Number one was the announcement yesterday (June 2) from AT&T signaling the end, for now at least, of unlimited wireless broadband. As of June 7 most 3G iPad users and all buyers of iPhones and other AT&T connected smartphones will have to pay for data based on usage. Unless grandfathered, from now on it will all be metered.

According to most reports (the New York Times’ David Pogue among them), most smartphone users should come out ahead by under either of the two plans. AT&T itself calculated that 65% of its subscribers use less than 200 mb of the lower price option (half the cost of the current unlimited plan they have) and altogether 98% use under the 2 gb limit of the higher price plan. But for the newer iPad, optimized for streaming video and more accommodating for watching You Tube, will these parameters stunt their use?

The matters if we probe the implications of the second news item, an AP story under the headline “Publishers see signs the iPad can restore ad money.” It began: “Good news for the news business: Companies are paying newspapers and magazines up to five times as much to place ads in their iPad applications as what similar advertising costs on regular websites.”

The story noted that “early evidence suggests the iPad is at least offering publishers a way to get more money out of advertisers.” Perhaps prophetically, though, author Andrew Vanacore hedged his bets, adding two graphs later: “Still, a lot will need to go right for publishers before the iPad and imitator tablet computers become a significant source of income.”

The seeds of what may not go right comes soon enough. Describing why iPad applications such as USA Today’s can justify higher ad rates than the standard online ad, Vanacore replays this scenario: “A reader can click on Courtyard by Marriott's USA Today ad and then with a flick of a finger scroll through images of the hotels' updated lobby design. Another tap and a high-definition video appears, full of happy hotel guests.”

But wait. With AT&T’s new data limited plans, this simple “tap” will generate perhaps megabytes of “high definition” video. Will tablet users want to eat up precious data usage on a Marriott ad. When the pool was bottomless, well, so what. With the pool is emptying fast, then perhaps not. At least, not as spontaneously.

AT&T’s new data plans are likely to be mimicked by other carriers eventually. Some or all might hold off initially so as to gain a short term competitive advantage. But they know AT&T is right. The spectrum for data is finite and when any commodity is free it get overused. Some mechanism is needed to ration it.

Every decision has consequences. It’s not unusual for some to be unintended. Matt Richtel, in his report describing AT&T’s data plan announcement, closed his piece with this anecdote:

“Mike Lapchick, an AT&T customer in Chicago, said that he tended to use his iPhone mostly for e-mail, and that he would probably see his data bill drop in half to $15.

“But Mr. Lapchick, who is the chief executive of a company that makes software used by Internet retailers to allow consumers to zoom in on product images, has another concern. As unlimited data plans go away, it could prompt cellphone users to watch their intake.”

He may not have realized it, but Lapchick could have been describing every media business that has hope that iPad and its competitors' forthcoming tablets may just have been blindsided by AT&T without being aware of what hit them. At least not yet.

I’ll come back to this at the end.

The construct of network externalities struck me while reading coverage of the annual media conference sponsored by small investment bank Allen & Co. for 27 years usually generates news just because of who attends: the top executives of the big media companies, the young stars of the Internet challengers, investment bankers, some politicians, academics and a few outliers, like a sports star. Though the sessions are closed to the media, there are enough leaks to keep the scribes busy,

Most years the gist of the news is about who might be acquiring or merging with whom. This year, in the midst of an economic slump that puts the kabash on merger activity, much of the chatter was about business models. Media companies that for decades—or centuries—thought they knew where their revenue was coming from are in a quandary about where they might be getting their next dollars or Euros.

Thus the latest theme is the insistence-- from New Corp’s Rupert Murdoch, IAC’s Barry Diller, Liberty Media’s John Malone, Disney’s Robert Iger, among others -- that the free content gravy trend must end. Consumers are going to have to learn to pay for content online as they do in print or via cable, for music and movies. The legacy media have been struggling with the online model for years now—so far with limited success to show for their all their studies, experiments and worries.

But for me, the more fascinating discussion was the one of the business model for the new guys, like Twitter and YouTube. Diller reportedly told one session that he did not see how Twitter could make any money, despite its growing visibility. It has something north of 4.5 million accounts, but only a small fraction actually post anything.

What business model might work for Twitter? It has been highly successful in attracting users and in generating “buzz.” But so far it does not have a business model. It is operating on $55 million of venture capital.

A report on the Allen & Co conference, says that apparently some of the smartest media and Web executives could not come up with a model that would work to generate revenue without undercutting the network externalities that have been so crucial to Twitter's adoption.

Barry Diller, a media industry veteran, commented "I think it's a great service. I just don't think it's a natural advertising medium." John Malone, a cable industry pioneer and savvy media investor, voiced a similar view. Twitter would be hard-pressed to sell advertising on its messaging service without alienating users. He added that Twitter's best bet is to simply get people so addicted to the service that they might eventually pay fees. Malone claimed that Warren Buffet, one of the most successful investors, was thinking along the same lines, applying that model to YouTube, another media property that is wildly successful as measured by use, but still quite unprofitable. Buffett told Malone he would pay $5 a month to continue using it (that’s easy to say for the second wealthiest man in the world).

