Sunday, April 6, 2014

Coordination costs can make it difficult to create synergies at media firms

Media firms have for years tried to reduce their costs by centralizing the production and marketing of a variety of content. But the cost of coordinating centralized activities can be considerable, large enough in some cases to offset the savings that firms hope to realize.
For example, firms that own multiple newspapers have for decades tried to reduce costs by centralizing the production of news or centralizing administrative tasks. Efforts to centralize news production have also been extended to newspaper websites and mobile editions.
However, centralization can be difficult to coordinate if individual newspapers use different computer systems or software to manage and publish their digital editions.
Technically, these companies are trying to create economies of scope, colloquially known as “synergies.” Economies of scope exist when the joint production of two or more products is cheaper than producing the products separately. 
Technically, it’s also much easier to say you are creating economies of scope than it is to actually reduce costs this way. The successful creation of economies of scope often requires that a firm re-arrange details of the production process.
If, for example, a multi-media news story is distributed to multiple papers with different publishing software, the story might have to be re-formatted for compatibility with each individual paper’s software.
Media firms are also trying to collect and analyze data about how audiences interact with the firms' web sites and mobile applications. This kind of analysis might also be expensive to coordinate if different websites use different measurements or data collection techniques. Trying to reconcile differences in the ways that numbers are collected can be a lengthy, frustrating and sometimes impossible task.
Firms might have to make significant capital expenditures to eliminate inconsistent software or other internal barriers to coordination. Some newspaper companies are buying or creating new software platforms for distributing digital news and advertising. Some of these initiatives may be intended to resolve coordination issues, if so that is a hopeful sign.
Problems coordinating activities inside a media firm are not likely to draw much attention outside these firms. But there is a reason multiple economists have won Nobel Prizes for examining coordination costs (here, here and here).
Media firms that centralize internal activities to save time and money will find it worthwhile to include coordination costs in their analysis of what it takes to make those efforts work.

Thursday, April 3, 2014

Shifting production to the Internet creates new problems that newspapers must solve

As newspapers shift from print to the Internet, they are hoping to significantly reduce production costs. These companies are trying to offset declines in advertising revenue by reducing the amount they spend on printing presses, newsprint and delivery trucks.

But the benefits of this change are not guaranteed. Reducing offline production costs is a complex problem to solve.

Most of the industry’s advertising revenue – about $21.8 billion in 2012 – still comes from print publications. So newspapers must maintain that revenue source at the same time they are moving to the Internet.

Production costs might be lower on the Internet, but they are not zero. Newspapers must pay for websites and mobile applications. But Internet advertising and other digital sources accounted for just 11 percent of the industry’s total revenue in 2012.[1] Newspapers also face significant competition from digital firms for online revenue.

To make the transition succeed, newspaper companies must keep digital production costs low enough to be competitive and attract enough online revenue to cover those costs. Meanwhile, the companies must continue to produce the print products that generate the bulk of their revenue for as long as those products remain profitable.

And economic survival isn’t likely to get easier for newspaper companies that do leave print behind. Those firms will have to manage new kinds of competition.
There was an important reminder this week of just how difficult the transition can be. Digital First Media, which owns 75 newspapers, has a strategy of moving quickly away from print to digital distribution on the Internet.

One high-profile piece of the Digital First strategy has now failed. The company is closing a centralized newsroom that used digital production to provide national stories for its newspapers across the U.S.  Rick Edmonds notes the failure is a valuable reminder that even digital news production is expensive:

It is myth, embraced by digital future-of-news enthusiasts, that Web publishing is close to free. [Digital First CEO John] Paton seemed of that view early in his tenure when he asked newsrooms to use mainly free tools to put out their reports for a week. 

But in his most recent manifesto/speech to the Online Publishers Association in January, he said he was looking for another $100 million to invest in the company’s digital activities on top of an earlier $100 million. 

Digital First is a private company, so it's hard to tell what the implications are for other newspaper companies. There is reason to be cautious because Digital First has complex finances – it was created by merging two other companies that had both been gone through bankruptcy. A hedge fund is a major investor, and that fund may be looking for a quick return on its investment.

Other companies with stronger finances or different investors might have more flexibility in managing the transition from print to digital. But it won’t be easy for any company to do.

[1] An estimated $4.2 billion of $38.6 billion in total industry revenue according to the Newspaper Association of America.

Tuesday, April 1, 2014

Some reasons digital media probably won't offset the decline in traditional journalism jobs

The long-term decline in journalism jobs appears quite serious because Internet-based firms don’t have a business model that can generate enough new jobs to replace the jobs that are being lost.

The Pew Research Center's Journalism Project recently weighed in on this issue, providing new information about the number of journalists employed at Internet firms. The data in the Pew report are limited, but they are in line with what we know about Internet business models.
Internet business models are not designed to support many jobs
The largest Internet firms – search engines and social media – use a micropayment system to generate small amounts of advertising revenue for each unit of production. Google makes pennies on each search result it delivers. Facebook and Twitter make a few dollars per year from each of their millions of members (these firms produce information about members that is used to target ads).
So Internet firms must keep their production costs low if they want to remain in business. These firms rely on automation – high speed computers and Internet connections – to deliver ads and information to their users. The firms also keep costs low with free access to the content that they index or display. Internet firms could not afford to pay for the content they need even if they wanted to.
Journalism firms that rely on Internet advertising revenue will have to charge the going rate, which means those firms must also rely on micropayments. So Internet-only journalism firms will probably only hire small numbers of journalists.
The Pew findings are in line with this expected outcome. Pew surveyed what it called 438 small digital news outlets focused on local coverage and found “an average of 4.4 jobs per outlet.”

