Despite an accelerated shift towards online advertising spending, most traditional media companies (TMCs) are more reluctant than ever to believe the “content wants to be free” mantra.

Everywhere you look, the diagnosis is bad: Disney’s CEO Bob Iger this past week admitted that the fall in DVD sales is “sobering”; meanwhile, sales of Zagat’s Guides are starting to erode.

Indeed, regardless of whether TMCs are accustomed to charging consumers or companies, content sure looks like it wants to be free — though at the Monaco Media Forum, James Murdoch, News Corp (CEO for Europe and Asia, summarized what everyone would agree on: the “first rule of monetization is that if you aspire to charge for something, you probably should not give it away for free.” Self-serving observation? Sure. True? Let’s see.

Do Media Executives Need a Lesson in Economics?

On the one hand, you don’t need a degree from the London School of Economics to recognize that excess supply will drive prices down.  That’s the basic concept of scarcity, but what the rise of video consumption and advertising is doing is differentiating between, not just video versus text, but mainly, real scarcity vs. false scarcity.

Real scarcity is when there is actually more demand than supply.  False scarcity leads to a false sense of security about demand for one’s product.

False Sense of Security

Hollywood’s strategy was forever to create false, or forced, scarcity.  Examples are numerous, but the best one is the slotting of  a show at 9 p.m. on Thursday evening during the late 1980s, wedged in between stellar shows including “The Cosby Show,” “Cheers,” Night Court,” etc.  Invariably, you could slot someone watching grass grow and in between those kinds of established shows, the 9 p.m. show would have built an audience.

Fast-forward two decades and you saw how false scarcity led to the disaster at NBC involving Conan O’Brien and Jay Leno.  Though lower ratings for Leno’s show harmed the lead-in to NBC affiliates’ important 11 p.m. newscasts, the fact that audiences didn’t follow this established star had more to do with Hollywood’s tried and tired strategy of creating false scarcity for their offerings.

Getting back to video, the reality is that TMCs should wake up before it’s too late by:

Realizing that creating false security by putting up paywalls with text content will prove futile;

Acknowledging that nothing will replace the billions and billions in their traditional businesses, but that doesn’t mean that they should not be focusing on new revenue streams and businesses, even if that means becoming a smaller business.

Of course, Hollywood executives swill never accept the latter and will fight to their last drop for the former.

Text Content is By Definition Easy to Duplicate, Thus Impossible To Defend

With articles, true scarcity is hard to create because content can be duplicated very easily.

Even if the New York Times is behind a pay wall or a Vanity Fair article is only found in a printed issue of a magazine, nothing is stopping an online blogger to pay for a newspaper or magazine, only to turn around and paraphrase or quote from it — that’s fair use.  Some among the blogger’s readership might be inclined to pay for the source content, but a large share will content themselves with the abridged version.

Now replicate that phenomenon across hundreds of bloggers,  and you get the idea: there’s a lot of supply created around that story, and while the advertising rates for Times and Vanity Fair content are much higher than all of the rest combined, it doesn’t change the fact that there’s a shift in equilibrium, especially when you toss in things like behavioral targeting and demand-side buying, where some advertisers don’t even care if their ad is placed on the source publications.

Why Scarcity Works Differently With Video

With video, it’s just not that straightforward or easy to increase supply, especially in the short-term. In two weeks I’ll focus on scarcity in online video and what both TMCs and new media producers need to do for a better prognosis.