An Economist Approach to the Newspaper Industry

You should really hear my brother and me argue.

It sounds sounds a lot like we disagree on everything, but sit and listen to us, and you realize that we often have the same point of view, just different ways of expressing it.

My brother is the guy who got me inspired/angry enough to write You Can’t Make Abundancy Scarce. Phill Baker (who has no online profile to link to), who studies economics and engineering at UPenn and was assigned a massive project – to write a 80 page paper on an industry effected by technological change.

I’m pretty certain that his decision to write on the newspaper industry was in part to piss me off, but in reality, I’m glad he’s doing it. It’s interesting to see how an economist approaches the industry from a macro perspective.

He’s asked me to publish the paper when he’s done, mostly to see what the “industry insiders” think. I’ve agreed, so look for it in the coming weeks.

In the meantime, we're in the process of another email exchange, in which I play futurist and defend us blogging “ilk.”

What follows is excerpts from his email (small edits), interspaced with my responses. Any emphasis or links are my own.

Uh, yea, definitely, as to the last point you made. It's interesting b/c this is a 'classic' example of how success breeds failure under the pressure of technological change. There's some fascinating literature in that topic, but the poignant example is Kodak: they were so focused on being a film camera company, that they completely missed digital. They thought they were in the business of film (they were a pretty sophisticated chemical engineering company), whereas they should have seen themselves in the photography business. Where we differ is the extent of the change. So the business model has lost its exclusivity and newspapers missed the boat. Now they're facing established competitors in their markets with serious competitive advantages and the benefits of network effects through first mover status (e.g. if the NYTimes had been craigslist, we wouldn't be hearing of the end of newspapers).

Newspapers are not going anywhere. Print will not disappear, there's simply too much demand. 15% profit margins (20% is a bit high, actually the industry average is about 17%), should disappear (they can be maintained at the cost of cutting everything in the paper, but that'd be stupid). Circulation will likely stabilize in the next few years as the cannibalization of the print edition by the internet edition faces diminishing returns.

What's fascinating is that their business model has been co-opted by search. I don't think, and the research backs me up here, that display advertising online will ever come close to replacing the lost advertising revenue that was enjoyed in print. The 'national' papers, or those that are big enough to scale and aren't trapped under burdens of debt due (some serendipity comes into play there), will likely find stability first as they can portray themselves as the replacements to the four TV networks. At the head of long tail, they'll be able to differentiate themselves from commodity news through designer websites, cool visualizations, (hopefully) good journalism and (hopefully) their brand names.

• Agreed. Ads will very likely not be able to fund the entirety of a newsorg in the future. I can say this with maybe… 90% certainty.
• Newspapers enjoyed a profit margin of 20% and higher.
• The issue here is largely mindset. Newspapers are used to thinking of themselves as …newspapers. As they realize that they are really just a specialized subset of the tech sector, they'll come to have a revenue model that is more inline with the industry. Which is to say, one that relies on multiple sources of revenue.
• We really agree on your last three points here. Newsorgs need a great UI, ability to inform using data, and to maintain a solid reputation.

It remains to be seen whether online news will Balkanize like cable TV, I tend to doubt it because the specialization of content and advertising on channels lends itself more to paid search advertising than content. Although people can unbundle stuff on the web, news is still a pretty broad category and lends itself to similar reporting: local, regional, national, international; political, financial, environmental, sports, technology, society, etc. Part of the inherent complexity of the subject is that it is, by definition, an unknown unknown, and hence being able to specialize completely is practically impossible as content would not be filtered appropriately.

I don’t know if newspapers will be the ones to successfully challenge TV online. They have the original reporting advantage, but broadcast news has some distinct features that give them a leg up.

• TV ads are more valuable. There’s a lot more money behind TV. If the average American watches 5 hours of TV a day, and just over a minute on newspapers a day, it's unreasonable to assume that newspapers, in their current form, can compete with TV ads in terms of value.
• TV has an entertainment value that newspapers haven’t been able to replicate. Newspapers have a reputation for delivering bad news, TV is about entertainment. Which would you choose to use? Which is more likely to get you to pay attention to ads?
• TV is already paying for the right to cover sporting events, newspapers rely on free access. As newspapers use the internet to move to live coverage, something will give. It’s quite possible that they won’t enjoy free access forever. (h/t to Andrew Burton for pointing this one out to me.)
• TV is used to the 24/7 news cycle, their websites are a testament to this.
• TV can do video. They can do it live. They can stream it. Ouch for newspapers.

