A controversy at Bloomberg shows why subsidizing journalism is a bad idea

One popular idea for financing journalism is to create a non-journalistic business that generates enough profits to effectively subsidize the production of news stories. A controversy at the financial information company Bloomberg illustrates some reasons that this is a bad idea.

Most journalism firms produce news and information to attract an audience that advertisers want to reach. Advertisers then pay the firm for access to the audience. Sometimes these firms also sell subscriptions to generate additional revenue. So the production of news that audiences consider credible or entertaining is essential to the economic survival of such firms.

 

Suppose a firm relies on a non-journalistic business to produce the majority of its revenue and profits. Suppose the firm also produces some news stories, but they only generate a fraction of the firm’s revenue. The firm’s non-journalistic business is essential to its economic survival. But journalism’s role is more ambiguous because the firm cannot afford to publish news that substantially reduces the amount of revenue generated by its non-journalistic business. 

Bloomberg offers an example of what can happen when there is a conflict between a non-journalistic business that generates most of a firm’s revenue and a secondary business that produces news.

Bloomberg has about 15,000 employees who provide data and information to stockbrokers, bankers and other financial professionals around the world. About 16 percent of Bloomberg’s employees work for Bloomberg News.

The news service was created to help sell subscriptions to special computer terminals that generate the majority of Bloomberg’s revenue. The terminals give subscribers access to a wealth of valuable data and other information, and subscriptions cost an estimated $20,000 to $24,000 a year. Bloomberg’s revenue was estimated to be $7.9 billion in 2012, and most of that was generated by approximately 315,000 subscriptions to Bloomberg terminals.

 

So Bloomberg fits the model of a company where the majority of revenue comes from a non-journalistic businesses. Even if the news service is not directly subsidized, the news service could not exist independently from Bloomberg’s other lines of business.

Bloomberg’s news service is focused on daily coverage of business and economic news. The stories are intended to help people who subscribe to the company’s terminals make informed business decisions. The news service also produces investigative stories and other distinguished journalism.

However, Bloomberg’s reliance on revenue from its terminals creates a potential for conflict if news stories threaten that revenue source.

A conflict over news coverage of China

 

A conflict between revenue and news appears to be the reason that three Bloomberg journalists have quit after internal disagreements about two investigative stories that were never published.  One unpublished story examined foreign banks that employed the children of powerful Chinese leaders. Another unpublished story examined a wealthy Chinese businessman and his relationships with China’s leaders.

 

About 15 months before executives decided to withhold the stories, Bloomberg had allowed its journalists to publish a different series of stories that critically examined the wealth of China’s elite.

 

The publication of those stories prompted the Chinese government to deny visa requests from Bloomberg journalists, keeping them out of the country. Sales of subscriptions to Bloomberg terminals in China slowed after the stories were published. These consequences probably influenced Bloomberg’s decision to withhold subsequent stories that were critical of China’s elite.

 

After Bloomberg’s decision to withhold the stories became public, the company’s chairman said that Bloomberg should reconsider the publication of articles that “wander away a little bit” from its core coverage of “the local business and economic environment.”

He did not specify which articles should be reconsidered, but he did say the articles could jeopardize the sale of subscriptions to Bloomberg terminals in China. The company was also concerned it might lose access to financial data from China, data that Bloomberg subscribers need to make money.

Withholding investigative news stories can damage a news organization’s credibility.

 

But at Bloomberg that concern was reversed. This was a case where publication of investigative stories might have damaged the company's credibility and potentially harmed its subscribers.

Bloomberg’s economic self-interest 

Why would publication of the stories have such counter-intuitive effects at Bloomberg?

Publishing stories about foreign firms that hire the children of powerful Chinese officials might force the foreign firms to end those arrangements, costing them business and profits. Publication of the stories might also lead to investigations or new regulations that make it difficult for firms entering China to gain an advantage by hiring the children of powerful officials.

So the business people who subscribe to Bloomberg’s terminals might regard withholding the stories as a sensible decision that helps business.

Publication could also put at risk the profits Chinese officials gain from their relationship with a wealthy businessman. The stories could also put at risk future profits and jobs at foreign firms for Chinese officials’ children.

 

So Bloomberg, the company’s customers, and Chinese officials all have self-interested reasons to oppose publication of the stories. Bloomberg journalists favored publication, but their contribution to the company’s revenue was too small to win the argument.

 

Bloomberg’s executives probably withheld publication because they had learned from publishing the earlier stories that critical reporting in China can damage Bloomberg’s economic interests. And responsible executives should put their company’s economic interests first, that is the very essence of their job.

 

The advantage of a traditional model for funding news

 

The controversy became public knowledge because The New York Times published stories about what happened at Bloomberg. The Times has also published its own critical stories about China, including reports on U.S. firms that hired the children of Chinese officials. Those stories did indeed  result in an investigation of one major U.S. bank. Chinese officials have also banned or threatened to ban Times reporters from working in China.

Why does the Times publish these stories when Bloomberg did not?

The Times is a much smaller company than Bloomberg, it only had about $1.59 billion in revenue in 2012.  However, the Times doesn’t have the kind of internal economic conflicts that created problems for Bloomberg. The Times uses a traditional model for funding journalism, and most of its revenue comes from circulation and advertising. Journalism is essential to the company’s economic survival.

