Thursday, July 30, 2009

The Internet, underpants, and everything

NOTE: This was originally written in 2005. I've updated it regularly with new thoughts, data, and quotations. The gist of the column remains unchanged. Should it eventually require a complete rewrite I'll re-post it as a new piece. Latest update: March, 2010.

The Internet is different, don't you see;
It's the place where information wants to be free!
-- Original rhyming couplet by Roger Plothow
A warped look at where newspapers and the Internet stand more than a decade after we met, staring awkwardly across the dance floor.

What the geniuses are saying
“At established media companies, the web sucks up a lot of staff, management interest and money with little to show for it. Skyrocketing eyeball numbers are great, but when there is no meaningful revenue attached to it, it's a parasite. As long as aggregators can take all that work for free and sell search ads - the only type that are working - the environment will not improve. Readers won't pay and advertisers won't pay. Hardly a business model.” -- Anonymous comment on the New York Observer web site

“You’re never going to get the traffic that really matters. So it’s a traffic thing, but also, how do you monetize the traffic that you have? It’s impossible.” --Publisher with Condé Nast

Web users will have to pay for what they watch and use, says Barry Diller, the media and technology executive whose company runs the search engine and the dating service. It’s “mythology” to view the Internet as a system of free communications. "It is not free, and it is not going to be," he said.

“Traffic growth simply doesn't matter. Period. What matters is revenue.” --Andrew Schmitt, Nyquist Capital
The answers remain elusive
There's a classic South Park episode starring the Underpants Gnomes in which the gnomes steal underpants and collect them in huge quantities, under the assumption that having a large quantity of anything somehow magically results in profits. This is how newspapers have treated the notion of web traffic. (Interestingly, some folks now think Twitter is following the same business model.)

There is no indication that the elusive sustainable online business model for newspapers of our size is ready to show itself. Newspapers and other local web sites are using no fewer than a dozen advertising alternatives, from horizontal and vertical banner ads to paid search contextual advertising to interstitial and video ads. Those same web sites are using nearly as many different ways to charge for advertising – pay-per-click, flat fees, etc.

Most ad managers for newspapers that have free access sites acknowledge that revenue growth either slowed or stopped altogether. In most cases, this includes an allocation of print classified revenue, and it doesn’t take into account (because it can’t be calculated) whether the newspaper has lost both circulation and print ad revenue by putting its news content online for free.

Many also have signed agreements with regional or national companies to vertically integrate their online advertising and/or news content. This is making big money for the aggregators (Google, Yahoo, Monster, etc.) but precious little for individual small newspapers. It makes a little more sense for larger newspaper companies that can aggregate the revenue. Only recently have the producers of this news -- the Associated Press, Rupert Murdoch, and others -- begun questioning whether Google is a good partner.

The Internet currently accounts for about 8 to 10 percent of total global advertising spending, or about $40 billion out of $450 billion. That percentage is growing every year, of course, but it remains a small fraction of the total and the growth rate is shrinking (theses numbers are aggregates of various studies). It’s likely that the percentage is smaller – much smaller – in isolated markets like ours where opportunities for aggregating revenue for contextual searches and banner ads on global sites are nearly non-existent.

Where we are

For starters, we’ve not been static and our web site isn’t inconsequential. We get 3,100 unique user sessions a weekday on, which help account for more than 900,000 page views per month, when all of our various sites are combined (including classified, obituaries, real estate and Marketplace).

Before going on, allow me to note -- traffic numbers don't mean very much. They're notoriously unreliable and they don't translate directly into advertising dollars, particularly in small markets. In her blog "Daily Patricia," Patricia Handschiegel draws a smart distinction between traffic and audience:
"What a lot of companies are secretly finding out is that traffic does not mean there is an audience, and that at the end of the day, the audience is where the value is. Boasting giant page views and unique visitors means very little when those you are driving to the site are not sticking around, using it or returning."
Our continuing strategy, dating back to 1999, is predicated on the premise that by giving away their local news content online, newspapers are sacrificing the engine – paid circulation – that drives sustainable profitability. Only time will tell if that’s a sound position. If it’s not, the implication is that paid circulation ultimately will become a fond memory, no longer a component of the newspaper business model. Our secondary premise is that it’s much easier for us to go from paid to free than the other direction. If the time comes that free access is the clear business model, we can make the switch literally in 24 hours.

