Thursday, March 11, 2010

Google gives newspapers some friendly advice - Why they should listen

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.

Sunday, March 7, 2010

ABC and Viacom Provide Illustrations of the Shape of Things to Come

The proliferation of channels for delivering entertainment, news, and dog pictures is now a defining characteristic of the markets where media firms compete.  Competition is increasingly about who controls popular channels where content must appear to reach large audiences.

This creates a potential for conflict when one company owns a channel and another company produces content for the channel.  Each company needs the other's product to succeed.  But the balance of power in these relationships will often be uneven.

Two news stories this week illustrate how this new reality works.  ABC just carried out its threat to pull the station with the Oscars from Cablevision, a major cable television company in Connecticut, New York and New Jersey.  Viacom, meanwhile, is removing its popular Comedy Central programs from Hulu, a web site offering free full-length television programs and movies.

Both disputes are about how much the distribution channels will pay the content providers.  But there appear to be significant differences in the balance of economic power.

ABC vs. Cablevision

ABC is negotiating to increase the amount that Cablevision pays to distribute ABC's programs.  The network receives payments from Cablevision subscribers for all of its programming, including ESPN and ABC Family. So the threat to black out ABC's New York television station before the Oscars begin was intended to put public pressure on Cablevision.

Right now, ABC's New York station is reminding viewers its programs are "Always Free Over the Air!"

But more than 3 million subscribers receive ABC's programs via Cablevision.  The network cannot afford to lose that many potential viewers for any length of time.  ABC's advertising revenues are based on the number of people watching its programs.  Large numbers of Cablevision subscribers are not likely to return to watching broadcast television.

Meanwhile, Verizon is advertising a deal aimed at Cablevision subscribers, hoping they will switch to Verizon's fiber optic service that bundles internet access with cable television.  But ABC's problem won't be solved if a significant number of people switch to Verizon. The network will just have to negotiate with a different company for access to a distribution channel.

Viacom vs. Hulu

Viacom is removing some of the most popular programs on Hulu, such as "The Daily Show with Jon Stewart" and "The Colbert Report."  This dispute is over advertising revenue that Hulu divides with content providers like Viacom.  Viacom wants a larger share of that revenue.

Hulu is growing rapidly, but that growth depends on popular programs like the ones Viacom is about to remove. And Hulu cannot control access to viewers the way that Cablevision does.

Fans of the Viacom shows can easily switch to Viacom's own web sites to watch their favorite programs.  The report that Hulu "will direct users to those (Viacom) sites" points to the balance of economic power in this dispute.

Hulu has not yet earned a profit. If Hulu loses a significant share of its audience after the split, Hulu will be forced to reconsider its deal with Viacom.

Still, both companies describe the split as amicable because both companies know they might not be breaking up for good.

Hulu was developed to find a profitable model for the internet distribution of television programs.  Hulu's owners include NBC, Fox and, it's worth noting, ABC.  Viacom owns multiple cable television networks.  So all of the companies have a shared interest in finding ways to make Hulu work.

Inspecting her new kingdom

Wednesday, February 24, 2010

What were the Miami Herald's editors thinking?

A badly-conceived "experiment" recently ended when the Miami Herald stopped asking its online readers for voluntary donations to help pay for news coverage.

This had the feel of a gimmick when it began two months ago. As I recently noted, the print editions of most newspapers don't generate enough reader revenue to survive.  They rely on advertising.

So it's hard to take seriously any talk about generating reader revenue to support general news coverage on the web.  Alternate sources of free news are plentiful and likely to remain so.

However, Herald executives may not be entirely daft.  They are continuing efforts to expand online coverage of local communities with news reported by "partners" who live or operate in those communities.

The partners apparently include a paella of local web sites, weeklies, and small dailies. The Herald is trying to attract readers without having to pay journalists and others to produce the local coverage.  This might help the Herald sell more local advertising.

What do the partners get? Access to a larger audience and a share of any advertising revenue generated by the experiment.  Now that is an idea that makes sense.

Monday, February 15, 2010

Google Buzz Privacy Complaints and the Economics of Social Networks

The economics of social networking favor whoever attracts the most users first, so it's no surprise Google used its vast trove of user data to create millions of instant members when it launched a social networking site.

Social networks become more valuable as more people join them, and Google's new site still has fewer users than Facebook. But coverage of Google's new social network -- Buzz -- focused instead on vehement user complaints that forced Google to make multiple changes in the privacy settings.

An estimated 176 million people have Gmail accounts, and Google made all of them automatic members of Buzz. The problem is that Google used information from each user's account to automatically make public a list of their frequent correspondents, along with information from photo albums and other tools that come free with a Gmail account.