Publishing critical stories about China does not harm an important revenue source at the Times. Instead, these stories might have the opposite effect.

The stories add to the newspaper’s reputation as a trustworthy source of news. That reputation is critical for attracting the audience that advertisers pay to reach. The Times is also generating increasing amounts of revenue from selling subscriptions, and some readers might consider investigative stories valuable enough to pay for.

 

Does this mean the Times would never allow its economic interests to conflict with its journalism?  Of course not.

 

But the reliance on credible journalism at the Times means the paper must focus on stories that its readers and advertisers prefer. This creates incentives to publish stories, not to withhold them. However, the Times will still shy away from stories that violate the preferences of its readers and advertisers.

 

Bloomberg is a large company with enormous resources and a history of supporting journalism. But Bloomberg had no choice when confronted with the possibility that some news stories could substantially harm its core business. The company had to withhold the harmful stories.

 

Those who argue that non-journalistic businesses should be used to finance journalism should rethink their argument. There will always be a potential for economic conflicts in these cases, conflicts that can damage the journalistic enterprise.

 

Journalists should not look to other businesses to help support what they do.  The journalism business will function best when it has to pay its own way.

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.

A first reaction to the New York Times' plan to charge for some web access

The decision to charge for "frequent web access" to the New York Times web site is almost certainly not intended to generate enough revenue from readers to cover the newspaper's costs.

Instead, the plan to offer access to a few articles free, but charge a fee for more extensive access appears to have three other goals. First, stem the loss of print readers who have shifted to the free web site, second, prepare for distribution over mobile devices such as Apple's new Tablet computer, and third, gather the kind of detailed information about readers that can make the paper more competitive in advertising markets.

The article hints at some of this saying:

Company executives said the changes would wait another year primarily because they need to build pay-system software that works seamlessly with NYTimes.com and the print subscriber database.

Why print readers still matter

Subscriptions are nothing to sneeze at, but U.S. print newspapers have for decades depended on advertising to generate more than 75 percent of their total revenue. Especially telling, industry statistics show the average price of subscriptions has not increased after adjusting for inflation.

So it's not realistic to expect any general interest newspaper will generate significant amounts of reader revenue in the far more competitive market for news online.

The Times will not charge print subscribers for access to the web site. This suggests the paper has recognized that loyal print readers will move to the web if they can get free access there.

And print subscribers are still far more valuable than web readers. The advertising revenue per subscriber in print is almost certainly much higher than ad revenue per reader on the web, so the Times needs to stem this loss.

Betting on mobile distribution

As for distribution on mobile devices, the Times is probably hoping consumers find electronic readers preferable to the smaller screens on mobile phones, and will therefore pay a bit to have the newspaper delivered in a superior format.

The companies that make these devices, Apple, Amazon, and others, are probably hoping semi-exclusive access to the Times will attract buyers for their devices. Of course, if this works those same companies will be able to extract a hefty fee from the Times for the privilege of appearing on their device.

The real goal of the Times is probably access to user information collected by Apple, Amazon, et al. An example is information about a user's location that comes with access to wireless networks that readers use to download newspapers and books. I will be surprised if Apple's device does not include GPS to improve the quality of tracking data (Yes, I know consumers also use GPS and might turn it on and off).

Knowing someone's reading habits and where they go to read is, of course, the kind of information advertisers crave because it can be used to make a precisely targeted pitch for a product.

Gathering reader information on the web

The Times will also be using its website to gather equally detailed data about its most loyal readers, those willing to pay for access. Just imagine the advertising-friendly statistics that might generated when information from print, the web site, and mobile distribution is combined.

New York Times threat to close Boston Globe prompts some weird criticism

Six years ago the New York Times Co. paid more than $1 billion for the Boston Globe, bringing two of the most respected newspapers in the United States under common ownership. But this marquee purchase is ending badly as the Times Co. threatens to close the Globe if its unions fail to make major cost concessions.

This threat has stirred understandable shock, given the Globe's reputation as a newspaper dedicated to journalism that represents the profession's highest ideals. The first order of business for those not directly involved might be considering the best way to fend off the threat, even though some believe it's just a hard-nosed negotiating ploy.

So, it's strange to see the folks at the Huffington Post -- who routinely attract audiences by featuring stories from newspaper web sites -- coming to the conclusion that this is the wrong moment for the Globe to launch a marketing campaign.

This story by the Globe's staff touches on the underlying problem, the risk that more and more people in Boston will decide the paper is not necessary to their lives. This marketing campaign that the Globe launched today shows executives are trying to address that problem.

Of course, marketing alone will not save the Globe. The underlying problem is a large debt and a steep decline in advertising revenue that makes it impossible for the Times Co. to continue paying off the debt.

But it's far from clear that advertising revenue will come back to the Globe when the recession finally ends.

Ad revenue follows readers, not sentiment, and readers in markets like Boston are shifting to new, more convenient media to access the news. Even if readers turn to the Globe's website for news, ad revenues will be much smaller because competition is more intense on the Internet.

Whatever the marketing campaign costs, it probably won't decide the Globe's immediate fate one way or the other. But the last thing the Globe can afford right now is to reduce efforts to attract readers and advertisers.