First Monday
Business model issues in the development of digital cultural content by Gerry Wall

Abstract
Business model issues in the development of digital cultural content by Gerry Wall
This paper examines business model aspects of digitizing cultural content. It is based in large part on a Study conducted by the author and his colleagues for the Department of Canadian Heritage. Based on data collected from several cultural institutions regarding their efforts to digitize content, the study found that implications for the cost side have been significant, leading to explorations of facilities and content sharing programs, formalized budgeting, the need for better copyright expertise and improved mid to long term planning. On the revenue (funding) side, a clear need for more rigorous assessments of user demand emerged. In addition, the possibility of revisiting organizational mandates was identified, as well as various revenue-generating opportunities including sponsorship, user-fees and private/public sector partnerships.

Contents

Introduction
Discussion
Conclusions and final thoughts

 

 

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Introduction

As cultural institutions progress in their efforts to digitize content (both existing content and borne digital content), they are confronted with some fundamental economic issues. The principles of economics, which involve the allocation of scarce resources in an optimal manner, apply equally to profit and not-for-profit undertakings. In all cases, undertakings must examine digitization impacts on the supply (or cost) side as well as the demand (or revenue) side.

As a first step in understanding and addressing the implications of digitization, Wall Communications Inc. was commissioned by the Department of Canadian Heritage in June of 2002 to conduct a study of potential business models [ 1]. The purpose of the study was to identify and assess current and potential business models relating to the creation and accessibility of digital Canadian cultural content. The study focused on Canadian digital cultural content made available by federal agencies and crown corporations as well as not-for-profit cultural and heritage organizations.

 

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Discussion

In conducting the study, Wall Communications relied on data and information from two primary sources. First, a detailed survey was carried out to collect information on existing digital products developed by federal agencies and non-profit cultural and heritage organizations. The survey also collected information on the business models currently used to fund digital products as well as expectations with respect to the development and funding of existing and new digital products in the coming years. Seven organizations participated in the survey:

The second key source of information used in the study was obtained from interviews conducted with recognized experts in the fields of cultural content digitization and business models for the delivery of content over the Internet. Wall Communications and Canadian Heritage identified the experts jointly.

The seven surveyed organizations vary considerably in terms of their size and mandate. Similarly, the nature, volume and scope of the cultural content held within their respective collections vary significantly and, consequently, so do their respective digital cultural products. In the relatively brief period (starting in 1995 or so) since most of these organizations first began to develop online digital products, a significant body and range of digital cultural content has been created by these organizations, but a significant amount of content remains undigitized (see Table 1 below). While the main target audience for the content has been the general public, much of the content is geared towards Canadian students, teachers and researchers.

 

Table 1: Digitization of Overall Holdings Accomplished to Date
Source: Wall Communications Inc., 2002.

Organization
Percent of Holdings Digitized to Date
National Library
<1
National Archives
<1
Museum of Civilization
<20-30
Canadian Broadcasting Corporation
<1
National Film Board
<40
Canadian Institute for Historical Microreproductions
<25
Historica Foundation of Canada
NA

 

In terms of current annual expenditures, the total year-end 2001 budget allocated for digital product development and maintenance for the seven surveyed organizations, in aggregate, is approximately CAN$26 million. This averages to roughly CAN$3.7 million per organization (see Table 2 below). Excluding the CBC, by far the largest organization in the group, the average drops to between CAN$2.0 and CAN$2.5 million per organization.

 

Table 2: Year-end 2001 Digital Product Budgets (CAN$)
Source: Wall Communications Inc., 2002.

Budget Range
Distribution
Under CAN$1.5 million
3 of 7
Between CAN$1.5 and CAN$5 million
3 of 7
Over CAN$5 million
1 of 7
Average Budget
CAN$3.7 million

 

The number of full-time-equivalent (FTE) employees involved with digital product development and maintenance varies considerably across the organizations (see Table 3 below). For all survey respondents combined, there are approximately 254 internal FTE employees involved in these activities, either directly or indirectly. This amounts to roughly 36 FTE employees per organization. The average, excluding the CBC, drops to between 15 and 20 FTE employees.

 

Table 3: Year-end 2001 Digital Product Budgets (Employment)
Source: Wall Communications Inc., 2002.

Full-time Equivalent (FTE) employees
Distribution (inc. CBC)
Distribution (exc. CBC)
Under 10 FTE employees
1 of 7
1 of 6
Between 11 and 20 FTE employees
3 of 7
3 of 6
Between 21 and 30 FTE employees
2 of 7
2 of 6
Over 30 FTE employees
1 of 7
—

 

On average, roughly one third of internal staff involved with digital product development and maintenance is dedicated to the digitization of content. The majority of the remaining staff is involved in content management (e.g., product development, content selection and administration) and technical operations (e.g., Web site design, development and maintenance). Finally, the resources dedicated to copyright clearance matters are very limited, and resources devoted to the marketing and promotion are negligible.