It's the "free" part that really caused all the problems.

Google --like its rivals Facebook, Yahoo, and Microsoft -- routinely trolls through e-mail and other user data so it can make money that pays for "free" email and other services. Sophisticated data about who users communicate with and what they communicate about is used to target advertisements that provide the bulk of Google's revenue.

So Google's engineers might not have thought much about revealing to users some of what the company knows about each person's network of personal connections. Google probably was just trying to convince users that Buzz might be an attractive alternative to other social networking sites.

Facebook, for example, claims it has more than 400 million users. Facebook uses a business model that is similar to Google because Facebook collects information on users to sell targeted advertising. So Google cannot be happy about having just 176 million Gmail users.

Social networks become more attractive as they add members because that increases opportunities for each person to, well, network with other members. Nonmembers know that larger networks offer more chances to find interesting people. This cycle can rapidly become self-reinforcing -- increasing size makes the network more attractive, so more people join and make the network even larger.

Google appears to lag far behind Facebook in this competition. Revealing each Gmail user's network of correspondents was just an ill-advised attempt to begin catching up.

Sunday, February 7, 2010

NBC and the myth of rational decision making

Dick Cavett's meditation on the Tonight Show train wreck is a reminder that sometimes bad decisons cannot be stopped at even the most experienced companies. And it has always been thus.

Wednesday, January 27, 2010

How Much Should The New York Times Charge for Web Access?

Today is the breathlessly anticipated day Apple will unveil its tablet, and part of the buzz focuses on how much newspapers might charge for downloads to the device. Last week, the New York Times announced it will charge readers for unlimited access to its web site.

These two things are probably not a coincidence. Last week I argued The Times is trying to limit the loss of print readers and make itself more competitive in online ad markets.

But subscription revenue will still be welcome. The Times must figure out a reasonable price for access to its web site. The newspaper must also set prices for delivering its news via electronic readers such as the Kindle and the new tablet.

The key is to focus on channels for delivering the news and advertising. Journalists are fond of saying content is king, but that is not correct. Readers also value convenient or speedy access to the news, and both characteristics can easily be more important than content.

The web channel

There is justifiable skepticism about how many readers will pay for access on the web, but not because readers have somehow been trained to expect free news.

Many readers already pay for access to news, and other content, on the web. They just don’t pay The Times and other news producers.

Readers instead pay an Internet Service Provider, or cellular provider, for access to the web and the news sites there. These readers will sensibly view any charge the Times imposes as a disproportionate increase in the price of access.

Say you pay $30 a month for access to the entire web. Even a $5 monthly fee for the Times seems like a very large price increase.

The web also offers numerous alternative sources for many of the stories covered by the Times. A large number of substitutes always means there will be competition to provide those substitutes at the lowest possible price.

That is why The Times has said it will not cut off free access its web site, but instead will continue allowing everyone to read a limited number of articles. That is also why the Times has been careful to reassure print subscribers that they will not pay the new fee for unlimited access.

The e-reader channel

One way The Times and other newspapers might solve the problem of competition is by finding a channel with less competition. This means there has to be a way to limit the number of news sources found in the delivery channel.

Apple apparently plans to do just that by charging publishers for access to its e-reader – newspapers will set their own price and give Apple 30 percent of the revenue.

Will this work? Yes, but only if two conditions are met.

First, readers have to decide the tablet has characteristics -- such as mobility, convenience, and status – that make it preferable to the web for delivering The Times.

Second, Apple and its wireless provider have to set a price for general access to the web and other digital content that is low enough to avoid the problem of readers thinking the Times is again charging a disproportionate amount.

One analogy is broadcasting and cable. When cable first came along, there was skepticism that anyone would pay for access to easily available broadcasts from their local stations.

But cable offered a much larger range of programs, and people were willing to pay for the local broadcast as part of this larger bundle of information.

Apps and games on Apple’s e-reader might play a similar role luring readers away from the web.

However, news from the Times in this analogy becomes a premium product, like HBO. But news is far less entertaining so prices will still be limited.

The other problem is that Apple, not the Times, owns the channel and will therefore charge the Times as much as possible for access. This is likely to become a real point of contention if the tablet takes off. The Times and other publishers are therefore likely to also maintain relationships with Amazon's Kindle and other e-readers.

The print channel

So, the only delivery channel controlled by the Times is print. That is another reason I believe plans to charge for access are partly an effort to stem the loss of print readers.

But the reliance on advertising revenue in the channel where newspapers have always had the most control over reader pricing is also a reminder that advertising will continue to be the most important revenue source.