Friday, February 15, 2013

Summary of Fallows' Article

I went a little overboard with my summary/critique because this is an area I’m pretty passionate and like to think I am somewhat knowledgeable about. So apologies for the length, but hopefully what I've written below will be helpful for the discussion.

Fallows’ basic argument is that despite the tough times for the newspaper industry—declining circulation, plummeting revenues—help is on the way, and Google, perhaps the unlikeliest of saviors, is working on ways to save the industry. Putting aside the weirdly fawning advertorial nature of the whole article (Fallows discloses that he is close family friends with Google CEO Eric Schmidt and seems to have interviewed a bizarrely inordinate number of former Atlantic interns in the process of reporting the story), his discussion of proposed solutions is helpful for us in terms of conceptualizing the future of newspapers and how we might get from here to there.

First, Fallows offers a familiar rundown of the diagnosis of the problem(s):

(1)  The decline of classified revenue due to free online competitors (craigslist, ebay, etc.). That revenue once accounted for 30-40 percent of all revenue and may soon be going to zero.
(2)  A steady erosion of circulation as the culture of newspaper reading has changed and young people opt for other news sources or none at all. (Fallows doesn’t say, but subscription revenue used to account for another third or so of newspaper revenue). Further reducing circulation dollars in recent years: the fact that newspapers were routinely giving away the product for free online. For some papers (the NYT), circulation has stabilized a bit since implementing an online subscription service and “paywall,” although the long-term trends are still discouraging.
(3)  Loss of the value of display ads in print. This is related to declines in circulation since fewer readers means the ads themselves are less valuable, but it’s also a function of the rise of so many alternative outlets for advertising: network TV and cable especially, but also companies can now micro-target audiences online through much cheaper custom ad products sold by companies like Google. And then of course on top of all that, the Internet provides businesses with many more ways to communicate directly with consumers through social media, reducing demand for traditional old (expensive) print ads.
(4)  Finally, compounding all these horrible strains on the business model, papers remain saddled with enormous “legacy” print costs. They only spend about 15 percent of their revenue on their most “valuable” assets: “the people who report, analyze, and edit the news.” But papers can’t easily eliminate these costs without sacrificing important revenue streams that depend on the print product (like most of the revenue).

Before I move on to the Fallows’ description of Google’s proposed solutions, I think it’s also important to note a couple other factors Fallows omits, which help to explain why so many papers were verging on bankruptcy (or went under) during the Great Recession. After all, these declines in revenue should be put in their proper context. Newspapers were once highly, highly profitable enterprises with margins far larger than most other industries. They arguably wouldn’t have such a difficult time managing the digital transition were it not for the fact that many of these companies also took on massive debt loads during the 1990s and 2000s during a period of consolidations, mergers and acquisitions. They are now struggling to pay off that debt at the same time they are dealing with the realities of the new information marketplace. And as is often the case, these mergers never really delivered the kinds of savings executives and management consultants once promised they would.

This burden of debt arguably prevents many of these organizations from investing and innovating and better managing their long-term strategies; instead of shifting slowly from being an industry with huge profit margins to an industry with smaller and smaller profit margins, it’s meant much of the industry was all-of-the-sudden on the precipice of liquidation. Furthermore, the fact that many of these newspaper properties remain units of public companies also means they are forced to contend with Wall Street expectations and demands for short-term growth, further hindering the ability to implement long-term strategies.

But anyway, back to Google and their proposals for saving the industry. Despite being very much implicated in the brave new information world of “unbundling,” Fallows says they are hard at work partnering with news organizations and experimenting with new ways to maximize income for newspapers. However, the solutions Fallows describes, when you get down to it, strike me as pretty lacking:

