Newspapers will put themselves out of business if they take advice from commentators who are telling them to become “more like” new media

Subheads in this post:

1. Each newspaper should charge its readers because prices are a critical economic signal that newspapers need to survive

2. Why new media companies have not reached the point when they can began charging for access to their products

3.New media companies have a business model designed to automate journalism jobs

I started this series of posts because newspapers are finally starting to charge online readers for access to news and advertising.

Each newspaper should charge its readers because prices are a critical economic signal that newspapers need to survive

The prices that readers pay tell each newspaper how much readers value that particular newspaper’s news and advertising.  There is no other way that newspapers can figure this out.

Each newspaper must know before it creates a news story if there will be enough revenue to cover the costs of producing that story. If the newspaper does not know how much revenue the story will generate, it also does not know if it can pay the journalist who creates the story.

So executives watch how prices change to figure out if they should hire journalists to produce news stories. If prices are going up, that’s a signal to produce more news stories and hire more journalists.  If prices are going down, that’s a signal to stop producing news stories and stop hiring journalists.

If the newspaper doesn’t charge readers anything at all, the executives don’t have any way to tell how many journalists they should hire to produce news stories. (It’s actually more complicated, but this is the basic idea).

Of course, we are far past the point of fine adjustments in the number of journalists a newspaper hires. Newspaper executives have been forced to lay off thousands of journalists and other employees because they are being devastated by competition from new media companies.

The fact that newspapers were not charging for online access probably made the problem worse.  Executives had no way to tell how many journalists they would need tomorrow to produce the news. All they knew was that prices for advertising – a distant second best for detecting the value of a news story – kept going down.

So charging readers is a critical tool for executives who are trying to make their business model work and keep their newspapers alive. Those executives need every tool they can find because the competition is so lopsided.

The newspaper executives are competing with new media executives. As I explained in my last post, the new media business model is completely different from the older media business model.

 

Why new media companies have not reached the point when they can began charging for access to their products

If new media companies charge for access they will hide the signals that they are looking for. The signals new media companies are finding are patterns in the jobs that journalists do each day.

 

New media companies give all journalists free access because they are trying to record everything that all journalists do all day long. Once the new media company has recorded enough actions by enough journalists, it uses computers to find patterns in the jobs journalists do. Patterns are required so the company can automate journalism jobs.

 

New media companies have a business model designed to automate journalism jobs
 

Once a job is automated, it becomes almost impossible for people to compete.  A high speed computer can almost always do the job faster, cheaper and better no matter how hard the person tries.

Here are some jobs done by people who work at newspapers that new media have already automated – advertising salesperson, advertising creator, advertising marketing researcher.

Many journalism jobs have also been automated. One example is the police reporter’s job. The job has 5 big steps:

 

1. go to police station. 2 find all police reports. 3. sort through all police reports to see where and when different kinds of crimes were committed. 4. go back to paper. 5. write story that tells readers about a handful of crimes that happened in a handful of neighborhoods.

 

Automation eliminates two steps – 1. go to police station, and 4. go back to paper. 

 

Automation is faster and better at the remaining steps. Automation can tell readers about every crime that happened in every neighborhood. All readers have to do is ask.  Then the computer goes to work:

 

3. sort through all police reports to find the crimes committed in the neighborhood the reader asked about. 5. write a story that tells the reader exactly what they want to know.

 

You can try it yourself. Here is just one example of a computer hard at work, doing its job as a police reporter.

Newspapers are competing for their economic life.  Commentators who tell newspapers that they should learn to be “more like” new media are talking through their hats.

If newspapers become more like new media that will ensure that new media win the competition.  That will also ensure there are even fewer jobs for the people that newspapers employ.

When two products are similar, consumers usually select the one that costs less. Consumers always select that one that costs less if it is actually a better product.  And the best way to make a better product that costs less is to use automation.

