Business Success

One of the most exciting developments in journalism is the widespread appearance of online news startups. These are taking a variety of not-for-profit and commercial forms and are typically designed to provide reporting of under-covered communities and neighborhoods or to cover topics or employ journalistic techniques that have been reduced in traditional media because of their expense.

These initiatives should be lauded and supported. However, we have to be careful that the optimism and idealism surrounding these efforts not be imbued with naïveté and unbridled expectation. All these initiatives face significant challenges that require pragmatism in their organization and sober reflection about their potential to solve the fundamental problems in the news industry today.

We need to recognize that these online initiatives are not without precedent. We can learn a great deal about their potential from other community- and public affairs-oriented media endeavors. Community radio, local public service radio and television, public access television, and not-for-profit news and public affairs magazines have existed for decades and provide some evidence about the potential of the startups. Most rely heavily on the same types of foundation, community support, and membership financial models that startups are employing and this gives them a head start in the competition of those resources.

Despite sharing fundamental objectives and goals, these existing news and public affairs enterprises exhibit wide differences in the services they provide and their effectiveness in offering them. Many suffer from precarious financial conditions.

For the most part, such initiatives are highly dependent upon volunteer labor, individuals with the best of intentions who contribute time and effort. Those who manage the operations must expend a great deal of effort to train, coordinate, motivate and support these volunteers. This incurs cost and takes time from other activities.

Most of the organizations operate with highly limited staffs of regularly employed personnel and this is especially true in news operations. Professional journalists working in these organizations tend to be poorly paid; few have health and retirement benefits; most do not have libel insurance that protects aggressive and investigative reporting; few have access to resources to invest time and money in significant journalistic research. The consequence of these challenges is that there tends to be high turnover because the operations typically rely on young journalists who use the organizations to gain professional experience and then move on to better funded or commercial firms.

The community and public affairs operations also exhibit widely disparate size and quality in their journalistic activities. Even most affiliates of National Public Radio—which is generally considered the most successful of non-commercial news operations—tend to have small and relatively undistinguished news operations. Most rely upon the exceptional content of the national organization, large metropolitan affiliates, and the best of the content collectively produced by other local affiliates. Affiliates with larger news staffs and quality tend to be limited to those linked to university journalism programs or in the best-funded metropolitan operations.

The challenges faced in these organizations should not deter the establishment of new online initiatives or keep the rest of us from supporting them. We need to be realistic about their potential, however. In the foreseeable future these startups will tend to supplement rather than to replace traditional news organizations. They may be part of the solution to the problem of news provision, but they alone are not the remedy.

Success in businesses is not the result of highly mysterious factors.

To be successful an enterprise must offer a product or service that people want; it must provide it with better quality and service than other providers—or at a lower price than competitors; it must change with the times and demand; and it must never forget to focus on customer needs rather than its own. And a limited number of competitors helps. Duh.

Many journalists have trouble understanding these principles, however, and we were treated to 2 classic stories in which journalists breathlessly announced this discovery over the weekend.

The New York Times told us about the “resurgent” Seattle Times. The Times is starting to reap the fruits of monopoly caused by the demise of the print edition of the Post-Intelligencer and the stabilizing economy. It has picked up most of the print readers from the P-I, raised its circulation prices, and been able to keep the higher ad rates that were charged when ads were put in both papers. http://www.nytimes.com/2009/08/10/business/media/10seattle.html

The Associated Press told us “Small is beautiful” and that local papers do not feel competition for big players like CNN, metropolitan television, and Craigslist because they focus on local news and advertising not available elsewhere. “Less competition means the print editions and Web sites of smaller newspapers remain the focal points for finding out what's happening in their coverage areas.” http://tech.yahoo.com/news/ap/20090809/ap_on_hi_te/us_small_newspapers_1

Journalists are also starting to discover that the industry might not be as dead as they have been portraying it to be. A number of stories have reported that the drop in advertising due to the recession appears to be near bottom, that profits and share prices are rising, and there is no wholesale rush to the web by print newspaper readers.

These “surprises” are developing, I believe, because journalists have never covered their own industry with the same interest and vigor that they have covered other industries. This is partly true because they have adamantly and publicly expressed distain for the business side of the news industry and because they tend to accept and endlessly repeat the views of publishers without critical fact checking or seeking better understanding of the business dynamics of news. Whatever happened to the old journalism adage "If your mother says she loves you, check it out!"

