Newspapers' death spiral has already begun

New competition from Web 2.0 companies along with continuing demographic shifts are about to send metropolitan daily newspapers into a spiral of decline from which few will emerge intact. Why now? People have been wrongly forecasting the death of newspapers for years. Why is this time different?

The first decade of the consumer Internet was very different from that which we're now entering. Web 1.0 was the display Internet. It was a decade when organizations put their brochures online and users got comfortable with the idea of a global network. Search tools were rudimentary, Web content was difficult to create and interactivity was limited. The brands that dominated the pre-Web days were able to extend their brands online. While a few important new sources of information did emerge, media giants like CNN, The New York Times, The Washington Post and the Associated Press continued to dominate online media. There was little threat to their underlying businesses.

That's all changed. It's now easy for individuals to create Web content. Computing power, storage and bandwidth costs are declining rapidly. The open-source software movement has dropped the price of software to near zero. Search engines have become a more effective marketing channel than e-mail. Google AdSense and affiliate marketing networks can generate income for website operators, even at low traffic levels. Today, a small group of people with a few thousand dollars and a good idea can build a self-sustaining web franchise in a matter of months. You couldn't have done that five years ago.

Layered on top of that is a demographic shift that is about to move a large new group of Web-savvy consumers into the economic mainstream. This new generation simply doesn't have the loyalty to established media that their parents do. And they don't read newspapers at all.

So here's where the spiral begins. Newspapers' profitable classified advertising business will be all but gone in 10 years, a victim of the vastly superior results and economics of search-driven online advertising. Display advertising will be under intense pressure from alternative media, including not just Web sites but an emerging class of small print publications and supermarket advertisers that serve local audiences (print publishing is getting cheaper, too). The department stores and cell phone companies that sustain newspapers' display advertising business will apply intense pressure on papers to bring down their prices.

Newspapers will be forced to lay off staff in order to maintain margins. Cuts in services will lead to cuts in editorial coverage, making papers less relevant to subscribers. As circulation declines, advertising rates will have to come down to remain competitive. This will put more pressure on margins, leading to more layoffs, more cost cuts, more circulation declines and more pressure on margins. Once this spiral begins, it will accelerate with breathtaking speed. And it has already begun.

Experience has shown us again and again that business models based on vertically integrated, proprietary products quickly collapse when confronted with competition that is open, standardized and much less expensive. It's happened in consumer electronics, telecommunications, computers and household appliances and there's no reason it won't happen in media. Advertisers will rebel at having to pay newspapers' high fixed costs when they can get the same audience through other channels at a fraction of the cost.

The sole advantage that newspapers have is their reach in local markets. Small businesses that sell aluminum siding, flowers and cleaning services have have few alternatives to newspapers for their ad dollars. That, too, is changing. The declining cost of electronic composition and offset printing is leading to resurgence of local newspapers and Web 2.0 technology is making it cheap for citizens to launch their own community websites. Search engine makers are figuring out how to provide value in local search. These forces are converging to attack newspapers' last refuge.

In 10 years, there will probably be half as many metropolitan daily print newspapers as there are now. Some will go entirely online, while others will merge with regional competitors. The question I'll focus on next is what will happen to the profession of journalism as a result?

Labels: mainstream_media

  ¶ 8:29 AM 0 Comments

  The vastly superior economics of Web 2.0 publishing

Having talked about the inefficiencies of the existing newspaper model, let’s look at the economics of what’s emerging in the Web 2.0 world.

A recent story in Business 2.0 magazine revealed the income of some popular bloggers. Read this article if you want to understand the emerging economics of blogosphere. They are vastly more efficient than conventional media. Michael Arrington is pulling in $60,000 a month writing TechCrunch. BoingBoing.net is on target to gross more than $1 million. Fark.com founder Drew Curtis says he’s on track to soon log sales of $600,000 to $800,000 per month.

“Blogs today benefit from what might be termed uneconomies of scale,” the Business 2.0 article says. “They are so cheap to create and operate that a lone blogger or a small team can, with the ever-expanding reach of the Internet, amass vast audiences and generate levels of profit on a per-employee basis that traditional media companies can only fantasize about.”