The surveyed organizations reported that they currently rely on a variety of sources of funding for the development and maintenance of their respective digital products. Reported current sources of funding include the following:

  1. Federal government funding — operations and/or project funding;
  2. Partnership arrangements — cost sharing and/or content access;
  3. Corporate/private sponsorship funding;
  4. Product sales and license fees;
  5. Access/subscription fees; and/or,
  6. Provincial government funding.

For all but one of the surveyed organizations, the Canadian government currently represents the most important source of funding by far. In this respect, it should be also noted that while partnership arrangements offer an alternative source of funding, the partners involved are frequently other federal government departments and/or agencies. Only CIHM and CBC have a user fee based funding approaches in place at this time, although the NFB is planning to implement as user pay model in the near future.

The surveyed organizations indicated that the top challenges that they have faced to date in developing and maintaining digital products include:

  1. Funding;
  2. Building capacity (e.g., developing necessary in-house expertise and technical infrastructure);
  3. Managing standards;
  4. Copyright clearance; and,
  5. Meeting the needs of target audiences.

Of these challenges, funding was the most consistently and frequently cited. Although, in general, most of the surveyed organizations reported that they have been able to meet either in part or reasonably well their digital product develop requirements to date (see Table 4 below).

 

Table 4: Adequacy of Current Digital Product Budget Levels
Source: Wall Communications Inc., 2002.

Degree of Adequacy
Distribution (percent)
Requirements hardly met at all
19
Requirements met in part
48
Requirements met reasonably well
33
Requirements fully met
0

 

In terms of medium- to long-term requirements, most of the surveyed organizations were unable to provide a clear picture of their future digital product plans and priorities or, as a result, future-funding requirements. Most have an enormous volume of cultural content yet to be digitized (especially in the cases of the NLC, NAC and CBC) which could take many years to fully digitize. However, to date, many of the organizations have only conducted limited assessments of both the success of existing digital products and the likely demand for new and expanded digital products. In Wall Communications' view, any new digital products that are to be developed should meet actual user needs in a user-friendly format. Moreover, there should be a complementary strategy to attract and grow an audience for the digital product, and raise the "visibility" of the product among potential users. However, it is not clear from the survey responses whether there is the necessary comprehensive and rigorous user demand analysis being conducted in support of new digital product development.

That being said, we consider that a continuation of existing funding levels — derived from all existing sources — in the near- to intermediate-term appears to be the minimum level of funding necessary to build on the achievements made to date. This would allow further progress to be achieved in terms of the scale, depth and features of each organization's collection of digital cultural products. However, if current funding levels are to be maintained, cultural and heritage institutions would likely continue to require federal government funding at or near existing levels in the near term. It would clearly be very difficult for the organizations to quickly adjust to a significant reduction in federal government funding or, even more so, to a complete elimination of that funding. Any significant changes in business model strategy would take some time to implement and, more importantly, there would be no guarantee that any new approaches adopted would necessarily be successful.

It is also important to recognize that government funding provided to date has done more than simply help cover the costs of specific digital cultural content projects. It has allowed the organizations to build capacity, technical infrastructure and expertise to continue the development of similar digital products in the future. The nature of the operations of the surveyed organizations is rapidly changing as a result of technological developments, as is the case in virtually all sectors of the economy today. Ongoing digitization requirements and the need to increasingly deal with "born-digital" cultural products will transform current digital product project activities into standard day-to-day operations. The investments made to date should provide cultural and heritage organizations with greater capacity to continue with future digitization activities in a more efficient manner.

Nevertheless, in the near- to medium-term, cultural and heritage institutions will continue to be dependent on federal government funding in order to continue with the development of digital cultural products and maintain their existing products. For further government funding to be granted, however, there should be clear evidence provided demonstrating the existence of user demand for any proposed new digital cultural product projects. Of course, we recognize that this factor would not form the sole basis for any assessment for any such funding requests or digital content funding programs.

There are several alternative business models that could be potentially adopted over the medium to longer term that could reduce and possibly even eliminate (in some cases) the need for ongoing federal government funding of the development and maintenance of digital products in organizations such as those surveyed. The approaches considered included those currently used by commercial online content providers; i.e.,

  1. advertising and/or sponsorships revenues;
  2. user fees (e.g., subscription- or transactions-based usage charges);
  3. product/services sales (e.g., from related products and/or services);
  4. cross-promotion (e.g., of traditional media or commercial operations); and/or,
  5. digital content licensing.