So here we have publishers and programmers and cable operators not only worried about their tried, if not quite true, business models in the face of declining circulation or viewership, unable even to see a healthy financial outcome for the new players that are growing exponentially, at the same time they achieve millions of users. Can it be that bleak?

Maybe that is why the latest round of investment at Facebook valued that money-sink at “only” $6.5 billion, down from the implied $15 billion by Microsoft’s investment in 2007.

So, finally, back to network externalities. The reason why a subscriber fee as a revenue source is a dangerous road for Facebook, MySpace, Twitter, or YouTube and the like is that any sort of charge, even a nominal one, is likely to lop off a substantial portion of its user base. This is the "Penny Gap.” – the experience that getting a user to go from free to any sort of payment, even a penny, is, in the online world, harder than getting a paying subscriber to pay more.That is, going from free to one cent a month would see a larger drop off in users that a service charging $1 riaisng its price to $2. The Penny Gap effect sets the network externality model in reverse. As some users drop off, the service becomes less useful to the remaining users, they are less enamored with it and drop and so it spirals down. Thus, services that thrive on network externalities need to proceed very cautiously—as their founders and managers presumably understand.

The folks who run the Web sites of legacy media, whether the online sites of the newspapers or newer sites like Hulu, do not have this issue. The value to me of my local newpaper—or its Web site—does not depend on the increase or decrease in the numbner of subscribers (except indirectly in the form of maybe more or less content as it generate more or less revenue).

The Penny Gap issue remains. Though media execs are calling for an end to free content as a way to save their franchises, so far no one has been willing to make the move, as they fear it will have a greater impact on the ad revenue than user fees will bring in. When The New York Times abandoned its subscriber Times Select pay tier, it made the decision that it could make more from advertising to large numbers than from a combination of subscriber revenue and lower advertising dollars.

The lesson is that the legacy media folks are going to have to solve their business model problem with a different solution than the one that might be best for new content Web sites like Twitter.

So I thought I’d call their—and your—attention to the lead editorial in today’s paper. Titled “Ink-Stained Politicians,” it is critical of congressional initiatives to “rescue” the newspaper industry. One of the leaders of this movement is my own senator, John Kerry. As are many of us, he is concerned about the future of the hometown Boston Globe. (The stakes may be particularly high, though, for the senator. In his re-election bid last year the Globe gushed: "The case for reelecting John Kerry would be strong under any circumstances . . . [but] the country needs his voice more than ever.")

So it was Sen. Kerry’s subcommittee that held a hearing on May 6 titled "The Future of Journalism." It was a morose affair, with publishers enumerating the fate of failing and fallen comrades. Then the senators turned to the culprits, Huffington Post and Google.

The hook for the hearings was what role Congress could conjure to help out what Kerry buys into as “the fourth branch of government.” One proposal, from Maryland Senator Benjamin Cardin, would allow newspapers to convert to nonprofit status (hmm-it seems like the point is that they are already nonprofits. What they should say is not-for-profits). Their operating revenues would be tax exempt. In return, they would be precluded from endorsing political candidates, though, as the Journal points out, that wouldn’t prevent them from taking sides more subtlety.

The other idea being floated was some sort of an antitrust exemption that, as described by Dallas Morning News publisher James Moroney, would allow the newspaper industry to conspire to find ways for making money from putting the work of its journalists online. Of course, I thought that was what the industry has been doing with such projects as Newspaper Next and The Newspaper Project. But I suppose a major league baseball-like exemption would allow publishers to band together for steps that would prevent the Huffington Posts and Googles from making money off their backs.

The Journal’s position is one that I have trumpeted, as have my colleagues here Dorian Benkoil and Vin Crosbie. That is to let the forces of technologies, consumer behavior and the marketplace play themselves out, at least for awhile longer, before panicking. I have argued (as have others) that there will be changes, for sure. But that there will also evolve multiple business models. There will be winners and losers. Services lost-- for example some local coverage if some cities or towns lose their daily printed papers—are highly likely to be regained as new players jump in to fill a vacuum.

We see hints of that with an array of Web sites that focus on local and even hyperlocal news. Some, like EveryBlock, for the moment are compendia of links to local government sites, some blogs and even local news from other sources. But that doesn't mean that is their end point. It is their opening gambit. Should they gain traction some will start adding original content (or they may find the to gain traction they will need original reporting). A few, such as Buffalo Rising and Patch, already do have reporters covering the local scene. Very few now. But given time, and a market, more later.

Dallas’s Moroney speaks for many in the legacy media who are urging Congress to legislate a "consent for content" requirement to get the Googles and Huffington Posts of the online world to pay "fair compensation" for content they pick up and then sell advertising on. The Journal comments “So, although most newspapers are giving away their content free online, the feds should guarantee them a stipend from anyone who gets someone to pay for it. There's a winning business model.”