Take the Fark.com example. The site generates 40 million page views a month with a staff of one full-time person and two contractors. Its only real operating costs are bandwidth charges. It produces almost no original content and has no capital costs. Members contribute their own content, so no editors are needed. The site almost runs itself. Yet this could approach $10 million in revenue before long.

Craigslist.org is another example. This is the fifth most popular site on the Internet, with global reach and an estimated four billion page views a month. It is absolutely killing the newspaper classified ad business. I read one estimate that Craigslist had cost San Francisco newspapers $70 million in revenue in just one year. The entire staff is 23 people.

There are plenty of other examples. BoingBoing.net is maintained by five contributors, all of whom work on it part-time. Google Blogoscoped, which is the best independent source of information about Google, is run by one person in his spare time. It’s averaging four million page views a month. Gizmodo grew to become one of the top five blogs on the Internet with only a single contributor. Digg.com, which is barely two years old, is already among the top 25 sites on the Web. Its traffic outstrips all the largest media sites. It has a staff of 15.

None of these sites is making piles of money yet, but I think that’s only a matter of time. Companies like John Battelle’s Federated Media and Nick Denton’s Gawker Media are figuring out the business side. And it’s not like these blogs have to make a lot of money to keep going. Adrants generates over $100,000 a year in advertising and that’s plenty to keep Steve Hall plugging away at his one-man operation. He’s getting paid to do something he’s passionate about.

How do these sites generate so much traffic at such low cost? They outsource everything.

• Editorial content is outsourced to an army of individual enthusiasts and bloggers who find interesting information on the Web and feed it to the site operators. Editorial expenses, which account for about a third of the operating costs of a daily newspaper, are practically zero.

• Circulation is outsourced to Google and links from other sites. In fact, there really is no concept of circulation in social media because there’s no way to “own” the reader. This is a very different model from conventional publishing, which relies heavily on subscriber lists to validate advertising rates. The Web approach is much less controllable but also much cheaper.

• Production is outsourced to Typepad, Blogger or any number of other hosted services at minimal cost. There’s no need for designers because everything is templated. Some sites practically run themselves. Bandwidth costs can be steep for popular properties, but that’s true for newspaper websites as well.

• Sales is outsourced to Google Adwords, Federated Media or other sales agents. This may change in time, but for now, most Web 2.0 companies can’t be bothered with a captive sales force.

Marketing and promotion aren’t even done. In the new Web, your marketing is your content. People either link to you or they don’t. This creates a lot of pressure on the site operators to be fresh and innovative, but that’s not a bad thing, really.

This is a new media model. Its economics are vastly more efficient than mainstream media’s. In the next post, I’ll look ahead to what I think will happen next.

Labels: mainstream_media, social_media

  ¶ 7:03 PM 0 Comments

  Over-sensitivity at the New York Times Technology journalists have long wrestled with the conflict-of-interest issues inherent in quoting industry analysts. These analysts - IDC, Gartner, Forrester and many others - are a vital source of commentary and perspective on happenings within the industry and they are quoted by nearly every major media outlet.

The conflict is that nearly every one of these analyst firms relies on vendors for their livelihood. Some, like Gartner, actually have a pretty strong user-side revenue source, but the reality is that most of these firms couldn't survive in their current form without vendor dollars. And the big vendors employ almost all of them. You'd be hard-pressed to find any major analyst firm that doesn't do business at least occasionally with IBM, Microsoft, HP, CA and other big vendors.
Reporters and editors know this, but it's an inconvenient truth that has been conveniently ignored for many years. Which is why it was surprising to read this editor's note in the New York Times late last week (registration required) regarding quote attributed to analyst Rob Enderle.

Enderle, who's a veteran analyst and an expert at courting the media, had contributed two positive but rather benign quotes to an earlier Times story on the Microsoft Xbox. Apparently, someone took exception to Enderle being quoted because Microsoft is his client (a fact that is fully disclosed on Enderle's website) . "Had The Times known of Mr. Enderle’s work for Microsoft, it would not have sought out his opinion on the product," the editor's comment said.
Well, had the Times known of every analyst's work for Microsoft, it would never have any analysts to quote. The reality is that it's hard to be in the tech analyst business without crossing Microsoft's path at some point. But the fact that you take money from a company doesn't mean you're beholden to it.

