual-medium access under different market conditions.
While the physical and digital mediums differ significantly in costs to produce and distribute, publishers should also consider consumers’ heterogeneous preferences for one medium over the other. It is not clear how this wave of digitisation of content and the shift in consumers’ preferences for the digital medium will affect publishers, consumers, and society.
Have you read?
We built an analytical model to study this important question. In our model, a monopolist publisher has the infrastructure to offer information goods in the physical as well as in the digital mediums. The marginal cost of the physical medium is non-negligible, but that of the digital medium is negligible. Consumers are heterogeneous in their valuations for information goods and have heterogeneous preferences for mediums. In the market, some consumers prefer the digital medium (digital-savvy consumers) while others prefer the physical medium (traditional consumers). We abstract this medium-mismatch disutility through a medium-mismatch cost parameter. Furthermore, the two mediums are partial substitutes, which we abstract through a sub-additive parameter. This implies that a consumer’s willingness to pay for the content in a bundle of the physical and the digital mediums is greater than what he’s willing to pay for content in any individual medium but less than the sum of what he would pay for content in each of the two mediums.
We identify two optimal content-medium pricing strategies: (i) the publisher offers information goods or content only in the digital medium under some market conditions, and (ii) under other market conditions, the publisher offers a choice of a bundle of the digital and the physical mediums or only the digital medium. Interestingly, we find that even when the marginal cost of the physical (or bundle) is very high, under a wide range of parameter values, the publisher’s optimal strategy is to offer the bundle and the digital rather than to offer only the digital medium.
The implication of the optimal content-medium strategy
Our results prescribe and provide the guidance for the publisher’s optimal content-medium offering strategy. A good number of national and regional content providers adopted various strategies in the late 1990s and in the early 21st century, but it appears that many of them have now converged to the strategies that we recommend, i.e., offering both standalone digital and a bundle, or offering only the digital medium. For example, among the top 10 newspapers in the United States (by 2017 circulation), nine, including USA Today, The Wall Street Journal, The New York Times, and The Los Angeles Times, have adopted the strategy of offering both standalone digital and a bundle. One of the top ten publishers, The Washington Post, offers the content only in the digital medium.
Specifically, The New York Times offered content in a bundle and in the digital medium in 2005. Two years later, it stopped offering the content in standalone digital and provided only the bundle option. Then in 2011, it re-introduced the digital medium along with the bundle.
We observe not only that newspaper publishers’ strategies are converging to our recommended content-medium strategies, but also that many music publishers are also doing so. The big three record labels (Sony BMG, Universal Music Group, Warner Music Group) and hundreds of independent labels offer both standalone digital albums and bundles of a CD and a digital album, through retailers like Amazon.
Our analytical model allows us to study the impact of an increasingly larger proportion of consumers adopting digital technologies, or the advent of the digital-native generation. We find that when the proportion of digital-savvy consumers is sufficiently large, consumer surplus and social welfare can decrease, even though the publisher’s profit increases. This result informs the ongoing debate in the popular press, which posits that digital consumption increases social welfare. Further, this result has policy implications for regulatory bodies like the FCC, because the prevalence of digitisation may be driven by publishers’ profit-enhancing initiatives and may hurt consumer surplus. This may call for the design of an appropriate policy framework that enhances publisher profits together with consumer surplus.