We are not entirely alone in our strategy. Only 50 or so American dailies use a pay wall today, but more than half our considering that strategy, many saying they will go to some sort of paid subscription within six months. More important, consumers are starting to warm to the idea of paying a reasonable fee for access to information they consider both unique and important, particularly from newspapers, according to fresh research by Boston Consulting Group.

Here's a particularly intriguing story out of Newport, Rhode Island, from Newsweek:
Spooky things began to happen this summer in the yachting mecca of Newport, R.I., shortly after the Newport Daily News hurled caution to the wind and began charging a $345 subscription fee for its online news—$200 more than for the print edition.

First, the phones stopped ringing in the paper's circulation department. Fewer subscribers were canceling home delivery of the paper, something they had been doing in droves when they knew they could get the same product for free at "Those calls have stopped," William F. Lucey III, assistant publisher and general manager, told NEWSWEEK.

But something even stranger happened: after the Web site put up a pay wall for nearly all its content, readers would brave driving rainstorms to go out and buy the newspaper. Since then, newsstand sales of the Newport Daily News have jumped by 200 copies a day. For a paper with a daily circulation of 13,000, that's a significant gain, especially since, in an era in which most papers are seeing steep declines in readership, even holding steady is a success; an increase is a triumph. "The fact that weather hasn't been fantastic makes me believe that the pay wall has had an effect," Lucey says. "We think that more people are buying the paper now that they can't get it for free online."
In Western Europe 80 percent of newspapers charge for online access one way or another, and that was in late 2007 before the more recent trend toward pay walls picked up steam. This comes from a paper written by Valerie-Anne Bleyen and Leo Van Hove at Free University of Brussells (irony noted). They wrote:
"When analysing the strategies of the 82 Western European newspapers in our dataset, we find — on a first level — that 19.5 percent of the sites are completely free, while 80.5 percent of the newspapers try to monetise (part of) their online content in direct ways. Within this second category, 28.8 percent offer only a charged–for PDF version, while 71.2 percent try to generate revenue sources in other ways (too)."
And Walter Hussman, publisher of the Arkansas Democrat-Gazette in Little Rock, concludes a great piece in a May, 2007 column for the Wall Street Journal with this summation:
“It is time for newspapers to reconsider the ultimate costs and consequences of free news.” He begins his piece by observing what we’ve been saying since 1999: “One has to wonder how many of the newspaper industry's current problems are self-inflicted. Take free news. News has become ubiquitous, free, and as a result, a commodity. Anytime you are trying to sell something that becomes a commodity, you have lost much of the value in providing that product or service.”
(Perhaps not coincidentally, Hussman runs a family-owned newspaper that defeated Gannett in a head-to-head battle for Little Rock.)

And, of course, back to my new favorite blogger, Daily Patricia, who continues to make too much sense to attract a lot of attention:
"Just because so many in business have been foolish enough to give away product that costs money to make does not mean that the monetization models that have existed, thrived and survived on platforms for decades are suddenly broken. There’s plenty of proof of this."

One need only look at Google News to understand the flip-side of this problem for us. Because so many newspapers provide their online news product for free, Google News is able to aggregate it, generate huge traffic numbers and turn contextual searches in to dollars. Meanwhile, it doesn’t generate a single piece of unique content. We’ve done all the work.

This notion seems to just now be dawning on our business’ top executives, despite the fact that not feeding the aggregators has been one of our stated reasons for having a pay wall since 2001. The bandwagon is getting a little crowded.