Perhaps they will learn.

New York Times Co., Gannett Co., Media General , and McClatchy Co. have all reported profits in the second quarter and the results have led to share prices doubling and tripling.

The developments must come as a surprise to those who saw the poor performance of recent quarters and convinced themselves that the newspaper industry is dead and gone.

Admittedly, the positive results in the past 3 months were achieved through restructuring, reducing news staffs to their 1970s levels, heavy cost cutting everywhere, and postponing reinvestments. But it shows there is still life in the industry and that the industry can be expected to recover in the coming year if economic conditions continue their current rate of improvement. As I have said many times, a industry with $50 billion in revenue is not going to ignore that revenue, close the doors, and disappear overnight.

Many have viewed the poor company performance in the past 2 years and then mistaken the steep concurrent drop in advertising as evidence of a general decline caused by long-term industry trends. In doing so, they have disregarded the impact of the economy on newspaper advertising and mistaken the dramatic drop in advertising as being an indicator of the industry's broader condition rather than the shorter-term results of 4 quarters of negative growth that have affected the economy as a whole. Some have also ignored the effects of corporate debt problems had on the industry's overall condition.

In multiple blogs and articles journalists and editors have pointed out that newspapers have fared worse than other media in the recession and used that the fact as evidence that the industry is a death's door. Two decades of research on newspapers during recessions, however, has shown newspapers typically fare worse because retail and classified advertising on which the industry relies are more affected by downturns than brand advertising (See post “The Credit Crisis, Volatile Markets, and Recession and Media” and the articles below). Obviously a lot of newspaper managers and journalists don't pay attention to research about their own business.

If one looks at the newspaper advertising expenditures over time (see Figure below), one sees that they fall with recessions and then recover. This pattern was especially evident from 1991 to 1993 and 2001-2003 when short downturns pushed newspapers into decline.

If one considers different category of advertising, it is clear that the classified advertising—which was a driver of growth in the 1990s—was significantly troubled after 2000, but recovered and spiked in 2005 (Figure 2). Its relative decline by comparison to retail and national advertising is probably the result of some substitution with the Internet, nevertheless newspaper classifieds produced $10 billion in 2008—3 times that of online classified.

Google, MSN, and Yahoo and other aggregators are cited by newspaper executives are harming newspapers. But what have they actually done? It is important to have a realistic understanding of their effects if one is to fashion strategies for the future of newspapers and news organizations.

Aggregators carry news stories from major news services and thus make international and national public affairs, entertainment and sports news widely available. The headline news on the aggregators’ home pages is becoming the primary news provider for those less interested in news and the online sections are well-used by news consumers who want more news or more timely news than appears in their daily newspaper.

Aggregators and others sites carrying content from news services are now contributing about 20 percent of the revenue of Associated Press, for example, taking some financial pressure off newspapers to fund the cooperative on their own. Other news services are also gaining income from online operators, thus helping them keep prices lower for newspapers as well.

So how do aggregators news harm newspapers? They harms papers to the extent that some less committed newspaper readers are willing to substitute their local paper with a news sources that don’t cover their cities. Some are willing to do so and this is taking some subscribers and single copy purchasers away from newspapers. U.S. newspapers have lost approximately 6 million circulation since 2000, but about half of that was circulation of the 70 competing newspapers or second editions papers that have been closed since the millennium. So one can thus say that at least 3 million people have decided to use other news sources.

Aggregators are also accused of STEALING value through their search functions and links to newspaper sites. Certainly the aggregators are CREATING value with the technique but are they taking value in violation of copyright or norms of content use? The answer is “no” because they do not represent the material as their own and direct those searching to the newspapers own sites, where they are exposed to advertising sold by the online newspapers.

Newspapers are now getting between 7-10 readers online for every reader they have in print. This plays an important role in making their sites attractive to advertisers, a development that generated the $3.2 billion in online advertising revenue that newspapers received in 2008.

Newspapers, of course, could stop the aggregators from linking to their content by putting it behind walls and charging for its use. If they did so, the aggregators could not link to it legally or technically without users encountering a pay or registration wall. So why haven’t newspapers done this until now? Frankly, because they get more readers and more advertising income by offering the material free.