In any event, it would seem to be a matter for negotiation rather than legislation.

The Journal continues: “The larger story here is that newspapers are enduring the familiar process of economic "creative destruction," in this case brought on by the Internet. Advertisers are fleeing to search engines, while barriers to entry in publishing have crashed. Despite the pain this causes to certain companies, this is not much different than any other industry buffeted by new technology or business strategies.”

Creative destruction is right. In the early 1990s, the 200 year old Encyclopaedia Britannica was a $650 million company. Five years later in was bringing in one third that. It’s business model based on a high priced part time sales force selling “guilt” as much as $2000 sets of books was undermined by Microsoft’s Encarta, given away for free on a CD with a new computer and based on an old Funk & Wagnall supermarket-distributed encyclopedia. The World Book suffered similarly. Both have had to retreat and reformulate to survive in the world of DVDs and online delivery. Where was Congress then?

The Journal’s editorial concludes with an argument almost stolen (dare I charge?) from a recent post of mine, save the last line:

“Some new business model will emerge for journalism, if not for all newspapers, and in the meantime the business of reporting the news isn't vanishing. It is taking new forms and adapting, with newspapers growing their audiences online even as the sources of their revenue shift. The industry is currently debating how to charge customers for content, and no doubt many experiments will be tried. No matter who emerges victorious, the journalism business will be stronger and more credible if it avoids the government's embrace.”

To its credit, the Obama Administration is keeping its distance. Press Secretary Robert Gibbs, responding to a question, commented that while it's sad for cities to lose their daily papers, any public assistance "might be a tricky area to get into.…I don't know what, in all honesty, government can do about it."

The sooner the suits in Washington and the executive suites in Dallas understand that, the better off it will be for the future of journalism.

If you’ve been on vacation in Bali and didn’t want to pay the $15 a day resort Internet fee, the shut down of the 45,000 circulation News will make this the first city to lose its newspaper. The plan, according to owner Advance Publications, is to completely shut down the operation, lay off all empoylees, then start fresh with two new companies that will need far fewer staff. One, a Web venture called AnnArbor.com, will have some original reporting but rely substantially on reader input and community forums. A second company is described as a printing company that will publish a twice weekly newspaper fo some sort. Advance is also cutting back its daily newspapers in Flint, Saginaw, and Bay City to a thrice weekly schedule.

Types of organizations eligible for non-profit status under IRS 501(c)

My take, I wrote Peter, is that I suspect new players will see it as an opportunity to pick up the slack. They will enter with a different expense base. Maybe no single one will totally replace today's version of the newspaper, but in aggregate they will cover whatever territory for which there is a demand, e.g., an entertainment paper-- probably ad supported. More local stuff online. More stuff you can view on iPhone-like devices or Kindle-like. We’re in a period of fits and starts, but if there is a market there will be big guys or entrepreneurs who will fill the gaps. At the premium end there is the example of the for-profit (they hope) GlobalPost.com. The low end may be the for-profit (they hope) citizen journalist new AnnArbor.com.

But what about the not-for-profit model, a proposal popularized by an op-ed piece in The New York Times last month? An academic study being prepared for publication in the Journal of Media Economics this summer (I’ll post more details in July) looks at the fortunes of nonprofits in the magazine business. It notes that “nonprofit” can take many forms, both legally and as operational models. Many not for profits rely heavily on advertising revenue, just as their for-profit cousins. The study observes that they can be just as susceptible to economic downturns as for profit publications.

Indeed, at a small conference I attended earlier this month, I pointedly asked Rick Edmonds of the Poynter Institute whether the general downward pressures facing the newspaper industry had affected the St. Petersburg Times. That paper is something of the poster child for the non-profit model. The paper is controlled by a foundation set up by the late Nelson Poynter. If the paper has a surplus – the nonprofit term for profit—it declares a dividend. This is turn is the primary source of support for the many good program of the Poynter Institute. Edmunds had to admit that the Times is indeed taking a hit from the same forces felt by all newspapers. It has made staff cuts in its newsroom to help keep up profit. Even so, dividends are down. The Poynter Institute has a comfortable cash reserve for now. But the larger point is that the Times as well as the Institute are not immune to the forces and trends in the industry or the economy.

Philanthropic organizations—even the wealthiest—cannot defy gravity. Harvard, the richest of universities, is having to make major cutback because its endowment—line the financial markets—shrunk 22% ($8 billion) between July and October 2008 alone.

So let’s suppose that a newspaper does indeed have a billion dollar endowment behind it. To generate income it must invest that money somewhere. The more aggressively it’s invested, the more money for the newsroom. If invested in Treasury notes, the endowment is safer—but it may be short changing its mission—essentially leaving money on the table that could be used for journalism. So it takes a moderate course of investment. And suppose that lets the endowment generate a 5% return devoted to newspaper operations. That would be $50 million initially, a nice subsidy to keep up salaries, news bureaus, staffing. But what happens, as it has this past year, if the invested funds lose 20% of their value—well under the markets overall financial loses in the past year, thanks to our hypothetical endowment's conservative portfolio.