    6. On the other hand, while no single model would necessarily be effective in all cases, there are several promising approaches that, in combination with existing funding models, could provide cultural and heritage institutions with potentially sustainable alternative sources of funding for digital products. These approaches include increased reliance on

    1. partnerships aimed at sharing costs and/or gaining access to content;
    2. corporate and/or private sector sponsorships;
    3. user fees; and/or,
    4. third party licensing fees.

      5. The two latter approaches likely hold the most promise in terms of longer term sustainability.

      However, with respect to a user pay approach, it is questionable as to whether user fees are appropriate in the case of certain cultural and heritage institutions such as the NLC and NAC. It appears that charging the public for access to either of these two institution's general interest digital collections would be contrary to their respective mandates; although, it may not be inappropriate to charge for access to digital content developed specifically for niche market applications. In addition, licensing digital cultural content to third party content aggregators could raise similar concerns, to the extent that digital cultural content previously provided free of charge was shifted to a third-party content provider on a user pay basis.

      While, the user pay and content licensing models could be effective and sustainable business model approaches for many of the organizations examined in this study, we would not recommend that the government necessarily favor these approaches over others. Just as the current funding approaches differ significantly from one organization to another, likely so would the business model approaches adopted by cultural and heritage organizations in the coming years.

      For cultural and heritage institutions to successfully deliver online digital cultural content in the future, with significantly less reliance on federal government funding, they would need to adopt a more commercial approach to creating digital products and marketing those products. This implies that some organizations may need to re-focus their digital products to satisfy more narrowly targeted market segments or user groups, and that they may want to re-examine their organizational mandate. Consequently, to the extent that government funding is scaled back, government's ability to influence the type of digital cultural content that is made available to Canadians would ultimately diminish. Whether or not and under what circumstances this trade-off would be acceptable to the government requires further consideration.

       

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      Conclusion and final thoughts

      Besides providing useful benchmarking information for the institutions that were studied, our Study made clear that there are three areas where all cultural institutions need to devote more attention. While all of the organizations examined in this Study have a reasonably clear and detailed digitization plan for the next one to two years, very few institutions have a mid to long-term plan. There are many reasons for this state, including the other two areas requiring further attention: copyright and demand assessment.

      Copyright is widely seen as a critical element in the growth of digital content, but numerous questions abound as to content ownership and control. The legal and commercial ability to offer content in alternative formats, the magnitude of potential liability, and the best way to acquire content have left many institutions uncertain about how they will be impacted and how they should proceed. As noted earlier, the level of resources devoted to copyright clearance and related matters has been very limited. Introducing copyright expertise as a separate budget line item can provide a first formal step.

      In addition, many cultural institutions have only a cursory understanding of their user's needs and demands. In the private sector, user feedback is quick and direct: If the service being supplied is inadequate to user needs, a firm must quickly adjust its business or risk insolvency. For non-profit cultural institutions who have traditionally relied most heavily on funding from federal and other government sources, a gap between services supplied and services most wanted can become significant over time since there is no automatic "market-driven" mechanism to link the two.

      Understanding what users want in a rigorous fashion is important because it allows an institution to better prioritize its initiatives and service offerings. Without this detailed understanding, how can an institution decide what to digitize and what projects should receive funding? To state the obvious, the number of hits on a Web site does not provide a rigorous understanding of user demand.

      Since no cultural organization can do everything (which is a corollary of optimizing scarce resources), there is a need to focus in on what any given organization should be providing. This may rightfully entail re-examining an organization's mandate. Ultimately, the mandate may need to be modified such that the institution is not "required to collect everything" or it may mean that notions of accessibility include some type of user-payment.

      Decisions on matters such as what to digitize or what to format into an online exhibit can have a life much longer than the decision-maker. It is therefore crucial that such decisions be made with a well-grounded understanding of what is actually being demanded by users. End of article

       

      About the Author

      Gerry Wall is President of Wall Communications Inc.
      E-mail: wallcom@sympatico.ca

       

      Note

      1. Wall Communications Inc., "A Study of Business Models Sustaining the Development of Digital Cultural Content," conducted for the Department of Canadian Heritage (4 June 2002).

      Editorial history

      Paper received 24 March 2003; accepted 12 April 2003.

      Contents Index

      Copyright ©2003, First Monday

      Copyright ©2003, Gerry Wall

      Business model issues in the development of digital cultural content by Gerry Wall
      First Monday, volume 8, number 5 (May 2003),
      URL: http://firstmonday.org/issues/issue8_5/wall/index.html