Publishers are increasingly arguing that they should turn newspaper sites into paying sites and they have been holding joint discussion about how that might happen and whether it would be beneficial to do so simultaneously. This has raised some antitrust concern, but it raises real and significant questions of what such a strategy would accomplish.

In my estimation it is not as easy answer to the challenges newspapers face and has some elements that put its effectiveness in doubt. This is primarily because it is uncertain what existing readers will do. Will they subscribe to print AND online? Will they stay with print only? Or will they drop print?

The first option would be financially beneficial, but is likely to attract a limited number of readers unless the joint pricing is so attractive that it produces little new income for the newspaper firm. If that is the case the benefit of the strategy is reduced. The latter option would be very damaging to papers because print advertising creates more value than online advertising and prices for print ads would decline more than would be gained online.

It also needs to be recognized that people who do not currently buying newspapers are unlikely to buy subscriptions to online news sites. Thus, creating a paid model will likely reduce the boosted audience that free online news currently provides. This would have a negative effect on online audience and the increasing revenue that is being obtained from online advertising.

But what of heavy news users? As I have written in other entries in this blog, heavy users tend to be promiscuous and move between many online news sites. A commonly used system for micropayments would be necessary or these heavy users will reduce their use of multiple sites if each requires separate payment registration. Even with such a system in place, it is unlikely that more than 5-10 percent of the newspaper purchasing population would regularly use such a system.

Moving to a paid online model will not be as easy as agreeing that everyone should switch to paid on January 1 next year. It will require considerable strategic thinking and providing new types of value for consumers if it is to be successful. Even then, the benefits for newspapers will vary significantly depending upon the size, location, and competitive situation of individual newspapers.

Self deception is more damaging than lies told to us by others because it more strongly affects our perceptions and decisions. One of the biggest self deceptions in the newspaper industry today is that the Internet is striping newspapers of advertising dollars and is a primary cause of its economic woes.

There is no question that Internet is increasingly attracting advertising revenues. They reached $23.4 billion in the U.S. in 2008. Looking at the numbers more closely, however, one sees a different story. About half those expenditures are search and lead generation fees that don’t compete with traditional newspaper advertising. Search payments alone are the single largest category of Internet income and represent 40% of total online fees.

Internet classified advertising—the direct competitor to newspaper classifieds—has never exceeded 20 percent of online advertising revenues and it is declining as a percentage of the total. Online classified advertising was $3.2 billion in 2008, about one third of the classified advertising expenditures in U.S. newspapers. Nevertheless, some newspaper executives and industry observers act as if all the online classified revenue has been diverted from newspapers, but the evidence of that is not very persuasive. As this figure shows, between 2003 and 2006, Internet classified grew considerably, but newspaper classifieds not only held their own but increased as well. Clearly there has been a significant decline in the past 2 recession years, but there is no evidence it is shifting to online classified advertising.

U.S. NEWSPAPER AND ONLINE CLASSIFIED EXPENDITURES, $ BILLIONS
If one considers annual gain or loss of classified advertising in the two media one sees that the patterns do not indicate any substantial demand side substitution (advertisers switching from one to the other) because the figures do not rise and fall in the same patterns or in somewhat similar amounts.

NET GAIN/LOSS FOR NEWSPAPER AND ONLINE CLASSIFIEDS, $BILLION
So why does the Internet constantly get the blame for newspaper woes? I believe it is because of it is just the newest in a series of threats to newspaper revenue. The Internet certainly is taking some money from newspapers, but it isn’t the worst culprit. The real competitor is direct mail and home delivery advertising that have taken much preprint and display advertising from newspapers in recent decades by delivering better household reach. That was compounded by the significant reduction in the number of large retailers in the late 1990s and 2000s. The development of the recession in 2007 and 2008 is currently playing the major role because newspaper advertising—especially classifieds—is more strongly affected by recessions than other types of advertising. But recessions come and go and there is no reason to believe that an advertising recovery will not accompany an improvement in the economy.

I don't mean to say that some former classified advertisers are not shifting to online sites, or starting their own company sites, allowing allows them to market more inexpensively. But newspapers can strive to get them back and to keep others from leaving by aggressively marketing to those people and firms and by creating effective print and online newspaper classified packages that provide more effective advertising responses for them.