Now, with an $800 million portfolio, if it still drew 5%, it could only add $40 million to its income. What’s a publisher to do? Just as advertising and circulation revenue are falling, so is the endowment income that could otherwise prop up its finances. True, it may be better off than its fully for- profit brethren. But it will inevitably need to make cuts: in personnel, in travel, in salaries—the same types of cuts we hear about weekly.

So not-for-profit is not the solution, endowments are not the solution. What is?

As I wrote to Peter, there is not a solution. We have left behind an either/or world for one of many options. There is opportunity for non-profits, such as the well established Pulitzer Center on Crisis Reporting or the new Pro Publica. The entrepreneurial for-profit sector is represented by a new model with GlobalPost. The Detroit newspapers are leading the way (or were pushed) for daily newspapers in hybrid online and print. Advance Publications is trying out another for profit model in Ann Arbor.

The result will be an evolving stew of print, online, mobile, video and audio news sources—international, national, local and hyperlocal. For profit and not for profit. From existing well known media companies, from nonmedia players, from entrepreneurial start-ups. Those that will be successful and those that will prove unsuccessful.

When I teach about marketing, the most important word I emphasize is the word “some.” I tell them not to think in terms of “People want more news” or “People are willing (or unwilling) to pay for…” Market segmentation is about “some." “Some people” want. “Some people” will pay. Some. The digital technologies here and still emerging make it far more efficient to provide news, entertainment, whatever, to each of us in more forms than at any time in history.

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.

Users also have the option to display two pages across in the layout of the actual newspaper. In this format, the cursor changes to a magnifier, so a click on the low rez image enlarges it to a readable size. Yet another option allows downloading individual sections or even the entire newspaper as a pdf file. (Today’s newspaper was a 46 mb ZIP file). As best as I can tell this still needs some work, as each page is a separate pdf file.

The technology is far more amenable to user preferences than the more static approach taken by YuDu or The Sporting News or other previous digital publications’ digital editions.

The notion behind the digital edition is that it is fixed, being a representation of the print version. It is not updated 24/7. It IS the printed paper, digitally rendered. There is no ink to rub off or newsprint to toss out, but otherwise it has the benefits—pages randomly accessible – and drawbacks—fixed in time—as the print edition. Users are advised to go to the paper’s Web site for updates and breaking news.

I also tried it on my iPhone and it worked well, with the usual caveat of the iPhone’s small screen. But I could use all of the digital version’s functionality. Apparently the digital edition does not use Flash or any other non-browser standard technology.

The digital Free Press (and any other newspaper that adopts a similar technology) won’t appeal to everyone. Nothing does. SmartPhone access can provide some flexibility for mobile use, but is not a satisfying substitute. Reading a digital version, even on a nice widescreen monitor, is confining to a fixed place. But it is not hard to see the possibilities. If compatible with e-readers, such as Amazon’s Kindle or the newly introduced iRex with a 10” “paper” screen, the portability issue and the form factor hurdle recede.

Of course, the technologies only address the economics of the newspaper. They do not solve the enduring bigger question: Who will be paying to buy a newspaper, digital or otherwise?

It’s no surprise that newspapers have been hurting, but the Detroit papers seem to be failing faster than those in other cities. Circulation of the papers is down between 15% (Free Press) and 22% (News), a long term slide that has no doubt been exacerbated by the troubles particular to Detroit’s major business.

The official announcement, expected next week, specifically refers to home delivery, suggesting that the papers will continue to print hard copies daily, with distribution limited to newsstands the four non-delivery days. The digital versions will continue as well.

I would have to assume that, if this comes to pass, the green eye shade folks have figured out the savings for this half-a-loaf strategy. I need to be convinced. If they do indeed still turn the presses every day, then the only savings are the variable costs of ink, newsprint, and delivery costs for the home delivered copies. All other fixed first copy costs stay the same. Subtracted from the savings is the lower advertising rates that could be charged for those days, reflecting lower circulation. The cut back is expected to be accompanied by a dramatic redesign of the print editions, which may have some cost implications. I guess we should wait for the details to make a final judgment.

The pending announcement makes very real the current virtual office pool in media circles, the winner being closest to predicting when the first major city newspaper would announce it would become an online-only service. Indeed, we may have a winner. in his column last week on media predictions for 2009, Business Week columnist Jon Fine included this precocious prophecy: “More than one newspaper in a top-100 market ceases publication or reduces its print edition to something unrecognizable as a daily newspaper.” Had he heard the scuttlebutt about Detroit, or is he just that good? (Fine also wrote “At least one recent, heavily leveraged media deal—Tribune, Univision, Clear Channel, the Minneapolis Star Tribune, I could go on—goes bankrupt. A week later the Tribune company did file for Chapter 11, though that debacle was a bit more foreseeable).