Perhaps the Old Gray Lady is still smarting from the humiliation of the Jayson Blair incident. It certainly went over the line in casting doubts on Enderle's credibility through this belated retraction.

The reality is that tech clients tend to cancel each other out. Analysts who do business with Microsoft are usually also doing business with IBM, Sun, Red Hat or other companies that compete with Microsoft. This competitive tension keeps people honest. It's appropriate for a reporter to ask analysts to disclose their clients, just as The Wall Street Journal now mentions client affiliations when it quotes stock market analysts.

Also, what analyst is his or her right mind would shill for a client? The damage to one's credibility would be devastating. A lot of people in the analyst business are still smarting over the WSJ's 2002 roasting of Aberdeen Group over the firm's now-discarded practice of "pay for praise." Aberdeen's name was mud in tech journalism circles for years following that disclosure.

In singling out one analyst for criticism, the Times went too far. Show me an analyst who doesn't do business with the big vendors and I'll show you an analyst who probably doesn't have much interesting to say.

Labels: mainstream_media

  ¶ 1:11 PM 3 Comments

  The New Journalism

It would be pointless to continue to post headlines about the looming financial disaster in the newspaper industry, so I’d like to focus instead on what will emerge from the rubble of that industry’s inevitable collapse. Over the next few blog posts, I’d like to sketch out a model of a new kind of journalism that is being formed in Web 2.0. I believe it will come to replace much of journalism as we now know it, and may form the basis for a rebirth of newspapers.

First, some background and assumptions. The business model of metropolitan daily newspapers is badly broken and can’t be fixed. The model was developed over 150 years ago to support a delivery method that is becoming irrelevant. Huge staffs of people were needed to create content, turn it into type, print it on paper and distribute it on a timely basis. It was very expensive, but it was necessary because there was no alternative way to deliver information on a daily basis.

Large editorial staffs were needed to create proprietary content. A few alternative sources of content were available, such as news wires, but there was almost nothing at the local level. In any case, running wire copy didn’t differentiate a newspaper from its competition, so staffs of salaried reporters were needed to turn up original news. At some newspapers, these staffs can run to several hundred people.

Newspapers had to maintain large circulation operations and massive subscriber lists in order to justify their ad rates. Circulation is expensive. While renewal rates for daily papers have always been high, it’s costly to acquire new subscribers through advertising and direct mail. In my experience working for a paid newsweekly, the cost of circulation didn’t come close to matching the small revenue it generated. Circulation revenue at newspapers has also been falling in recent years due to price cuts and competition, further squeezing margins.

Capital costs inherent in buildings, presses, paper, ink and people to run all those machines were astronomical. Labor unions added to those costs. In some cases, the unions have succeeded in preserving jobs that were automated out of existence years ago. People go to work and literally have nothing to do.

Add it all up and a metropolitan daily newspaper must employ several hundred people to produce the product. Newspaper advertising is very expensive because of the large fixed costs. The Chicago Tribune, for example, charges $755 per column inch in the daily paper ($1,135 on Sunday). That business works as long as advertisers are willing to pay for it and for many years they have. That’s because newspapers were one of the most effective means for businesses to reach consumers in certain geographies.

Because newspapers are so capital- and labor-intensive, their revenue-per-employee is relatively low. The New York Times Co., for example, generates about $280,000 per employee. The Journal-Register Co. generates a much more modest $105,000 per employee.

The upside, though, is that newspaper model has traditionally been profitable and predictable. Once a newspaper achieved dominance in its market, it was practically unassailable. As consolidation reduced the total number of daily newspapers (there are about 1,750 in the U.S. today), competitive pressure eased and the winning papers were able to drive their ad rates higher. Until the mid-1990s, this was a pretty nice state of affairs. Even the Internet didn’t put much pressure on newspapers, at least during its first decade.

That is all about to come to an end. As I’ll argue in future posts, the business model of metropolitan daily newspapers is poised for a collapse that will be stunning in its speed and scope. The cause is Web 2.0. In the next installment, we’ll look at some of the economics of that emerging business.

Labels: mainstream_media, social_media, Web_2.0

  ¶ 9:09 AM 4 Comments

  Why people blog Three months ago, Christina Kerley asked a group of marketers and frequent bloggers (including me) a simple question: What is the single greatest point of value you receive from blogging? I thought the question was phrased well because it asked about value (which is a bottom-line thing) and it forced people to choose just one answer.

