A lot of newspaper publishers and editors are understandably angry that Google is siphoning their revenue and readers. But they should set that emotion aside for now, and listen to what the company's chief economist is saying about their industry.
Hal Varian was already a distinguished research economist when he turned his attention to information economics. His knowledge and authority were well-established when he joined Google, so his words reflect more than the company's self interest.
Varian's description of the problems facing newspapers in this post on Google's policy blog won't surprise anyone who follows the business side of the industry. What deserves consideration are his suggestions about which parts of the problem matter most.
Why newspapers are losing the race for online advertising
Varin points out that print editions of newspapers are still attractive to advertisers because people actually read them. Online readers average less than two minutes on a day looking at newspaper web sites, which sounds to me as if they mostly skim headlines.
As a result, newspapers aren't attracting much of the rapidly expanding pool of online advertising revenue. Varian says search engines are not the real culprit. Search engines actually account for almost half of the revenue newspapers have managed to attract.
The real problem is readers don't find newspaper web sites engaging. Meanwhile, lucrative advertising in categories like automobiles and real estate has migrated to independent web sites that provide information about, well, automobiles and real estate.
Varian doesn't say this, but he is clearly responding to proposals some publishers have made to block search engines like Google from indexing their stories.
Those publishers should listen.
Cutting costs vs. charging for access
Varian also reminds us of a basic economic fact, one that I've also tried to stress. Most news is a commodity. Readers can find the same basic headline and story on lots of different websites. When competition is intense, prices are always low.
If newspapers want to differentiate themselves enough to persuade readers to pay for access, they must find and pay for better ways to provide unique news that readers will pay for.
Varian points out that newspapers could instead cut the costs of producing the news. He estimates printing and distribution accounts for half the cost of producing a physical newspaper. Covering the news accounts for just 15 percent of the cost.
Varian suggests newspapers try to cut costs by producing news only on the internet.
I think this makes sense, but only as a long-term response. Companies that produce physical newspapers cannot just abandon their financial obligations, such as loans to finance a building or a printing press.
Varian's real message is that it's late in the game for print newspapers that want to compete on the internet. Perhaps they should consider focusing on the issues he highlights if they want to start catching up.