February 07, 2005

Reading the Vanishing Newspaper, 2: How Newspapers Make Money

Much has been written about the risk-averse culture of newspapers and how it locks newsrooms into a losing cycle of defensive decision-making. Philip Meyer tells us how that culture came to be: Newspapers are the victims of a "history of easy money."

In the second chapter of the Vanishing Newspaper, Meyer's explication of the "easy-money culture" is both telling and indicting (all emphasis throughout is mine):

"If the money comes in not matter what kind of product you turn out, you become production-oriented instead of customer-oriented. You are motivated to get out the gate as cheaply as possible. If your market position is strong, you can cheapen the product and raise prices. Innovation happens, but it is often directed at making the product cheaper instead of making it better."

Meyer describes what I've called the news factory [Read: Rethinking the News Factory (Again)], a place where routine trumps creativity, where "news" must be fit into well-defined slots and where managers are valued more than leaders.

The comment about innovation is especially true. Think: Where do newspapers invest the most capital? In equipment designed to lower the cost of production - presses, mail-room routers, newsroom pagination systems that replace costly back-shop employees.

Where is the similar investment in human capital? In new editorial products? In cross-platform innovation and integration, both for editorial and advertising? It is all but non-existent. Investment by newspapers in newsroom training is about a third of the national average and newspapers are getting thumped in the battle for classifieds by online operations like eBay and Craigslist because they failed to understand early on, and therefore invest in, the revenue potential of the web.

The second point above is critical. Meyer points out that the newspaper revenue model changed dramatically in the second half of the last century, shifting from a dependence on retail advertising (local display ads), which comprised 57 percent of revenue in 1950, to a reliance on classified (local help wanted, real estate and automotive ads), which comprised 40 percent of revenue in 2000.

Classified advertising is highly cyclical. It rises during good times as more jobs are available and more houses are being sold, and it falls during bad times when the reverse is true.

Classified lineage has been eroding for some time, a decline accelerated by newspapers' reflexive response to the challenge: Raising prices and lowering quality, which in the case of classifieds mean to charge more per line of advertising while circulation is dropping. Instead of more for less, which an organization likes Craigslist offers (free ads for most people; a flat $75 for help-wanted), newspapers, accustomed to holding monopoly positions in their markets, offered less for more.

Meyer reaches into what surely must be the voluminous files on the newspaper business he's assembled over the decades for a 1982 report by an investment analyst who describes, with satisfaction, the "aggressive pricing" by newspapers "especially in one-newspaper markets." In the literature of business, the term "aggressive pricing" means lower pricing. Not so in the 800-pound gorilla newspaper model. Meyer explains:

"That's because most industries are competitive, and a price cut is an aggression against the competition. Newspapers, being mostly monopolies, direct their price aggression against their customers instead of each other."

Got that? "Aggression against their customers."

Still, Meyers asserts, despite decades of neglect of customer and reader, newspapers have two assets upon which to draw in the fight for the future: Habit and Trust. Anecdotally, he offers this:

"A good newspaper, some sage once observed, is like a fine garden. It takes years of hard work to build and years of neglect to destroy."

In the short term, the habit of newspaper readership, which eroding, will continue, at least for this generation. And advertisers, accustomed to newspapers, will continue to buy page space, at least until substitute forms of media provide greater return on their investments.

In the long term, Meyers lays out a scenario that appeals to me: If we believe newspapers are not in the news business, but in the influence business, "then the quickest way to gain influence is to become a trusted and reliable provider of information."

Newspapers can survive by selling trust, a commodity, says Meyer, that "in a busy marketplace lends itself to monopoly." I'm not so sure I agree with the monopoly component of that statement, but the logic holds true that trust is a key differentiator in a world of multiple choices. We have seen that in the emergence and ascendance of non-traditional news media and of personal media whose appeal to the consumer is transparency of purpose and authenticity of voice. Blogs, of course, exemplify this model, as does Craigslist, which purports no particular point of view other than the unconflicted belief in an open forum for conversation and commerce.

Trust, says Meyer, perhaps a bit too wishfully, can be the lighthouse that guides newspapers beyond the shoals of print into a sea of agnostic content produced for the good of the community. He writes:

"(Newspapers) would define themselves not by the physical nature of the medium, but by the trust that they have built up. And they would expand that trust by improving services to readers, hiring more skilled and writers and reporters, and taking leadership roles in fostering democratic debate."

Another word for trust is goodwill, which means the non-tangible assets of an enterprise. Meyer points out that the value of newspapers, defined by their sales prices, is only 20 percent physical (presses, trucks, etc.) and 80 percent goodwill (standing in the community based on their journalism and commercial influence).

Here's where it gets interesting. If newspapers "liquidate" that goodwill by gutting newsrooms and jacking up advertising rates, they open themselves to competition and replacement by new forms of media that are not shackled by the up-front capital costs of starting a newspaper. Internet news operations, blogging conglomerates, niche market newspapers - each challenge traditional newspapers on different fronts: Virtual (therefore cheaper) distribution; targeted content, measurable audience; narrow geographic focus. Meyer writes:

"The race to be the entity that becomes the institutional Walter Cronkite in any given market will not be confined to the suppliers of a particular delivery technology. How the information is moved will not be nearly as important as the reputation of the creators of the content. Earning that reputation may require the creativity and courage to try radical new techniques in the gathering, analysis, and presentation of news."

Well, I quibble with the Walker Cronkite metaphor, but Meyer is correct in his detailed of what's needed: Creativity of content and of conception of what is news, and courage to take risks, fail, recover and risk again.

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Posted by Tim Porter at February 7, 2005 09:13 AM