Monday, May 4, 2009

Out of print: The future of news, newspapers and journalism

Presented to the Club on April 25, 2009 by Martin C. Langeveld

The topic I’m presenting tonight will be familiar to most of you, even if you have not been a regular visitor to my blog. Not a week has gone by in the last six months without news of a threatened or actual closing of a major newspaper, the bankruptcy of a major newspaper publisher, layoffs, buyouts or mandatory furloughs imposed on newspaper employees, and other symptoms of the travails of a once-powerful and monopolistically rich industry. This month [April, 2009], readers of the Boston Globe were shocked to find a front-page headline and story disclosing that its owner, the New York Times Company, was threatening to stop publishing the paper on May 1 unless it got major concessions from its unions.

It’s not surprising the New York Times Company would make this threat, since the Globe is reported to be losing well over a million dollars a week. The Times company has run out of credit lines, has sold and leased back a chunk of its recently completed Times Square headquarters building, is peddling its stake in the Boston Red Sox, and has borrowed $250 million from a Mexican tycoon the flagship paper had earlier called a robber baron. Clearly the Times is not in a position to subsidize the red ink at the Globe, for which it paid $1.1 billion in the mid 1990s.

And among newspaper owners, the Times company is relatively well off. Among the publicly-owned US newspaper firms, several are bankrupt, and most have credit ratings at or near junk-bond status. Their collective market value has fallen by more than 90 percent in the past few years. Collectively, the industry has laid off more than 10 percent of its workforce since the start of 2008. The combined paid circulation of American daily newspapers has fallen from more than 63 million in 1984 to less than 50 million today — a drop of 21 percent during a time when the number of households grew by about 40 percent. U.S. Daily newspapers today have less than 14 percent of total U.S. advertising expenditures. In 1989 it was 28 percent — so they’ve lost half their market share in 20 years. These are long-term trends that predate the arrival of the World Wide Web, and they have continued unabated through economic expansions as well as recessions.

For people with an appreciation for the importance of good journalism to the maintenance of a free and democratic society, and for the historical role of newspapers in providing what is often considered the best, broadest and deepest journalism available, the industry’s decline is a concern. What went wrong? What can be done? Will there be newspapers a few years from now? Where will essential journalism happen if newspapers depart the stage?

The origins of the present crisis in newspapers, as I’ve indicated, go back many years. The question is, what’s driving the trend away from newspaper reading?

Back in the 1970s and early 1980s, newspapers noticed that younger people weren't reading newspapers as much as their elders. The industry responded with youth-oriented features and a Newspapers-in-Education program, hoping to inculcate the daily newspaper habit. And, the philosophers among us said, "Look, when these kids grow up, get married, buy houses, have kids in school, and pay taxes, they'll read newspapers because they need to know what's going on." And indeed, some of them did. But the experience since the 1970s is that each succeeding age cohort reads newspapers less than the prior cohort. Moreover, as each cohort ages, it tends to reduce its newspaper readership. This is true even of the oldest age groups. Nothing the industry has done has made the slightest dent in these inexorable trends.

The industry now tends to point to the internet and suggest that it is both the problem and the opportunity — younger people read newspapers less because they get their news online, but the industry can benefit from rapid growth in online readership and revenue.

But, hold on: the age-cohort readership trends started in the 1960s, not in 1995 or so when the online readership started to make an impact. This problem has been a long time coming. The readership figures show that around 1970, the nation was still fairly monolithic in its readership habits — all age groups were heavy newspaper readers with rates ranging from 70 to 76 percent, but then all age groups started reducing their newspaper reading.

Why? What happened to that solid franchise? I think it relates to the gradual proliferation of concerns and interests in our society. Go back to the Great Depression of the 1930s: Everyone was in the same boat; the country was unified in its interests and concerns; everyone read newspapers and listened to radio to know what was going on. This continued through World War II, the Korean War, the early stages of the Cold War, and the Vietnam War. But the Baby Boom generation changed the game. With greater prosperity and less international turbulence to worry about, interests began to diversify enormously from the 1970s right through the current decade. It was a luxury we could afford — more cable channels, more movie screens, more books and magazines focused on more niche interests, more sports franchises, more highways to go to more malls, more resorts and more entertainment venues, more exotic foods on supermarket shelves, more cheeses from more countries served at dinners like this, more recreational drugs, more diversity in every possible direction.

Daily newspapers can no longer reflect all this diversity in their pages. The idea of a single mass medium that everyone in a community or metropolis would want to read is no longer logical, any more than we are all likely to watch the same television programs log in to the same website or tune to the same radio station.