(1)  Distribution. From what I could tell, this basically means better search engine optimization (SEO). Fallows doesn’t use such an unglamorous industry term, but it’s ultimately what’s meant by Google’s outreach efforts where they have consulted with news organizations to improve where content shows up in search engine results and the Google News aggregation algorithm. These efforts help Google as much as they help newspapers, of course. More to the point, a larger online audience is pretty meaningless unless newspapers find better ways to effectively convert more eyeballs to more money. The monetizing part below remains key.
(2)  Engagement. Google wants to get papers to incorporate more video (preferably using YouTube), more reader-supplied content, and new presentation modes (Fast Flip) to improve the actual product they’re selling, to make it something people find more essential to their lives and interesting to read. This is great, and there’s no doubt papers have been slow to innovate on the web, but again, expanding online exposure won’t save papers unless that monetizing part comes together. The “Living Stories” experiment Fallows describes in which Google partnered with The Times and the Washington Post to develop informational content around topics that aren’t just “articles” and “breaking news” is presented as an “engagement” innovation as well, although to me it seems much more like an SEO experiment designed to attract search engine audience.
(3)  Monetization. Here’s where we get closer to real proposed solutions. Fallows describes a few efforts to improve monetization:
a.     The return of some form of bundling. By this Fallows means some kind of online paywall system like The Times’ recent experiment with a Digital Subscription Service. As Fallows notes, newspapers never really made money on the news, they made money on the entertainment, sports, and lifestyle coverage—which generated most of the ad revenue—but since you paid for a bundle of the whole paper, it effectively subsidized the expensive newsgathering activities that you might not care to pay for if articles were sold separately. Of course the trouble with a subscription model is that it runs counter to efforts to maximize your readership online, reducing what you can make with online display ads. This conundrum is why it took The Times so long to decide how to proceed and why they went with a porous “metered” system instead of a hard paywall. Finding the right balance is the big challenge going forward, although it remains an open question whether any combination will provide enough revenue to survive.
b.     Expansion of the online display ad market. This isn’t really a specific solution per se; it’s more an article of faith that Fallows repeats that eventually as people spend more time online, the demand for ads online will be an order of magnitude larger than it is now. Therefore, eventually sometime they will provide newspapers with the revenue they need to survive. The other piece of the argument is that because Google (and Facebook, etc.) know so much about all of us, ads can be micro-targeted at the individual level, making them extremely valuable, so companies will be willing to be a huge premium for them. Two questions here: Will ad rates, which are currently just a fraction of the cost of print ads, ever really reach parity (more on this below)? And two, if Google and Facebook are the ones with all the individual-level data, aren’t they going to be the ones to benefit from the custom micro-targeted ads? Newspapers, at best, can hope for cut of this revenue, but it’s hard to see how a share of a smaller ad market will provide enough revenue to make up for what’s being lost.
c.     More efficient management of online ad sales. This gets kind of complicated but the basic idea is that managing in-house ad sales is typically focused around selling “premium” ads for the home page or section fronts. Systems for selling ads through the “back door” where people come to the site through an article page they clicked on a search engine are much trickier and harder to manage. Google is working on improving that, and although that means, again, they’ll be taking a cut, the expansion of the pie argument suggests there’s room for both newspapers and Google to benefit. 

All in all, like I said, I have trouble seeing how these numbers add up. The biggest concern involves whether or not the market for online display ads will ever catch up to replace enough of the ad revenue losses on the print side. The problem here is twofold. On the one hand, online ads can’t replicate the impact of a full page ad in print because the reading experience is so different online (the ad itself takes up a fraction of your visual attention, and one click and it’s gone). On the other hand, print advertising was and remains absurdly overpriced. Advertisers used to have few ways of knowing how many people they were reaching (whereas online you can measure views and clicks). For a time, newspapers maintained near monopolies over disseminating information in communities, which meant they could get away with charging insane rates for print ads that may or may not have been seen by most subscribers. The Internet has demolished this inefficiency. Targeted online ads that are seen by more people and are clearly more valuable won’t necessarily ever come close to prices of print ads because the old ways were never actually sustainable.

So where does that leave us? I don’t know. But one of the things this reading and the others this week don’t spend a lot of time on is what to do about the legacy side of the equation, the print product that everyone agrees probably won’t survive at least in its existing form for much longer. In part because print readers tend to be diehard, set-in-their-ways subscribers who are resistant to change, newspapers have been loath to experiment too much with this product, instead focusing on innovating online and squeezing out pennies from their digital readership. But I think managing the transition effectively will require reconceptualizing the print product itself and its relationship with the online newspaper.

My suspicion is that a thinner (cheaper to produce) paper with less breaking news, more aggregation, more summary, and a smattering of analytical pieces meant for a “reading” audience instead of a “grazing” audience, may be the right formula for the future print product, which will only exist as a premium companion product to the online news product. The New York Times’ slogan “All the News that’s Fit to Print” is arguably more relevant than ever, and yet what’s fit to print in a digital media age is a question that surprisingly few publishers have begun to ask. 

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