Why new media can’t replace all the news and information created by old media

My last post mentioned that new media companies would collapse if they had to produce original news and other information. This point is often lost in the debate about newspapers and other pre-internet media companies charging for access to news and information.

Older media companies should and do use many of the cost-saving tools and techniques developed by new media companies. But this is not a two-way street. New media companies cannot afford to begin producing original news, advertising and other information.

All companies use the same business model: Revenue – Cost = Profit. Another version of the model is useful for understanding the differences between older and new media companies: 

Average Revenue – Average Cost = Average Profit

Google and Facebook are new media companies, and A.H. Belo is an older media company.  All three companies are in the advertising and information business, but in very different ways.

Google primarily produces free search results for internet users around the globe. Google generates most of its revenue selling advertising. Facebook offers free membership in a social media website for internet users around the globe. Facebook generates revenue selling advertising and virtual and digital products. Belo’s primary business publishes 4 daily newspapers in U.S. metropolitan markets. Belo generates most of its revenue selling subscriptions and advertising.

Each company illustrates the business model for the industry where it operates.

		Google	Facebook	A.H. Belo
Total production		1,722,071,000,000	845,000,000	686,468
Unit		(searches)	(members)	(circulation)*
Total revenue		$36,531,000,000	$3,711,000,000	$422,513,000
Revenue/unit		$0.02	$4.39	$615.49

^*print and digital
Based on company financial reports for 2011-12. Google searches from statisticsbrain.com.

Total revenue and production at the new media companies overshadow the newspaper company.  But the averages show the new media companies need very large production to generate their billions in revenue.

If the new media companies were the same size as Belo, Google would have just $14,562 in annual revenue. Facebook’s annual revenue would be about $3 million.

So the much higher average revenue at the newspaper company appears to be an advantage.  But this is misleading.

Low average revenue at the new media companies means they must also keep production costs low. New media companies solve this problem with automation. They are experts at using computers and high speed internet connections to produce and deliver search results and social media pages. Employees create or maintain the automatic processes (computer programs and hardware) that do most of the work.

The production and delivery of original news and information is much less amenable to automation. Each news story must be created by employees who gather and format original information. Employees must work continuously to create a steady stream of news. Production and delivery of printed copies of a newspaper is also labor intensive.

		Google	Facebook	A.H. Belo
Employees		32,467	3,539	2,100
Total revenue		$36,531,000,000	$3,711,000,000	$422,513,000
Revenue/employee		$1,125,173	$1,048,601	$201,196

The second table shows the advantages of automation. Revenue per employee at the new media companies is more than four times larger than the newspaper company.

Doesn’t higher productivity mean new media companies can hire employees to produce original news and information if the companies that produce information go out of business?

No.

First, these figures don’t account for the costs of automation.  New media companies have enormous banks of computers scattered around the globe so they can deliver search results and web pages in the blink of an eye.

Second, companies only hire workers who can help increase profits. So new media companies would only produce original information if those employees matched the productivity of computer programmers and technicians.

But employees who produce original news and information have much lower productivity than employees who create or maintain automated production processes. The last table shows what would happen if productivity at the new media companies was as low as productivity at the newspaper company.

		Google	Facebook	A.H. Belo
Production per employee		53,040,657	238,768	327
unit		(searches)	(members)	(circulation)
Employees needed if each produces 327 units		5,266,272,171	2,584,098	2,100

If new media companies had the same productivity as the newspaper, the search engine would need more than 5 billion employees and the social media site would need more than 2.5 million employees. Obviously, the new media companies cannot afford to produce all of the news and information that they need to be successful.

New media companies are well aware of their dependence on free access to an enormous variety of information. That is why they support free expression and work to maintain free access to information created or posted on the web sites that they own or index.

But even if the new media companies wanted to produce the information they require, they could not afford it.  They could not even come close.

It would be helpful if more participants in the older vs. new media debate understood the actual business models. Perhaps they could move beyond the current unproductive discussion.  Perhaps they could focus on the best ways to ensure consumers have continued access to the useful products that all of these firms provide.

(Employee totals at Google and Belo include some who work in secondary businesses at these firms.)