The World Wide Web, of course, has only accelerated this trend of diversification; it is tailor made to cater to an unlimited number of niche interests.

The demographic trends clearly show that within a few years, the average newspaper reader will be of retirement age, and only the 65-and-up age cohort will still have a majority (but barely) that reads a daily newspaper. That's not a sustainable business model.

Now, you might think that newspapers could simply shrink into being a smaller, but still substantial piece of the media landscape. Thirteen percent of the advertising market is still real money, after all — almost $38 billion, to be precise. But other factors layer onto the demographic trends to make this a perfect storm. For many decades, newspapers enjoyed monopoly power in the pricing of advertising: there was generally one newspaper in town, and if you wanted an ad, you paid the price. Starting even a weekly newspaper to compete with the daily was a costly proposition — so the dailies were protected by high barriers to entry. This pricing power was particularly true in the classified pages, to which the principal media competitors, radio, TV and billboards, could offer no alternative.

The usual financial formula at newspapers into the 1970s looked like this: the circulation revenue — what customers paid to subscribe or to buy single copies — covered the cost of printing and distributing the paper, and for the cost of the circulation department itself. Display advertising and preprinted inserts paid for all the other expenses: the newsroom, the ad department, the building, the business office, and so on. This meant that the income from classified advertising was pure profit, and as a result, newspapers were able to earn operating profits of 20 to 30 percent from the 1920s right through the Depression and World War II and into the 1990s, despite losing audience and overall ad market share.

The promise of that kind of profit margin kept the market value of newspaper properties high, encouraged the creation of newspaper chains fueled by leverage, and created a corporate culture that discouraged innovation and strategic planning. But along the way, personal computers, Moore’s Law, Metcalfe’s Law and other technological trends eliminated most barriers to entry — newspaper competitors in the form of alternative weeklies and more recently hyperlocal web sites could be started from proverbial kitchen tables to erode the monopolies of the dailies.

And then in 1999 along came Craigslist, another kind of kitchen-table startup with a classic piece of disruptive innovation for which newspapers were totally unprepared — free classified ads. Craigslist now offers classifieds online free, nationwide, in almost any category. It charges only for a few categories in a few markets, which is all it needs to cover costs and make a profit. With just 28 employees, operating out of a San Francisco storefront, Craigslist’s impact has been to cut in half the classified advertising volume of the entire daily newspaper business in the last 10 years, an impact of about $9 billion. And Craigslist’s web traffic as measured in pageviews is now six times as much as that of the entire daily newspaper industry.

The only further impact that stems from the current recession is that all the downward trends have accelerated, and now the loss of market valuation and credit standing means that the industry, which has never been big on R&D anyway, has no resources it can apply to innovation, at least not to innovation that requires upfront investment.

Consequently, when the current recession ends, there will be no bounceback for newspapers. Estimates are that nearly all of the top 100 newspapers by circulation are operating in the red. Results for the most recent quarter show revenue declines larger than those in any quarter of 2008. It seems very likely that many of these newspapers will be closed, merged, or very substantially restructured in the next 12 months.

Out here in the hinterlands, the picture is better. Most of the newspapers in small towns and small cities, with circulations under 50,000, continue to be profitable at least on an operating basis, before debt service. This group contains about 1100 of the roughly 1430 newspapers in the country. And in the so-called community newspaper category, weeklies and very small-dailies, some reports indicate that they have lost very little revenue over the past few years — and a majority of them are still privately owned without much leverage. So outside the metro markets, newspapers can survive, though not necessarily thrive. And to get the small-town dailies owned by big chains, including papers like the Berkshire Eagle [in Pittsfield, Massachusetts], out from under highly-leveraged ownership, there is going to have to be some restructuring pain — read: fire sales during bankruptcy proceedings.

Still, the future of print is bleak, considering the loss of pricing power and the continued migration of eyeballs to online news sources. Look at it this way: if journalism had just been invented, would you invest in a startup that proposed going to Canada, cutting down trees, putting them through an enormous machine to make newsprint, trucking that paper halfway across the continent, putting it through another enormous machine to print newspapers, and finally driving down every back alley and dirt road to deliver those papers, every single night? Besides not passing environmental muster, you would not get a call back from any venture capitalist with that concept on your executive summary. The future is online, the investor would say, and correctly so. During 2008, for the first time the percentage of Americans who report getting most of their national and international news online exceeds the percentage who still get most of their news from newspapers – the ratio is that about 40 percent go online, versus 35 percent who go to newspapers. The ratio for local news still favors print, but not by much.