So if newspapers want to become more like new media they will also have to become experts at automation. Newspapers will have to learn to automate all of the jobs that they currently hire people to do.

 

At that point, the competition might look like something like this:

The best computer programmers in the world vs. journalists trying to learn how to program computers

Who do you think will win?

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.)

 

Newspaper paywalls are a rational response to competition - what took so long?

Sometimes it takes a long time, but in the end rationality will have its say.  This appears to be the case for some prominent members of the newspaper industry, which has struggled to adapt to competition from the internet.

The steady stream of reports that more and more newspaper companies like the New York Times, Gannett, and E.W. Scripps are beginning to charge some customers to access news and advertising shows the executives making these decisions are starting to figure out the economics of the internet.

The tactics may not work for every newspaper.  When the tactics do work, newspapers are unlikely to ever regain dominance in their respective markets. But that is not the point. The markets where newspapers operate changed and became more competitive, and newspapers have to figure out how to compete.

Papers are starting to divide readers into groups based on each group’s willingness to pay for access to news.  Some readers only read a few articles from time to time, so they are unlikely to pay anything for access.  Newspapers can satisfy these readers by giving everyone free access to a limited number of articles – 10 or 15 seems to be a common number – each month.

But other people want access more often and will pay if they have no other choice.  Some people want to regularly read specific kinds of news and advertising, or perhaps they will pay for the convenience of access in multiple delivery channels – print, the internet, mobile devices.  Each group will be willing to pay a different amount depending on the strength and characteristics of their demand.  This means newspapers can charge each of these groups different amounts for access to news.  The different prices for various combinations of apps, mobile access, web access and print show that newspapers are starting to do just that.

Economists call this price discrimination, and I understand why that’s not a great way to market one of these new pricing plans.  But the industry has come up with an even worse way to describe them – paywalls.

The industry’s inelegant term does, however, remind us that part of making price discrimination work requires that newspapers first stop allowing everyone to access all of their content for free. Scholars such as Steve Wildman, Danel H. Simon & Vrinday Kadiyali and Florian Stahl(et al), have pointed out that newspapers are competing with themselves if they charge for access to print editions and also give away news on the internet.  Once readers figured out what was happening, they began to abandon the paid option in print.

There are many non-trivial reasons the newspapers that are changing might have stayed with this irrational strategy for so long.  It takes time to react to and understand new forms of competition. Just acquiring and learning to use the technology that allows price discrimination probably required substantial time and effort.

Another reason might have been that newspapers were told – and are still being told – they should not charge readers for access.  Newspapers are told not to charge for access because internet-based media companies make money without charging for access to news and other information.  But search engines and social media have a very different business model, and that model would collapse if those companies had to pay for the creation of content as newspaper companies do.

So it was good to see this week that newspaper executives are talking about things like subscriber retention and creating different bundles of digital and print subscriptions (another kind of price discrimination) that focus on high quality news. It will still be a long, hard slog, but at least they are giving themselves a fighting chance.

The economics of transitioning to digital media markets

The transition from traditional media markets to digital markets was one of the dominant threads of discussion during last week’s conference.

Executives from traditional media firms who are trying to manage this transition disagreed on the best approach. This was not surprising given the complexity of the problems they face.

Here are three pictures that illustrate some of the challenges for firms that operate in multiple media markets.

This first picture shows traditional markets on the left, channels might be print, or radio and television, either broadcasting or cable.  Firms earn revenue from advertising, subscriptions, or a combination of the two.

Firms face a downward sloping demand curve because an increase in price reduces the amount of advertising or subscriptions they sell, and vice versa.  The shaded rectangle is the amount of revenue the firm generates (price x quantity  = total revenue).

On the right is a digital market where the channel might be a website on the Internet. The firm faces a downward sloping demand curve, but prevailing prices are much lower. The firm is forced to charge a fraction of its price in the traditional market.  The online audience is much larger but the total amount of revenue, shown by the shaded box, is much smaller.