CK has compiled the responses from about 30 bloggers, some of whom you will probably recognize, into a clever PDF collage that she's giving away for free. It's a quick read and gets to the heart of why people are so passionate about blogging. Notice how few bloggers mention money as a motivation.

But speaking of money, CK's experiment is also a smart move for her business. For the price of her own time and whatever she paid a deisgner, she's come up with a unique product that demonstrates innovation, market knowledge and focus. I have no doubt that thousands of people will read this document and the viral buzz will be good for Christina's business.

I love the idea of giving away useful content as a way to demonstrate market mastery. It's a win-win for the giver and the receiver. The best example I've seen of this was David Meerman Scott, who used a free ebook called The New Rules of PR to establish himself as a thought leader in his business. Nearly 100,000 downloads later, he's got a new career, a book in the works and a lot of running room in front of him.  ¶ 8:25 AM 2 Comments

  Blendtec's appealing videos I hear marketers ask all the time how they can engage with their audiences and build "buzz" in new media. Check out what BlendTec is doing. The company makes mixers, blenders, mills and other appliances that chop stuff up. They took a cue from Letterman and posted a series of videos in which they grind up things you didn't think could be ground up (like golf balls!). It's a lot of fun to watch and it reflects very favorably on BlendTec because the videos really show off the power of the appliances.

So think: what do you do that's really remarkable? How can you demonstrate that with new media and build awareness virally? Blendtec is an example of a company whose product most people consider a commodity using Web 2.0 media to look different.

Labels: video, viral_marketing

  ¶ 10:29 PM 0 Comments

  Good reading

WOMMA Puts Edelman On Probation – Looks like the PR industry’s social media poster child is on a 12-step program. Ironically, Edelman helped write the WOMMA ethics code.

Web 2.0 Growing Faster Than Online Video, News – This is an excellent roundup of trends in social media properties from the ad:tech conference. One surprise: Feedburner is the fastest-growing Web 2.0 site. Interesting data, also, on search engine use by Web 2.0 participants. They’re much more active than typical surfers.

eMarketer: Online Video Ads To Surge 89% In '07 – Video is the next frontier. EMarketer predicts the online video ad market will approach $3 billion in 2010.

Four Industries Expected To Top Half Of Online Advertising – and they are media and entertainment, financial services, travel, and automotive. Not too surprising, really, but Jupiter expects those four industries to spend $11.5 billion on line in 2011. But Jupiter was also the company that said 35% of businesses would launch blogs this year.

Hackers, Plagiarism Claims Hit Wikipedia – It was a rough week for everyone’s favorite wiki. One researcher claims that about 1% of Wikipedia content is plagiarized. Of course, about 1% of everything on the Internet is plagiarized.

Review: Netgear's Skype Phone Keeps You Connected – In case you were wondering what to get me for Christmas…

Can Wikipedia Ever Make the Grade? – This detailed analysis of Wikipedia from The Chronicle of Higher Education moves the ball forward in the ongoing debate over trust. Basically, can a community-edited encyclopedia ever be really credible? There’s an interesting dissection of the Wikipedia culture, which is almost hostile to academic research, and the Chronicle submitted some Wikipedia entries to experts for grading (they didn’t fare so well). There’s also a reference to Citizendium, a project by a Wikipedia co-founder to create an alternative encyclopedia with formal editorial oversight.

  ¶ 9:50 AM 0 Comments

  What no one ever tells you about Blogging and Podcasting Congratulations to Ted Demopoulos on the release of What No One Ever Tells You About Blogging and Podcasting: Real-Life Advice from 101 People who Successfully Leverage the Power of the Blogosphere. My copy arrived in the mail yesterday.

Ted interviewed 101 bloggers and podcasters to find out their secrets and ideas. The book is a nice compilation of advice and must have been a heckuva lot of work to assemble. It's short (186 pp. plus a glossary and bibliography) and easy to read.

Full disclosure: I'm quoted in a two-page section called "What Makes a Great Podcast?" Although I wasn't doing much podcasting at the time I talked to Ted, it's since become a major part of my business. I've done custom podcasts for an IBM/Ziff-Davis project called Innovations, several clients of TechTarget and the SaaScon conference. You don't need a lot of expensive equipment and good podcasts get great results.

