Sunday, July 27, 2008

Bad week -- and decade -- for newspapers

It was a week of bad news for the U.S. newspaper industry, just the latest installment of a decade of such bad news.

  • On Monday, a study by former LA Times reporter Tyler Marshall documented the downward spiral of the nation’s 1,217 daily newspapers. After interviewing executives from 15 papers and surveying 259 newspapers, the study from the Pew’s Project for Excellence in Journalism showed that executives are cutting staff, national and international news, but don’t have a real plan to turn things around.
  • On Wednesday, the industry’s premier property (The New York Times Company) announced dismal earnings. In just a year, the company’s stock price has fallen to half its earlier value, to the point that the flagship paper is valued nearly the same as its suburban rival, the much smaller Long Island Newsday.
  • Finally, on Thursday, the San Diego Union-Tribune, the oldest business in my hometown of San Diego (and the second oldest newspaper in Southern California) went up for sale. Apparently his financial advisors convinced owner David Copley that he could more easily support his lifestyle if his wealth was in T-bills rather than an illiquid, privately held newspaper descended from papers his grandfather bought 80 years ago.
The problem for Copley — like other sellers — is that there are few buyers. Once upon a time, Copley might have hoped for a merger with one of the two nearest newspapers: the Orange County Register or LA Times (which ran a SD editon from 1978-1992). However, both are in trouble: like most family-owned newspapers, the Register has unhappy heirs that care more about money than journalism; the LAT went through this already, resulting in the paper being bought in 2000 by the Tribune Company (and being badly run ever since). Among other likely buyers, national newspaper chains like the Times Company, Gannett, and Media General are reporting declining earnings while struggling with high debt from previous acquisitions.

Of course, stress and realignment for the industry come with every major dip in the economy, when fewer housing sales and reducing hiring squelch the two major sources of advertising revenues. In California, the 1992 recession killed the San Diego Tribune and the LAT’s SD edition. I bailed out of the newspaper business at the end of the 1982 recession, only six months before my coworkers traded up to the bigger paper (and a $100/week raise) when classified ads rebounded.

However, in 2008 the real pressure is coming from long-ignored structural problems. Newspapers are the ultimate information good — lots of up front costs and near-zero marginal costs (even less than for software, which tends to generate support costs proportionate to the quantity sold).

So, as with any other network effect, the virtuous cycle on the way up (success increase profits which allows a better product which fuels success) becomes a vicious cycle on the way down (declining sales means cuts reducing product quality which lowers sales further). Of course, I watched this vicious cycle nearly put Apple out of business, first as an Apple ISV and then in my dissertation.

Newspapers have a particularly hard problem — escaping the complacency of the past four decades. With few exceptions, all the major newspapers in the US were either a monopoly or cozy oligopoly (usually a duopoly). They didn’t have to compete to make money, they just told advertisers “if you want to reach local buyers, we’re the only game in town” and (at least before television) told readers “if you want local news, we’re the only game in town.” (In two-sided market terms, this is called charging both sides, although advertising provided 70-80% of the revenue.)

Now, of course, we have at least a decade worth of young people that no more expect to pay for news than they would pay for music; somehow they still pay for movies, but that probably won’t last either. The papers have reached out to new readers with their online websites, but as U-T investigative reporter David Hasemyer dryly put it,
While many newspapers' Web sites have recorded jumps in readership, media analysts have pointed out that advertisers generally don't consider an online reader to be as valuable as a print reader.
Even for those newspapers that enjoy broader reach than ever — notably the New York Times — a shift from print to online means that revenue (and profit) per reader has plummeted.

Newspapers face two structural problems and have been unable to fix either one. Due to new web-enabled competition, newspapers have lost their pricing power both sides of the two-sided market — and there seems no turning back.

First, is there are so many other ways to reach readers via the web — whether CraigsList, or Google’s localized version of AdSense. The cost of one impression has plummeted from the days of dead trees when there was only one regular way to reach a given household.

More seriously, online information is now a commodity: people get news free now from so many online sources. (One major sources is from Google and Yahoo news sites, that use AP news compiled from local papers). OK, the NY Times or the big city daily has better news, but how much better? If it’s $20/month (or even $10 or merely requires a login) will readers bother? Most won’t. As with other commodities, better loses to “good enough.”

Some newspapers think it’s just a matter of getting a good revenue model, or fixing website design to be more compelling, or some other tweak. After all, they argue, people want local news and there’s no other source. This argument has been made by insiders for years.

To this, I’d say: “where’s the existence proof?” The newspaper industry is notorious for copying each others’ design, circulation and advertising tips, so with 100+ newspapers with more than 100,00 circulation, one of them should have figured it out by now. Instead, newspapers are using the same online revenue models they always have.

The only exceptions are financial newspapers like the WSJ and FT (where business owners and investors are willing to pay a premium for slightly better information) and the free suburban weeklies and subway dailies (which pay little or nothing for content, and it shows.)

Of course, most journalism students (like poli sci or history students) know nothing of economics and little of business. (BTW, back in 1981-1983, that included me too). So they keep hoping that — since all their friends know they have a better product than the bloggers and the wires and the other free sites — someday the tooth fairy will come waive her wand and everything will be right. But it ain’t gonna happen.

For nearly a year, rumors have been swirling that a big city newspaper (such as the SF Chronicle) will stop killing trees and go online-only. The first one will get hit with a double whammy: someone else will swoop in and get the dead tree advertisers (in this case, the SF Examiner or the Bay Guardian or the Oakland Tribune) while the collapse of revenues will mean a cutback in the news staff and thus the quality of the online product. Maybe the paper could stabilize with an editorial staff of 150 instead of 500, but (as with any newspaper today) the process of downsizing would be bloody, shaking the confidence of employees, and both types of customers.

Some rich guys buy money-losing sports teams for ego reasons; perhaps someone will do that with a newspaper. The problem with this sugar daddy fantasy is that the pro teams are an appreciating asset, while newspapers are clearly a declining one. Also, there are no luxury boxes in the newsroom that billionaires can use to impress their friends.

1 comment:

Jim said...

The above article pointed out an issue that has been generally overlooked in why Newspapers were able to both charge exorbitant advertising rates and remain in the quaint format of the last century.... they were in most instance3s a monopoly in their respective markets.
Which means new forms of competition can shake them apart.