The end for newspapers is not in sight and those who think that the $50 billion industry is going to collapse and disappear within a year or two because of Internet advertising are just not paying attention close enough attention to what is really happening across media industries.

Salary data from the annual newspaper compensation study done by the Inland Press Association underscores the points I made in a lecture at Oxford University recently on why journalists deserve low pay.

According to the salary study, average newspaper wages in the U.S. increased 2.1% between 2008 and 2009, but that result was skewed because hefty increases went to producers of interactive (online) content and editorial personnel involved in new business development. Journalists on the average received no or marginal increases depending upon their category.

My lecture, which was carried in a significantly reduced form in the Christian Science Monitor , and redistributed by multiple online sites and blogs, produced shock, anger, and invective by many journalists who missed its point. The text of the full lecture can be found at the website: http://www.robertpicard.net/files/Why_journalists_deserve_low_pay.pdf

Journalists today create very little economic value and are having a difficult time getting people to pay for the social value they create. The fact that newspapers are rewarding those who help create new businesses and revenue streams far above traditional journalists accentuates this point.

I admit that the title of my speech was deliberately provocative. It was meant as a wakeup call from a former journalist who loves the news industry. The reality is that no one deserves either high or low pay. The level of pay is EARNED. Journalists deserve pay based on the economic value they create (evidenced by what the public is willing to pay for news) or on the willingness of the public to support social purposes contributing funds to foundations or non-profit news operations.

In today’s world—in which the mass audience for newspapers and its business model are disappearing—continuing to provide the same types of coverage and content in the past will not create economic value and earn good pay. I do not believe that Internet news aggregators, community journalism, and blogging will ever replace the functions of good journalism and it will not replace the functions of most newspapers in the short to mid-term. There is hope for journalism.

If journalists want to promote good journalism and value creation that makes them earn more pay, they will have to take more responsibility for coverage decisions and content choices so that journalism becomes more valuable. Journalists have shown unusual willingness to leave those decisions to publishers and editors who have stopped acting like journalists. But it need not be that way.

The question of whether we are witnessing the end of journalism is perhaps the most common topic at contemporary gatherings of journalists and journalism scholars. Although hushed and apprehensive conversations about it have taken place in recent years, today’s discussions are open and filled with alarm and fear.

Many of the voices and opinions, however, misunderstand the nature of journalism. It is not business model; it is not a job; it is not a company; it is not an industry; it is not a form of media; it is not a distribution platform.

Instead, journalism is an activity. It is a body of practices by which information and knowledge is gathered, processed, and conveyed. The practices are influenced by the form of media and distribution platform, of course, as well as by financial arrangements that support the journalism. But one should not equate the two.

The pessimistic view of the future of journalism is based in a conceptualization of journalism as static, with enduring processes, unchanging practices, and permanent firms and distribution mechanisms. In reality, however, it has constantly evolved to fit the parameters and constraints of media, companies, and distribution platforms.

In its first centuries journalism was practiced by printers, part-time writers, political figures, and educated persons who acted as correspondents—not by professional journalists as we know them today. In the nineteenth century the pyramid form of journalism story construction developed so stories could be cut to meet telegraph limits and production personnel could easily cut the length of stories after reporters and editors left their newspaper buildings. Professionalism in the early 20th century emerged with the regularization of journalistic employment and professional journalistic best practices developed. The appearance of radio news brought with it new processes and practices, including “rip and read” from the news agencies teletypes and personal commentary. TV news brought a heavy reliance on short, visual news and 24hour cable channels created practices emphasizing flow-of-events news and heavy repetition.

Journalistic processes and practices have thus never remained fixed, but journalism has endured by changing to meet the requirements of the particular forms in which it has been conveyed and by adjusting to resources provided by the business arrangements surrounding them.

Journalism may not be what it was a decade ago—or in some earlier supposedly golden age—but that does not mean its demise is near. Companies and media may disappear or be replaced by others, but journalism will adapt and continue.

It will adapt not because it is wedded to a particular medium or because it provides employment and profits, but because its functions are significant for society. The question facing us today is not whether journalism is at its end, but what manifestation it will take next. The challenges facing us are to find mechanisms to finance journalistic activity and to support effective platforms and distribution mechanisms through which its information can be conveyed.