  ¶ 1:43 PM 0 Comments

  Measuring engagement in a world of distraction Relevant to my post earlier today about engagement, The Diffusion Group put out a press release about a new report called Measuring the Value of Media Engagement Against the Economics of Attention.

I'm not likely to spring for the $995 report, but the summary makes a good point that measuring engagement in an age of what pundits call "continuous partial attention" has become almost impossible. When someone is watching TV, surfing the Web and responding to e-mail at the same time, how can you tell what's engaging them? This will baffle marketers for some time to come and generate nice consulting fees for social media experts. I hope! :-)  ¶ 10:17 AM 0 Comments

  How to measure engagement? The always-insightful Max Kalehoff of Nielsen BuzzMetrics has a provocative column on MediaPost about engagement. Basically, how do you determine the value of a media outlet as it relates to bottom-line sales? He notes that some websites and blogs have massive traffic but very low click-through rates, while other sites with much smaller audiences have far more activity. Which is more attractive to marketers?

This is the rule of small markets and it's something marketers need to understand. An engaged audience is a much better target to reach than a mass market. Engaged audiences are interested and respond. They're much more likely to buy because they have a meaningful interest in the topic.

Traditional media planning has focused on broad reach with an overlay of targeting. In other words, we now buy the Cooking Channel instead of the Today show. Web 2.0 lets you find the audience of people who specifically like baking brownies. This takes engagement to a whole new level.

But, as Kalehoff points out, measuring engagement is very difficult. Perhaps there's a business opportunity there.


  ¶ 9:48 AM 1 Comments

  Corporate action is in the shadow blogosphere

I was at the Society for New Communication Research’s annual forum yesterday in Boston (congratulations to Jen McClure and her associates for a strong first-year event) and had an interesting chat with Franz Dill, who’s kind of the chief blogging evangelist at Procter & Gamble. Dill is a 27-year P&G veteran who runs an internal blog that highlights new technologies that may be of use to the business. He’s got about 1,000 subscribers to an internal newsletter and he’s encouraging other P&Gers to get on the blogging bandwagon.

About 100 of them have done so. Anyone at P&G can have an internal blog, he said. They just put up their hand and P&G gives them an account, some training and a presence on an internal portal that links to all the blogs within the company. Initial interest came mostly from the technie crowd, but word is now spreading to the business people and the internal P&G blogosphere is becoming more diverse. That’s good, because the purpose of blogging is to share information about the business.

P&G’s experiment is being played out across the corporate world, where blogs are becoming a more and more important tool in internal communications. It’s what I call the shadow blogosphere. Lots of journalists and bloggers have complained about the lack of blogging activity by big businesses. I’d guess that less than 20% of corporations outside of the tech sector have public blogs (The New PR Wiki maintains the best list I’ve seen in this area). I think there are good reasons for corporations to be skeptical of public blogging, including legal liability, compliance issues, the risk of public embarrassment and competitive sabotage. I expect big businesses to continue to creep slowly into the blogosphere.

Behind the firewall, though, there’s plenty of action. Talk to companies that sell content management systems and they’ll tell you that most of their corporate business is internal. It’s not that big businesses don’t “get” blogging. They just don’t see a compelling need to blog in public.

There are compelling reasons to blog internally, though. Dill noted that because blogs are easy to archive and search, they create a database of corporate knowledge over time. This is a resource for new employees, in particular, since they can now tap into historical information that helps them come up to speed quickly on the company. Blogs are easier to maintain than e-mail lists and they’re a great way to disseminate timely information. The idea of an internal corporate portal is great. Employees should have one place they can come to discover what information is available around the company. These portals are fulfilling the promise of intranets.

P&G is now experimenting with blogs in its supply chain. These are private journals intended for use by its suppliers and distributors to keep current with news that relates to them. That’s another great application of this technology.

It’s hard to tap into the conversations that are going on in the shadow blogosphere because companies don’t see a need to talk publicly about it. But I’m convinced that this is where the action is in corporate blogging right now and may be where it will stay for the next couple of years.

  ¶ 8:31 AM 0 Comments