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