There is a delicious irony that the wireless phone companies reap the rewards of enlisting tens of millions of users to pay about $10 monthly for the feature of sending and receiving 160 character text messages, yet publishers can’t make a business of convincing a small fraction of that number to pay half that amount to receive an online “newspaper” or magazine.” We pay to create our own information but won’t pay to receive news and other information created by “professionals.”
This phenomenon is at the heart of a sudden groundswell of concern for the future of the newspaper. Of course, it’s been building, with wave after wave of bad news (which editors thrive on when it refers to anything but their own backyard) of steep declines in circulation and an erosion in advertising that transcends the fall off signaled by the general recession.
And the remedies being proposed? Stripped to their core, there are two. One is to rely on some form of philanthropy. An investment officer at Yale and a financial analyst propose turning newspapers into nonprofit organizations, perhaps endowed by a foundation. They estimate that it would take only $5 billion to fund The New York Times (assuming I suppose a stock market that is more robust that we see at the moment).
The second is to cajole readers to pay something for the online version or to pay more for the print version. In this column I’m focusing on the latter. Another day I’ll add my analysis to the non-profit fantasy.
The re-ignition of the “pay for content”—or as it is now called a “paywall” --- is a response to the tsunami of bad news emanating from all corners of the legacy media business. Although local television and radio are hurting while magazines are downsizing, most of the Sturm und Drang has been about the even worse performance of newspapers. The New York Times has eliminated its dividends to conserve cash and has taken a $250 million loan from a Mexican oligarch. Hearst Corp., once the largest newspaper publisher in the U.S., put the Seattle Post-Intelligencer up for sale Jan. 9, and announced it will convert to digital only or shut it down if a buyer is not found soon. Same for its San Francisco Chronicle. The Detroit Free Press and The Detroit News now deliver papers only on Thursdays, Fridays and Sunday. The Tribune Company is in bankruptcy. And on it goes.
The argument of the growing bandwagon is that newspapers must stop giving away their content free in their online incarnation. They can’t depend on advertising revenue to pay for the same amount of quality journalism that has been supported under the traditional newspaper business model. They need to start charging something. Though not new (I last wrote about it almost three years ago), the subject has been largely dormant until recent months) when a flurry of articles and Blog posts have energized the subject. Tim Burden, at Printed Matters, has nicely annotated the debate since December.
The Achilles heal of this line of reasoning is that advertisers have long covered the full cost of content for newspapers. The share of the total cost of running a newspaper that is derived from circulation revenue has at best covered the cost of the paper, ink and maybe the press, the gas and trucks. Subtract the cost of the presses, printing and delivery and subtract the revenue paid by readers and what is left is the actually the cost of producing the content and the revenue provided by advertisers. At its core, readers have been receiving the information for free for decades.
So if the issue is how can “newspapers” continue to provide whatever mission we think they have fulfilled for the past century as they migrate to an all digital format, then we must follow the money. And that takes us to advertisers-- the same folks who make Google “free” and Yahoo “free” and Huffington Post “free” and “Politico “free.”
If newspapers have essentially been able to thrive on the revenue from advertisers alone (again, with cost of printing more or less covered by circulation revenue), why are they having so much trouble today? The answer is not one single factor, But a major contributor is that newspapers – whether print or digital—are just worth less to advertisers than they were 20 years ago. Back then, local advertisers did not have many options for reaching the mass local audience. What was the alternative for auto dealers? For real estate agents? Supermarkets or department stores? For some, direct mail was one possible option. But that was about it. Using pre-prints instead of ROP became attractive for some large display advertisers, leaving the publishers with a piece of the cash flow. Advertisers were hit with regular rate increases. And they pretty much had to pay, The publishers made good money.
But then a double whammy. Just about the time the Internet became a real alternative for classified listings—think Craigslist, Monster.com, eBay, Autotrader.com—and for retailers—think DoubleClick, Google, et al—the boys at the cable operators had perfected the insertion of highly local spots into their feeds. Between 1989 and 2007 local cable advertising increased from $500 million to $4.3 billion—or from 0.4% of all advertising to 1.6%. Advertising in newspapers fell from 26% to 15% in this period. Although some of the highly local advertisers going to cable may have taken some of their funds from budgets for radio or other local media, it is probable that a significant share came from the hides of newspapers. I estimate perhaps up to 20% of the decline in local newspaper advertising share can be attributed to local cable spots.
The other whammy, the gorilla in the room, is Internet advertising. No need to elaborate. But its impact on newspapers is not just that it has siphoned off dollars per se. Much more importantly is that the Internet has given most advertisers greater market power against newspaper publishers. Many big advertisers—like car dealers, real estate offices and big box retailers—don’t need the newspapers as much.
And this also explains why even an all-digital newspaper may have trouble supporting its economic model with online advertising. If newspapers could have simply eliminated all hard copy production costs and kept its advertising rates at the online equivalent of print milline rate, they could be profitable even with less advertising. But online rates are much lower on an equivalent copy sold vs. online visitor basis.
All old media also had a house edge over advertisers stemming from merchant John Wanamaker’s insight, “Half my advertising dollars are wasted. I just don’t know which half.” Now they do. Publishers (and broadcasters) are at a disadvantage in promoting the efficacy of their product when online metrics provide much greater certainty on who is clicking and even buying, vs. the legacy media.
Hence, the renewed look at shaking coins from the readers or viewers. Easier wished than accomplished. We already have a history of those who have tried and succeeded. It’s a short list: The Wall Street Journal. Those who have tried and considered it a failure include The New York Times, Slate, the Atlanta newspapers and USAToday. The Penny Gap lives.
The magnitude of the challenge can be distilled from The New York Times’ experience with its Times Select. In its two years of existence, the Times attracted 227,000 paying customers, at $49 annually. This translates into about $11 million annually. And this was just for access to a portion of its material. In abandoning a partial pay model, the Times calculated that it could get greater revenue from advertising on those paid for pages by opening them up, no charge.
I suspect that what we will find in the intermediate future is a mix of models and choices, among them:
• The Detroit model is one reasonable experiment: An attractive daily digital version, with home delivery of the paper reduced to Thursday, Friday and Sunday.
• An advertising supported all digital model, with the publisher closing down the printing plant, selling off its trucks, laying off the circulation and production departments.
• A voluntary pay model. This may take one of several forms. The “shareware” model for software has proven to work to a point. Users are asked to pay what they can or think the product is worth. Many users will be free riders. But, as we see with public television and radio, millions in their audience make annual contributions. (In 2007 at least one-third of those who downloaded Radiohead’s free "In Rainbow" album made a payment, in some cases higher than what the band would have received from a CD sale.)
How these and other variations develop will also depend on changes in the mobile business. The rate of adoption of SmartPhones with iPhone-sized screens; the pricing and availability of e-readers, such as the Amazon Kindle and the price for wireless broadband will enter into the viability of digital news formats replacing physical formats.