Prices are lower in the digital market because of the volume of identical or close to identical media content – audiences easily can switch to a substitute if the firm raises prices.  In addition, most online advertising revenue is generated on about 50 websites, according to the Interactive Advertising Bureau.  Everyone else competes for small shares of the remaining revenue.

This next picture shows what happens as audiences continue to shift from traditional channels to digital channels. The shift is illustrated by the new demand curve in the traditional channel, which now generates considerably less revenue than before.  Even if the audience increases in the digital channel, competition keeps prices low.  The shaded box on the right shows there is not enough revenue to make up for losses in the traditional channel.

This last picture shows what can happen if a firm starts to raise digital prices because audiences find its content especially appealing.  Intense competition in the digital market might create a price ceiling, illustrated by the kinked demand curve.  When prices reach the flat portion of the demand curve, additional increases mean the firm will lose all of its customers.

The risk of this happening drives the debate about charging for access to websites.  That debate was present at the conference, and will be discussed in future postings.

But the larger point is that operating in different channels requires different strategies.  Three strategies were discussed at the conference.

One was a classic differentiation strategy - provide content tailored to the interests of different market segments – or niche audiences.

Another was a cost-reduction strategy.  Reduce costs by creating economies of scale, republish the same or similar content in different channels.  This is often referred to as convergence.

The third strategy is based on moving away from intensely competitive digital channels. Firms are trying to find less competitive channels where audiences and advertisers are more likely to pay for differentiated content.

Does economics overlook the logic of communication?

Eric Rothenbuhler of Ohio University wonders if economic logic falls a bit short when it comes to understanding what drives success for media companies.  Rothenbuhler, whose research focuses on the nature of communication, writes in response to yesterday’s post:

Steve Wildman is right, of course, about the economic logic of servers versus channels and storage versus programming.  But media companies that forget they are communicators, that try to operate by economic logic alone, are doomed.

The shift from programming channels to storing stuff on servers is analogous to the shift from being in the communication business to being in retail, or wholesale, or just warehousing. The relationship with the audience member goes away and the media business becomes just a supplier of things people choose—it might as well be Sears.

The penny press was programming, not story storage.  Top 40 radio was programming, not juke boxes.  Even silly stuff like NBC's "must see TV" Thursday night line up some years ago, worked because it was programming that pulled audiences in and held them, it gave them something to anticipate before they watched it and something to talk about after—it created an event in the everyday flow of their life.

The greatest successes in media businesses are always based on communication innovations, on programming that attracts and holds audience members because it draws them into a communicative relationship.

That's what media managers ought to be thinking about today - the logic of communication. Be successful at that, and the money will follow.

Eric co-authored a seminal article in the field of media economics when he was a master’s student at Ohio State.  There was a very nice moment at the conference when he and lead author John Dimmick were together again.

Dimmick (r) & Rothenbuhler (l) at the conference.  In 1984 they published "The Theory of the Niche: Quantifying Competition Among Media Industries," Journal of Communication, 34(1), 103-119.

Abundance and scarcity in new and old media

Speakers at last week’s conference clarified what the exponential increase in production of digital media content means for different kinds of media firms.

Steve Wildman of Michigan State University explained the negligible cost of storing content on a digital server removes an important constraint on the production of media content. This very low cost allows companies to open up their servers to anyone who wants to upload a video, photo, text or other content.  If someone does want to access a particular file, the company that owns the server doesn’t pay the cost of producing a copy – the person who accesses the content pays that cost.

The result is sites like YouTube, where millions of videos are stored and most are never viewed.

Wildman said digital servers act as if there is an almost unlimited number of channels for delivering media content.  Each channel is created when someone actually requests a copy of the content stored on a server.

This has been a boon for all of us because it dramatically reduces the cost of exercising our apparently limitless desire to create and distribute messages, photos, videos and other content.