From my literature review, what shocked me the most was survey results considering trust: apparently people trust other people more than they trust the experts, by a wide margin. This might apply to product reviews and movie ratings, but I'd be shocked if the smart people at the Times couldn't find a way to prove that their trained, intelligent and talented journalists actually produced more informative, accurate, well-written, better sourced content than some bloke.

Information along with basic facts that come off of the wire. That probably should stay free, and might be the way to help the long tail papers - the smaller metropolitan papers that can't get the scale necessary to survive online. Although it seems their readership is more loyal, so they could conceivably milk their print editions for a while longer, they will probably have much great long term problems finding sustainable models than those companies at the head of the tail.

• I'd really like to have a link to that data. Really. (later: Phill promised me PDFs of the data, I'll look through it for anything good.)
• I'm working on compiling a list of axioms for hwe to do news, and one of my first ones is "trust the crowd." If two heads are smarter than one, many are smarter than one.
• I think that what people trust is relationships. If they have a relationship with an expert, they'll trust him. i.e. people watch pundits b/c they feel they have a relationship with them.
• I wager that sites like digg are successful because 'content is king,' and to a lesser extent because users believe that other users are trustworthy.

One reason I don't like your 'ilk' is that you make up new terms of art (that paper I sent you does too), and run around screaming like chickens with your heads cut off. Maybe it's different 'cause your 'inside' the industry and have to do that to get yourselves heard, and to try to fight against the inertia that's holding folks back, but, you're not the first, and you won't be the last. This is the churn and creative destruction of capitalism/technological progress. That you dismiss print so quickly disturbs me. Folks have proclaimed the death of radio after 1.) the record, 2.) the tape-cassette, 3.) cable TV, 4.) the VCR, 5.) the CD, 6.) the internet, and 7.) internet radio, they were never right. Most of the time, these are not zero sum games, nor are the goods perfect substitutes.

• I don't think Print is going to die. I do think it will continue to decrease. Print will become a luxury good.
• Just as the horse was replaced by the car, the candle by the lightbulb, film replaced with digital, the old method will be around, just in a luxury, antiquated, kind of way.

That experimentation is important is certainly true - except you claim to know what won't work. So your definition of experimentation is like Ford's: you can have it in any color you want, as long as it's black. When previous technological discontinuities have occurred (e.g. aviation, PCs, automobiles, etc.), it typically takes a few years of rapidly evolving experimentation before a dominant design emerges. What's interesting is that the innovation is much more on strategy and organization rather than technology, but it'll be interesting. One of the quotations that I saw in my reading was that there won't be one big solution, but many small ones. Benkler outlines many of these. I don't understand what you specifically disagree with him about. You dismiss the 5 outcomes he outlines by claiming some internal contradiction in his analysis of the positive effects of the outcomes - you don't argue why the outcomes will or will not happen.

• It's not so much that I'm claiming that you can only have black, as much as I'm saying that I know pink and green pokadots is an ugly color choice.
• There are fundamental rules being developed for this new paradigm, we know some of them, and are attempting to define the rest.

I think one possibility Benkler doesn't give credence to is the possibility of a 'new' business model - or really something that's already done but hasn't been applied to the newspaper industry. It might be possible that newspapers could become like rockstars - give the content away for free and charge for live performances, or in the case of papers, some type of consulting or analysis for companies. Or perhaps they can sell products based on it. Or perhaps there is nothing else.

Yup, I’m with you – newsorgs can charge for a great user interface, and should charge for access to their ‘new media’ skill set.

I don't really want to debate the positive effects of this change, because in a perfect world we wouldn't need the Fourth Estate and likely this will reduce some of its power. I think you're still misinterpreting Benkler's argument. He's arguing that newspapers have always been an imperfect Fourth Estate, and that they will continue to remain so. The internet will neither destroy it nor perfect it - it will simply change its form and probably move the needle in one direction or the other depending on the magnitude of various countervailing factors that are still in flux.

Agreed.