The debut of the Open Salon tipping system seems to have left most users pretty cold, by all accounts, and there has been some discussion about what kind of business model is behind this - Sally Swift suggested that right now, it's all about return on investment (ROI), and that we could contribute to the business model.

It's probably a little early for ROI yet, and I was having a hard time believing that there was no over-arching business strategy that would shed some light on the question of compensation. So, I decided to see how much I could find out or just guess about the economics and purpose of Open Salon within the context of Salon.com and the Salon Media Group, and speculate a bit about what they may be thinking in terms of their financial dealings with contributors to Open Salon.

Most of the content below is from Salon Media Group SEC filings, with the exception of the cost to run the Open Salon Beta, which is a guess.

First of all, the cost to run a beta of Open Salon. Since this site is in beta, it probably is pure cost, no revenue. I wouldn't be surprised if it's a blend of "other duties as assigned" for most Open Salon staffers, with the possible exceptions of Kerry Lauerman and of recurring work for the architects. I'd be surprised if the unburdened labor costs were more than $200k - $250k per year, which is to say a good chunk of Kerry Lauerman's time, some time for the architects, and part time input from the Deputy Editor, designer, and project manager. This is not a lot of money, in any case.

As for the licensing, it's been pointed out that Open Salon runs on Broadband Mechanics. For the roughly 1300 users plus whoever's signing up, it costs $10k for a license. You can license up to 100,000 users for $20k, which is nothing. (I'm writing a business case for enterprise content management software for perhaps 200 users, and even with discounts initial licensing is closer to $2MM to buy, and annual maintenance is 18% of that.)

What's next? Hosting. According to the Salon Media Group 10-k submission to the SEC (a rich source of information, to which we shall return later), Salon.com has up to 6.5MM unique site visitors a month. I suppose you could work up an estimate of what that must mean in terms page hits and of their need to support concurrent visitors, but what it tells me is that they probably have enough server capacity to set up a dev-and-test environment, and support a 1300 user beta that has a tiny fraction of the page hits, without even noticing. Supposing that the IT operating costs of $800k cited in the 10-k represent the cost of keeping Salon.com up and running, then I'd be surprised if Open Salon's cost was equivalent to much more than a fraction of a percent - let's say $10k, just for grins.

So a complete SWAG guess is that one year of Open Salon in beta could cost between $220k and $270k. I'm not completely convinced, because my guess of the labor costs alone would only be about 5% of their production labor costs for (real) Salon - which seems low, and I have no idea what Tippem costs, but let's roll with it.

Now we get to the question of "why do this? What do they hope to get back?" Well, improving their advertising revenue, not to put too fine a point on it.

If you look at Salon.com's revenue for Fiscal 2008 (through March 31, 2008), they made about $5.4MM from advertising, $1.3MM from Premium members, and $746K off everything else, like The Well. Advertising was 72% of their revenue in 2008, and posted a very small increase from the previous year. Premium readers, on the other hand, are a declining source of revenue. From the 10-k:

Due to reader interest in Salon’s political coverage during the 2004 presidential campaign, which created opportunities to promote membership drives, either singly or in conjunction with third parties, Salon reached a peak of approximately 89,100 paid subscribers in December 2004.  Since that time, paid subscriptions have continued to decline, to approximately 47,200 as of March 31, 2007 and approximately 33,900 as of March 31, 2008.  The drop is expected to continue during the next year as Salon emphasizes advertising revenue over Salon Premium revenues as previously mentioned.

Salon plans to continue its rapid audience growth through a combination of editorial enhancements, new products, and more effective use of technology.  Salon has continued to add new writers, and enhance or create new content areas and features for its readers.  Salon has been developing a new social networking service for its users, “Open Salon”, which will allow them to post user profiles; contribute blogs and other content; and collect all their contributions to Salon, including Letters to the Editor, in one place.  Management believes Open Salon will attract and retain unique users, increase advertising inventory and lower its incremental editorial costs. 

Salon generates most of its revenue from advertising on its Website, as well as through subscribers who pay to read its content without ads.  

However, as Salon increased its number of readers to its Website, Salon has determined that if its advertising sales team can sell most of its inventory, it will be more profitable for Salon to drive its readers to its advertising supported Website rather than to a subscription, without-ads Website.  Salon recognizes that its subscription model will continue to be preferred by a minority of its readers, and will therefore continue the subscription program, with emphasis on “Premium with ads” as a means of increasing potential ad impressions.  Additionally, Salon will continue efforts to increase the average value per subscriber by bundling third-party services with subscriptions, and intends to offer other products and services to current subscribers.
 
Salon increased emphasis on advertising revenues during FY08 and will continue to do so in FY09.  In FY09, Salon plans to increase the size of its sales team, focus on broadening its advertiser base to include luxury items, apparel, home furnishings and packaged goods, and intends to expand into other advertising categories as well.  It will also expand the use of ad networks to fully monetize any unsold remnant inventory.

As previously mentioned, Salon has plans to launch a new user generated social network, to be called Open Salon.  This site will be an extension to Salon’s highly popular “Letters to the Editor” function, which allows readers to react to a story and begin a conversation with both the writer and the audience who is reading the story.  It is also intended as a home for bloggers who can take advantage of its larger, aggregated audience. This site will be rolled out during the course of FY09.

Salon also plans to engage readers with Web 2.0 tools that enhance their experience on the main Salon Website.  As an example, one social media application under development is the Sphere “widget,” a configurable pop-up feature activated by links embedded in articles on Salon.com.  These widgets will contain links to related stories on Salon and on other sites.   Sphere widgets contain ad inventory that Salon’s sales team will bundle with other advertising opportunities.  This feature is not expected to generate significant revenue, but is likely to drive additional page views to archived content, increase the average time spent on our Website and streamline the editorial process by obviating the need to
hand-select related stories.

Overall, Salon is working to integrate social media applications with Salon’s content.  A “share this article” link will expose users to a variety of single-click tools that permit content to be shared, tagged and distributed outside Salon’s domain.

 Also, Salon's Overlords are putting a degree of faith in Open Salon as part of increasing revenue. Deeper in the 10-k it emerges that the fiscal 2008 revenues for Salon were $7.5MM, but the operating costs were $10.88MM, for a $3.37MM operating loss. That's a hefty difference, and Open Salon by itself probably won't close the gap.

While a modest target like a multiple of five return on my guess-timated beta costs would get you about a third of the way to closing the gap, the content to advertising content dollar ratio is going to be pretty high, and the content to pay ratio correspondingly low. Again, this suggests "hobby money" levels of pay. Some of the local worthies have already indicated that for most writers, that's about as good as it gets anyway.

So, all this goes to suggest, to your not-very-humble correspondent in any case, that there probably won't be a huge amount of compensation for Open Salon content because it's intended to be a relatively low cost resource to create a broader network effect for building advertising revenues, but that there will be some other form of compensation model beyond tipping as the site goes live and is integrated into the broader Salon empire.  

I'm not planning to quite my day job, for what that's worth.

Postscript: Joan Walsh doesn't need your tips, she just got a raise. I don't know how it rates for editors, but even though I didn't agree with a lot of what she wrote about the recent Democratic primary, I can now say with confidence that she doesn't get paid enough for the abuse that she took.