The report also examined large digital organizations, some with national and international audiences, and the findings were striking. Only five of 29 large organizations[1] employ more than 100 journalists. Another six organizations employ 70 or 50 staffers, and the remaining 18 organizations employ fewer than 50 journalists.

Unfortunately, the Pew report did not include information about wages or the markets where the digital organizations operate. The report did not attempt even simple comparisons between digital and traditional media firms such as the number of journalists for a given audience size.
Comparisons would have been helpful because traditional media such as newspapers and television stations still employ the bulk of journalists in the U.S. Traditional firms don’t (yet) operate on a micropayment model. These firms still have substantial advertising or circulation revenue from their print and broadcast editions.
Some trends in markets for journalism jobs
So what are the current trends in jobs at traditional and digital media organizations?  A complete answer is beyond the scope of this post. However, I’ve examined trends for one important category of journalism jobs to illustrate how we might begin to answer these questions.
The category is employment of reporters and correspondents in the U.S. Reporters play a vital role by gathering raw information that is used to produce news stories. These statistics are from the Bureau of Labor Statistics, here and here,  and don’t include editors, photographers, or newsroom managers.

Bureau of Labor Statistics Reporters and Correspondents in the U.S.
Pct. Difference
Total employment
Nominal avg. wage
Inflation adjusted (2008)

The illustration begins in 2008, the year after the recession hit and advertising revenue at traditional media organizations went into a steep decline. The illustration ends six years later in 2013, when a sluggish recovery from the recession was well underway.
This first table shows the 2008 total of 50,960 reporters declined by 14.3 percent in those six years.  The average annual wage of $44,030 in 2008 increased by just $330 in those six years. I converted the 2013 wage to inflation-adjusted 2008 dollars, and the result shows that real wages actually declined by 6.8 percent.
Declining real wages are exactly what you would expect in a profession where employment is declining.
Reporters and Correspondents at Newspapers, Periodical, Book and Directory Publishers
Pct. Difference
Total employment
Nominal  avg. wage
Inflation adjusted (2008)

The second table shows the number of reporters working at newspapers, periodicals and other publishers. There was a 26.8 percent decline in the number of reporters in this category from 2008 to 2013. Nominal wages also declined by $320 a year. After adjusting for inflation, real wages declined by 8.3 percent.

Here again, a decline in real wages is expected because of the significant decline in the number of jobs. The decrease in jobs probably resulted from declines in newspaper and periodical circulation and advertising revenues.
Reporters and Correspondents in Radio & Television Broadcasting
Pct. Difference
Total employment
Nominal avg. wage
Inflation adjusted (2008)

This third table shows reporters working in radio and television broadcasting. There was a 7.2% increase in the number of reporters employed. However, the absolute increase was small – just 700 new jobs in six years – and did not result in an increased wages. Instead, real wages declined by 13.5%.

Why did wages for radio and television decline when the number of jobs increased?
One possibility is supply and demand.  We know, for example, that the supply of journalism graduates seeking television jobs far exceeds the demand.  Another possibility is that broadcasters adjusted to declines in ad revenue by laying off expensive older workers and hiring inexpensive younger workers to replace them.
However, there is not enough information in the table to be sure what the cause might be.
Reporters and Correspondents Other Information Services.
Pct. Difference
Total employment
Nominal avg. wage
Inflation adjusted (2008)

The fourth table shows reporters working for “Other Information Services.” This broad category with 242 occupations includes computer programmers and web developers. So this may include reporters working for digital firms.

Jobs in this category increased by 113% in six years. The percentage is high because the 2008 base of 1,830 jobs was small, and the actual increase is just 2,080 jobs.
Despite the rapid job growth, both nominal and real wages decreased dramatically from 2008 to 2012. Real wages declined from $71,200 a year to just $53,447 a year, a decrease of 24.9 percent.
The decrease in wages might be due to the small number of jobs in 2008. Perhaps these jobs were concentrated in high wage areas, and new jobs were added in less expensive areas.
Another possibility is that demand for these jobs is growing so fast it outstripped supply. The Pew report has anecdotal accounts of hundreds or thousands of applications for a single job at a digital firm.  If this is typical, it would drive wages down.
Again, the table doesn’t offer enough information to figure out the cause.

I think this illustration shows three important results.  First, almost all of the overall decline in reporting jobs is accounted for by one category - newspapers and other publishers.[2] Second, there is downward pressure on wages even in categories with minimal or strong job growth. Third, growth in the other information category still falls far short of replacing the jobs that are being lost.
Meanwhile, the Bureau of Labor Statistics projects continued declines in the number of reporters and correspondents, stating there will be 14 percent fewer jobs by 2022.

[1] I did not include one firm on the Pew list, Vice, because its staffing includes journalists and non-journalists. Vice has the largest staffing number, 1,100, which means job totals in the Pew report may have an upward bias.
[2] Two small reporter categories, each  with fewer than 700 jobs, were not included this analysis.

Thursday, March 27, 2014

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.