Two months ago, the Christian Science Monitor announced that it would become a weekly in print, along with its continually refreshed Web version. The Monitor has long been suffering so it was even less a surprise that the Tribune filing.

Still, this is quite likely the start of a trend. Some publishers may be emboldened by the Detroit plan to move ahead their own online-only strategy. Others can wait and see how it works out for Gannett and MediaNews, then either follow suit or decide to find other ways to cut costs. My own prediction (drum roll please) if that over the next two or three years more dailies will move to a hybrid platform, akin to Detroit, with less than daily delivery or even printing. The early trickle could become a stampede by the end of the decade, regardless of how fast the economy recovers. Newspaper economics are changing.

But much of that is abstract for those not actually losing jobs. So here’s a blast that brings the harsh reality home: Out of Town News, the venerable international news outlet in the epicenter of Harvard Square, in the epicenter of one of the more literate nooks of the world, is closing.

Out of Town News used to be a bustling hub, situated just outside Harvard Yard, across from the Harvard Coop bookstore, at the literal crossroads of Massachusetts Ave, JFK Street and Brattle Street. It was at the entrance (or exit) to the Red Line of the subway system.

As the Boston Globe reported:

John Kenneth Galbraith bought a copy of Le Monde there every day. Julia Child searched for obscure Italian and German cooking magazines, and Robert Frost once stopped by - it actually was a snowy evening - to get directions to a reading.

I used to stop by often. Outside there were stacks of the Globe and Herald, The New York Times, New York Post and the Daily News, Wall Street Journal and Washington Post. Inside were shelves laden with newspapers from Los Angeles, Philadelphia, Denver, Athens, Tel Aviv, London, Paris, Frankfurt, Tokyo: Indeed, 200 cities. Its name was truth in advertising. There were also hundreds of magazine titles, inside and outside. Customers could stand there and browse—or even read—without fear of being asked to move along.

But times change. I haven’t bought anything from Out of Town News in maybe 10 years. And apparently many others haven’t. Galbraith and Child are gone—replaced by a new generation that can read today’s Le Monde online—instead of paying $4 for a two day old issue.

Out of Town News was started by Sheldon Cohen in 1955. Previously he hawked newspapers with his father at the subway station. I met Cohen in the early 1980s. At the time I was working at a policy research program at Harvard, trying to scope out the implications of the inevitable transition to digital for the information industry. For a guy with ink under his nails, he was precociously curious not only about what threats that might have for the print business but what opportunities it might hold for him.

Though later I would see him now and then in the Square, I don’t know for sure where those few discussions lead him. But with great timing—maybe luck, maybe insight—he sold his business to Hudson News in 1994—yes, the year that the Internet went commercial and the Netscape browser was released. Hudson News is the purveyor of print media and over priced gum at newsstands in many airports. According to the Globe, Cohen, now 77, wept when he was told that the kiosk would be closed.

Institutions need to sunset when they have outlived their usefulness. There is probably a majority of two or three generations of Harvard students who have walked through Harvard Square for four years and never stopped into Out of Town News or even thought much about it. I wonder what will be the media institutions that disappear for them to shed a tear over when they look back.

[Added March 30, 2009: Reports of the death of Out-of-Town News were a bit premature. See this brief update.]

Of course, that doesn’t mean anyone’s making money on it, a point Burbank also raised.

Oddly, though, he said there has been “little impact” of citizen journalism, no breakout viral video clips from a cellphone, despite the many opportunities of Joe Biden speaking many places every day. (I might counter that there’s a lot of influential blog and Twitter discussion, and that any Swift Boating might occur online, especially via email. Video is not the only place to look for influence. Not to mention Obama’s in-game ads.)

The Sporting News has a rich history, starting publication in 1886. I remember my father subscribing in the 1960s. It was thick with box scores and stats for every team and every major sport. In 1977, when the Times Mirror Co bought the publisher for all of $18 million it had a circulation of about 356,000. By the time it was sold to Vulcan Ventures in 2000 for $100 million it had a circulation of over 500,000, but it was being threatened by the successful launch of ESPN Magazine, which had 850,00 circulation within two years of its 1998 launch.

The Sporting News was sold again in 2006, to American City Business Journals. Today the circulation is about 700,000, but at an annual price of only $14.97 for a new subscription—compared to about $61.00 in constant dollars in 1978.

Like many print publications, The Sporting News has been substantially affected by online content. Daily sports news has been particularly hard hit. The Internet is made for getting late night scores, accessing the scads of stats that even casual fans crave, following teams in far-off cities—and all for little or, most often, no consumer cost.

Like most other print publications, it has had an online presence. The Sporting News Today is something else though. It is a magazine formatted for the screen. But it is not like a Web site. It involves no scrolling. It is pdf-like, though it is not read with Adobe Reader. It is not the print edition read online, as with Zinio. To me each screen looked like a double page spread in a magazine—but with no need for a gutter. I sort of felt that I had spread opened the tabloid-sized magazine. You will note that each of the “double pages” has one page number.