But traditional media companies own and must pay for a limited number of channels, they could never afford to act this way. Traditional companies must earn enough revenue from publishing each piece of media content to pay for the channel where the content appears (Wildman has detailed this analysis here).

Non-media companies benefit from unlimited media channels

When server based content is combined with modern search tools – such as Google or Bing or twitter – it becomes cheap for companies to find and communicate with customers.

This makes possible new marketing strategies such as Open Branding, discussed by Nita Rollins of Resource Interactive.  Open Branding calls for companies to engage in a dialog, building online communities where customers have a voice in the creation of the company brand.

Of course, companies will only do this if the cost is less than or equal to the return in the form of increased sales or revenues.  But digital tools have dramatically lowered those costs, so companies that sell non-media products can take advantage of Open Branding.

But media companies face increased competition

But what about companies that are actually in the business of creating and distributing media content? 

Media companies must compete for attention with the huge amounts of content generated by individuals and organizations using free server space.  For example, the time of a city council meeting, or a call for volunteers to help a civic organization can now be published directly by the council or the civic organization.  Media companies are no longer neccessary to get the word out.

Stephen Lacy of Michigan State said the central problem facing media companies is how to create content that is both scarce and valuable to potential audiences.  One way to do that is by offering content that has special quality to set it apart. 

But for now I want to focus on the channel part of the scarcity issue.  Another way to make your content scarce is by controlling channels people use to access the content.  That can mean controlling the hardware – computers, smart phones, tablets- used to access all of those servers.

Competition to control access to unlimited content

In this competition, companies that can limit consumers to a single device or related set of devices can win.  Apple is the highest-profile example of how this works.

I’ve written before about how Apple limits access to music and video downloads by requiring that customers use Itunes.  The company's recent effort to seamlessly link Apple devices with one another and with Apple’s servers is another step in this direction.

Meanwhile, the company knows it can increase the range of content and functions available to customers by allowing more apps on its devices.

Of course, this also means anyone who wants to provide content to Apple customers – such as a media company struggling to compete in a server-based market – must design an app that allows Apple to keep a substantial share of revenue the app generates from Apple customers.

For now, companies like Apple appear to be ahead of the game when it comes to creating scarcity in the digital media world.

Creating the Future: Managing Media in the Digital Age

Readers of this blog are invited to a Sept. 7 conference at The Scripps College of Communication  to discuss the challenges and opportunities for firms operating in fast-moving media markets.

Richard A. Boehne, president and chief executive officer of The E.W. Scripps Company, will be the keynote speaker for Creating the Future: Managing Media in the Digital Age.  He will be joined by top executives from media firms in Ohio and West Virginia and leading scholars from four universities.

For registration and other information, visit our conference website: http://scripps.publishpath.com/creating-the-future-2011

Partial list of speakers:

Richard A. Boehne, president and chief executive officer, The E.W. Scripps Company.

Margaret Buchanan, president and publisher, Cincinnati Enquirer

Bray Cary, president and chief executive officer, West Virginia Media

Richard Dix, publisher, Kent-Ravenna Record Courier

Lynn Gellermann, executive director, TechGROWTH Ohio, managing partner, Adena Ventures

Anne Hoag, associate professor in the Department of Telecommunications, College of Communications, Penn State University

C. Ann Hollifield, Telecommunications Department head, Grady College of Journalism and Mass Communication, The University of Georgia

Stephen Lacy, associate dean for graduate studies, College of Communication Arts and Sciences, Michigan State University

Phil Pikelny, vice president Dispatch Digital and chief marketing officer The Dispatch Printing Co., Columbus

Nita Rollins, Ph.D., Futurist, Resource Interactive.

Scott Titsworth, Interim Dean, Scripps College of Communication, Ohio University.

Steve Wildman, James H. Quello professor of telecommunication studies, College of Communication Arts and Sciences, Michigan State University

Joseph Zerbey, president and general manager, The Toledo Blade

Contact me if you have any questions by e-mailing: martinh1@ohio.edu