So you would think that with all these trends and factors, online news ventures, designed to step into the breach and provide the journalism so necessary to our democracy, would be easy to get financed and would be popping up all over. And to some extent they are, but what makes it difficult to get new online news sites started is that there is no clear business model. The sites of newspapers themselves are not even profitable, because the audience migration from printed newspapers to the web has mostly bypassed newspaper web sites, which get only about one percent of all U.S. web traffic. and together get more unique visitors than the entire newspaper industry.

The snag with coming up with a business model to sustain online journalism is this: they don’t actually sell journalism in print. For the last 100 years, good journalism at newspapers has, in effect, been a charitable endeavor engaged in by publishers earning monopolistic profit margins. The business of newspapers is to sell eyeballs to advertisers — news content is simply a convenient lure to get the public to buy and read newspapers. Publishers, to their credit, often took pride in their newsrooms, competed for Pulitzers and other honors, and generally spent more than strictly necessary to fill the paper with news. Society benefitted from this largesse. But this doesn’t work very well anymore in print, and it won’t translate online at all, since there is no monopolistic pricing there. So what are the options for business models that can deliver the fruits of journalism via the Web?

I could discuss a variety of options, each of which could turn into a Monday Evening Club paper of its own, each of which has its pros and cons, but in the end, none of which will work as a ubiquitous model. Among the proposals floating around are these (and notice that we have a tendency to dissect the potential models in traditional terms):

  • Pay-for-content models supported by readers who buy subscriptions, just like printed newspapers or magazines
  • Pay-for-content in which readers purchase individual news items through a micropayment system, just like downloading songs from iTunes
  • Non-profit models, similar to public radio or public television, supported by public contributions
  • Models supported by advertising, also just like print
  • Publicly supported models, such as the BBC
  • And of course hybrids of two or more of these, as well as print/online hybrids like the current newspaper model, are possible.
As I said, each of these defines a model in traditional terms by analogy to an existing legacy media (even iTunes is in a sense a reversion to the old way of selling songs singly on vinyl). But if we know anything about the Web, it’s that things will not be the same tomorrow as they are today. Witness the speed with which the general public has adopted social networking — Facebook was founded at Harvard in 2003 as a network limited to college students. Within 3 years, 85 percent of U.S. students had signed up, or about 4 million members. In September 2006, less than three years ago, Facebook opened membership to the general public; today it has 200 million active users worldwide. And it is just one of many social networks. Social networking is an aspect of what is being called Web 2.0. Web 1.0 was driven by the hyperlink. It simply connected pages and sites to each other. (Incidentally, one of the failures of newspapers is that most of their stories published online are still devoid of that very basic ingredient.) Web 2.0, into which we are now shifting, is driven by connections between people, through social networks. Newspapers and news sites in general are still trying to discover how to operate in the 2.0 environment and to incorporate social networking in their business models. Web 3.0, also called the semantic web, is the next big step being envisioned. Going beyond connecting pages (1.0) and people (2.0), it entails the connection of facts, ideas, and concepts – something very relevant to the world of journalism. In the semantic web, search (a 1.0 concept) and personal recommendations (a 2.0 concept) will be augmented by tools that can more or less automatically deliver content strongly relevant to a user’s instantaneous needs, interests, concerns, questions and interactions. It may entail intelligent personal agents that can recommend content, answer questions, make simple online arrangements and purchases, and otherwise help organize your life. And all of this will be ever more mobile on pocket-sized devices that will only incidentally make phone calls, serve as your wallet, your set of keys and your GPS navigator, and verify your identity. To conceive of enterprises that can create and deliver journalistic content in that environment is not easy, but today’s news enterprises need to be thinking in that direction. What I can suggest is that they ponder the following.

Hanging on to bricks, mortars, machinery and other legacy concepts including ink on paper is not realistic. All of that is baggage that will hinder, not help, in a truly digital enterprise.

There will be open source networks creating journalistic content, not newsrooms with four walls. Collaboration and flexibility will be key. In these networks, individuals can have as much credibility and influence as organizations (a point proved by Anton Kutcher last week when he beat CNN in the race to have one million Twitter followers).

News is a process, not a product. The basic unit of news, the story, will be part of a continuous flow of content through blogs, microblogs, wikis, discussions and links. News publishers will do what they do best, and link to the rest. Readers will not come to content; content must find readers.

Free is a business model. Monetization will come from creating conversations between people and brands, not from traditional advertising.

Photo: the "newsboy statue" in Great Barrington, Massachusetts, by Mary F. Lutz, used under Creative Commons license.