By offering to send subscribers an email each day, readers so do not have to bookmark anything. Just click the link.

The content is vintage Sporting News: Right now heavy on baseball, but lots on football—professional and college. There is hockey, basketball, NASCAR, tennis. Even Little League World Series coverage is promised. And, with a nod to WEB 2.0, it will offer readers the opportunity to provide their own input: “You’ll get a byline, file to an editor.” (Actually, a clever spin on “Letters to the Editor.”)

No surprise, the business model for the Sporting News Today is, for the moment at least, advertising, though it was rather light for a first edition. The inaugural issue had a full page from SpeedTV.com, three half page house ads for Sporting News affiliates and a full page promotion for the revamped Sporting News magazine, which will become a bi-weekly. (Management expects to lose 100,000 circulation from current levels to the free online publication).

I’m not a design expert—I’ll leave that to my colleagues at Innovation Media Consulting Group. But the Sporting News Today will feel comfortable to readers who like the look of print and are put off by clicking here and there for do their online reading. The layout feels modern but grounded in print. How that plays may be generational—or not.

As a final note, it may be worth pointing out that while traditional print publications are downsizing, The Sporting News Today is hiring. Indeed, I got turned on to its impending launch by Charles Apple, it’s new art director, who was hired away from the Virginia Pilot newspaper. (Has anyone seen numbers on how many print journalists have been hired by online-only ventures other than self-funded blogs?)

There has been speculation in recent years on when we will get the first announcement that a daily newspaper will shut down its presses completely and switch to digital-only. There are still some big hurdles, like portability. But should services such as Amazon’s Kindle take off, allowing readers to take their digital publications on the go, then the Sporting News Today model may have legs and encourage a general interest newspaper to give it a whirl.

A few weeks back the editor of the Cleveland Plain Dealer on "On the Media" talked about how newspapers in Ohio were reaping great benefits trading material, and linking and cross linking. More importantly, she said she was no longer reliant on The Associated Press for her stories from the region but instead was getting the original versions direct from the other sources around the state rather than paying “a big chunk” of her budget, about $1 million for rewritten AP stories. Picking up directly, on the Web, and putting other papers’ stories directly in the newspaper was also better quality, she said, and readers were noticing:

“I mean, we've always had access to news from all over the state. It was just, you know, it went through the AP mill. I frankly think we're getting better, more distinctively written stories because they're not going through the AP mill.”

I’m not saying this will happen immediately. AP, whose core business is the not-for-profit cooperative dues of member newspapers, has offered to cut its rates starting next year. Newspapers, despite ad and circulation declines for decades, have been notoriously slow moving, and many will be reluctant to pick up content from papers they might think of as competitors; the AP has given them the cover they sought to do so less blatantly. But the economic pressures are only increasing as revenues and readership decline more precipitously, and any success in Ohio could be the thin edge of a wedge. “We've set up this little cooperative,” said the Plain Dealer editor, Susan Goldberg. “I don't know how it'll work in the future, but right now it's working really well.”

Add to that AP’s deal to have its direct results placed higher in Google than member papers, further pissing them off, and newspapers will look harder at the Ohio example. We're talking months or perhaps years, certainly not decades. The example could spread nationally or internationally.

CEO Tom Curley has been leading the AP into a future in which an increasing share of its revenues comes from sources other than member dues, such as direct photo revenues, Web content services and broadcast fees. But the transformation may not be fast enough. AP doesn't have the luxury of Bloomberg or Thomson Reuters in which news gathering can be supported by financial terminals that really bring in the bucks.

AP should own the Web. It has its roots in the trading and sharing of information. It gets a significant chunk of revenue from providing the backbone through which others pass content. It coded and tagged and parsed content with everything from category codes to prioritization markings, and ways to match text and photos decades before those practices became fashionable for everyone. But culture and old habits are very hard to change, and I fear for the company's viability hope it can work out a more creative win-win solution for all.

There is, in short, much uncertainty surrounding where the business models for media are and should be headed.

One area that legacy media can control and should know something about is content. Newspapers, broadcasters, publishers of all stripes, have absolute control over their content. Newspaper publishers constantly need to ask themselves “What do consumers want when they subscribe or take $.50 (or $1.00) out of their purses/pockets to buy the publication. Broadcasters certainly ask, ‘Why should viewers tune us in?”

But I’m constantly amazed at their lack of insight and therefore the choices they make. And here I’m referring in particular to the broadly defined “news” segment of the media. Research shows that there has been a range of motivations that are involved in getting individuals to buy a newspaper or tune in a news program—or click to a Web site bookmark. One of the top motivating factors is the interest in learning what we do not know. What happened in the world while I slept? Who won the game last night? What is the weather forecast for tomorrow? What did my stocks close at? What does some “expert” think about a new movie or show? Surprise me!

What we don’t need the news media for is to be told what we already know. The Internet has, of course, made it possible for more people to know more of the answers to the above types of questions before they are available in print or even on a regularly scheduled broadcast. Still, there are many things we know even without the Internet. For example, most of use know if it is hot outside. Or wet or windy or cold. We look out the window or open the door. Anyone who drives a car knows the price of gasoline. Anyone who flies knows the airports are crowded and lines at Thanksgiving are long.

So where am I going with this rant? I’m astounded—and hopefully some of you are as well—at how the editors of news media shoot themselves in the foot everyday with the non-compelling nature of their many of their content decisions. For example, most days I turn on “American Morning” on CNN, even before the computer is fired up. And what do I hear, at length, each day lately? A business reporter, Ali Velchi, telling us the price of gasoline. “Pain at the pump” is the not so original refrain. And the usual “B” roll of someone filling up, with the obligatory quote from the woman in the street who is driving less and someone who will give up their “gas guzzler.” And the anchors commiserating over the latest record. And a reiteration of where Lundburg or AAA thinks the price is going in the “peak driving season.” Compelling stuff, no? Maybe the “Today Show” isn’t so lame.

Not long ago I was asked by a small chain of newspapers to spend a few days with their editors in a session to help them understand and strategize for the challenges facing them. They sent me a large stack of their newspapers so I could get a flavor for them. In the sample were issues from several of the papers with a variation of the headline “It’s Hot Out There.” Immediately I created in my head what this would say. By the third paragraph it would quote some gardener about the heat and how he is coping with it. And sure enough, in the first article I read I was both pleased and disappointed with the copy. There, in the third graph, was a quote from Pedro something, with the Generic Landscape Co. “Yeah, it’s hot. So we start really early and quit by two o’clock,” he explained. I mentally patted myself on the back. But there was more disappointment that the article was so very predictable.

However, the larger point is that, with both CNN and these newspapers (and many others that could be included) that these prominent “stories” were not about news. They were what anyone knew.

In this space I have recently been critical of The Wall Street Journal for a new editorial approach that has often reduced prominence of analysis and surprise in favor of featuring in many cases material that most readers would already know: A who-what-where-when accounting of an earthquake. A routine summary of the previous night’s primary results (and, with its early deadline, less timely that what was in the local newspaper). It is telling readers what many, if not most, could be expected to learn from other media they are likely to have seen.

The legacy “news” media cannot materially change the trend toward whatever is coming via technology. But they can slow their demise by concentrating on the content of their products. And they can enhance the position of their digital products as well by providing audiences with the serendipity factor and with a value added quality that is needed to have users buying, tuning or clicking to their products. That has been the not-so-secret sauce behind the strength of The New York Times, USA Today, Fox News and, until recently, The Wall Street Journal. Give people what they don’t know, not the current weather or yesterday’s price of a gallon of petrol.

A few folks have been using Twitter as a kind of live-blogging mechanism, so folks following a Twitter feed can read what a reporter has to say about an event or news scene as he/she types it in a handheld device. That can be perfectly valid, but it’s important -- as with any medium -- to consider the audience, and how they’re likely consuming what’s being provided.

A lot of the Twittering I’ve seen reads as if you have to be at the event to understand what was said -- you have to be so much an insider that you’re already on the inside. If that’s the case, what’s the point? To be pedantic about it, some questions:

Do your readers need more information? Should you give a full name of whom you’re talking about?

• Shouldn’t you say specifics rather than just allude?
  
• Can you sum up, or should you quote?
• Yes, it’s only 140 characters, but as Mark Twain might have said: I wrote a full article because I didn’t have time to Twitter. Writing intelligently in 140-character bursts is a hard thing to do.
  

What else?

Here’s another way to look at more by subtraction. David Pogue, a New York Times tech columnist who I find entertaining and quite informative, had a column last month about why a product can be a success even with acknowledged flaws. Referring to Apple’s Mac Air he wrote:

…When your laptop has the thickness and feel of a legal pad and starts up with the speed of a PalmPilot, it ceases to be a traditional laptop. It becomes something you whip open and shut for quick lookups, something you check while you're standing in line or at the airline counter, something you can use in places where hauling open a regular laptop (and waiting for it) would just be too much hassle.

It's the same lesson I learned when I reviewed the Flip "camcorder" a couple weeks ago: if you change the shape and concept of something enough, it ceases to be that thing. It becomes a new thing, or a descendant of that earlier thing. But it's no longer the original thing, and you can't judge it on the same yardstick.

Lesson learned: Form—the products attributes—can create the function. Thus an entrepreneur can break out of a well-defined category (camcorder, laptop, cell phone) by changing some key characteristics—weight, time to boot up, capabilities—even a dramatic new price point.

Does this insight provide any guidance for the media industry? Should the local newspaper continue trying to be a general interest publication even when online? Is it already something else, in which case it needs to be evaluated by a different metric (i.e., time spent, return visits) than what has been used in the past (i.e., hits or clicks or gross eyeballs or total page views)? Or, perhaps, should legacy media be creating new “things” based on the old? What is the media equivalent of the Mac Air or Flip camcorder: a product that is recognizable but, by changing—often removing—product attributes is used by consumers (and advertisers in this case) in new ways?

Experiments with short form videos—first popularized from the bottom up thanks to the YouTube platform—have now become mainstream with the traditional video programmers. Viacom purchased short film pioneer Atom Films in 2006. But most attention continues to be on finding outlets for conventional programming, such as NBC Universal/News Corp.’s Hulu.

If I had the answer I’d offer it (though probably not here—a guy’s got to feed his family, or in my case, start paying college tuition). But I think it is an area ripe for brainstorming and another round of informed trial and error.

Ready. Fire. Aim.

Wilson looked at many of the more successful Web ventures and observed that what they had in common was a basic service that they offered for free and a step-up premium service that they charged for.

The basic voice over IP service Skype, for example, lets users call anyone anywhere for no cost, so long as both the caller and callee are at broadband-connected computers. However, if you really want to be able to call anyone anywhere—that is, to a land line or cell phone -- there are per minute charges. Want voice mail? Upgrade to Skype Pro.

A wonderful service I use called LogMeIn employs a similar approach. It gives me access to my desktop computer from any other computer, anywhere. A free version lets me see all my directories and files and transfer them to my remote laptop. The upgraded version actually displays the screen of my desktop, with access to any program or file, as though it was on my remote computer.

There are many other examples.

But for the Freemium model to work, Wilson observed there are other characteristics that demarcated the more successful implementations and the others:

• Ideally, they don’t require any downloads or plug ins to start. Lots of exceptions here, but it is a helpful goal.
• Support every browser with any material market share. There is no excuse these days to be FireFox or Safari challenged
• Make sure the service works on various flavors of Windows, OSX, and Linux.

In short, he says, eliminate all barriers to the initial customer acquisition.

But unlike 30 day free trials before having to pay, a true Freemium experience ensures that whatever the customer gets day one for free they are always going to get for free. Nothing is more irritating to a potential customer than a “bait and switch.”

If Freemium is such a great approach, why wasn’t The New York Times’ foray into this model more successful? It gave away a basic service and, with Times Select, offered a premium upgrade.

Part of the answer (there is sometimes but not usually a silver bullet) may be that the model is most likely to succeed when the customer implicitly understands why the paid service has to cost money. Free e-mail accounts that offer greater storage for a fee. Termination cost on other carriers networks in the Skype model is explicit justification. In the case of TimesSelect, it would be obvious to most readers that arbitrary withholding of access to some portions of content was not related to significant costs. It may have made some sense as a “value” play, yet it clearly did not work. “But if your free service is loved and you do a good job articulating the value that comes with the paid service, you can convert to paying users with good results,” concludes Wilson.

The Freemium model was augmented one year later by another venture capitalist, Josh Kopelman. He has labeled his observation “The Penny Gap.” I recall meeting Kopelman when I was teaching at Temple University in Philadelphia. He had started Infonautics Corporation, the predecessor of today's High Beam Research, in the early Internet days. I assume from that he learned some lessons about offering a subscription service that gave users access to a wide range of magazines, journals, reference and newspaper material. (And that he was more successful with a subsequent venture, Half.com, acquired by eBay).

The Penny Gap says in essence that getting a user to go from free to any sort of payment, even a penny, is harder that getting a paying subscriber to pay more. Going from free to $1.00 is a much higher hurdle than from $1 to $2, even though the difference is the same. The Penny Gap is a disconnect with classical economic theory, which would hold that demand increases as the price decreases. As Kopelman illustrated in the accompany figure, getting users to make any financial commitment is the greater hurdle than the amount itself.

What does this say about the content-heavy online ventures of the legacy media business? In large measure it helps explain why they settled for the most part (well, except for The Wall Street Journal) on an advertiser supported Web model. From USA Today to Slate to The New York Times media sites have tried and failed to make a user pay model stick, despite offering some high grade content.

But by dissecting the successful non-media sites that have achieved a substantial user-pay component, could media firms find areas where they can truly find value added to justify a premium? I’m not optimistic. Two years ago I might have offered that a comprehensive ad-free video service could be sold at a premium. Recall CNN tried that with its Pipeline service, providing real time video streams and an archive of telecasts. It met many Freemium characteristics, including a presumption of additional cost for all the storage and bandwidth. Apparently Time Warner determined that more advertising revenue outweighed the subscription dollars. Hulu, the new NBC Universal-News Corporation joint venture, is all free, all the time. It has not made noises about offering paid-for premium content.

The bottom line is that as a generalization the media business may not get over the Penny Gap chasm. For those firms that have been on the electronic side, where advertiser supported has long been the total revenue stream, maintaining that model may be easiest to accept. For that segment of the print media that has been used to drawing at least some of its revenue from consumers, resigning itself to only advertising may be tougher. And perhaps a bit of a blow to its self-esteem.