Advertising that has driven newspapers, radio and television for decades doesn’t seem to work online – Internet users resent the interruption far more than do newspaper readers. In fact, newspaper research still indicates that readers consider advertising content of equal value to the news – there is no other medium that can make that claim. There’s no newspaper equivalent of the DVR, but there is an online equivalent (my computer is like most – it has a program that blocks pop-up ads). So, while billions of dollars are being spent globally on Internet advertising, only the large aggregators are making real money. Local web sites have not settled on a workable advertising model.

Newspaper advertising is different than that for other media. The aforementioned Hussman agrees: “It turns out that a Web site is a very different medium from a newspaper. While consumers often find pop-up ads a distraction and banner ads as more clutter, readers often seek out the advertising in newspapers.”

For independent newspaper companies like ours in isolated but healthy markets, the Internet’s impact will evolve over a generation or more. In some ways this is trickier than dealing with a sudden shift – we must manage the process of change, gaining expertise in new media without reducing our expertise in print (the “fiber media”), particularly since print will likely provide the majority of our revenue and profit for the foreseeable future. Pick your metaphor – we’re walking a precarious path with one foot in the analog world and the other in the digital one.

Newspapers in large markets replete with free-access general news web sites are at the highest risk and are suffering the most from online competitors and shifts in readership habits. This isn’t to say it hasn’t affected us – it has and it will. But we’re in an enviable and strong position and must learn to adapt as the market demands it – not before and certainly not after.

Tim Rutten, media columnist for the Los Angeles Times, summarizes the likely future pretty well:
“Look, there are going to be newspapers around for a very long time, but the successful ones are going to be hybrid news organizations in which there's some sort of amalgam of print and online presentation of the news. It's clear that there are going to be some things we will continue to do best in print, some things we're going to do for our readers online on a 24-hour basis.”
What to do now?
One of the strategies that has not been pursued aggressively enough by our industry is differentiation. As unfiltered “information” expands online, we can offer added value by applying proven journalistic standards to how we operate on the Internet. Our value will be enhanced as we maintain our position as a credible source of information. We can’t be too local, but we must practice journalism.

There's no arguing that the Internet has removed a major obstacle to local newspaper competitors. But delivery was never our main ace in the hole -- it has been, and is more now than ever, journalism. Citizen journalism is an interesting idea but not the basis for a business model. Real, passionate, local, expertly practiced journalism differentiates us from our rivals, from TV web sites to those coming from someone's basement.

Differentiation is not just a journalistic issue. “We've had a lot of scams off of Craigslist,” said Detective Gretchen Ellis, Tacoma Police Department, talking about the recent infamous case in which a Craigslist ad led to the complete ransacking of a vacant house. “We've had prostitution things happen, rental scams, fraudulent activity. In this case, it appeared the items were going to be given away, but they were not.” This presents us with a tremendous advertising opportunity – there is still a place for trained human intervention. Of course, then there’s more tragic case of the Craigstlist killer.

There’s a growing theory that newspaper web sites aren’t necessarily about advertising revenue but should be used simply to draw younger readership to the newspa… um, the news thingy. This assumes that instead of cannibalizing the newspaper’s circulation, it enhances it. There is some data to suggest this is true, but it remains an unproven idea. Others promote an online-first strategy, which might make sense for newspapers and magazines seeking a national or global audience, but there's no evidence to support that approach for regional or local newspapers.

It’s telling that one of most intelligent recent comments about our business comes not from a publisher or journalist but investment banker Jonathon Knee:
“You have to focus on your competitive advantage, which is local. When the smoke clears, the local newspaper, which may not be the sexiest part of the newspaper industry but is overwhelmingly the largest and most profitable part of the industry, will be a smaller and more-focused enterprise whose activities will be directed to those areas where their local presence gives them competitive advantage and they will continue to generate as a result better profits than the supersexy businesses in the media industry asking for government or nonprofit help like movies and music.”

Why we should embrace online circulation

John Gottschalk recently retired as chairman and CEO of the Omaha World-Herald, a partially employee-owned newspaper (with some sister papers in the company) that enjoys one of the highest market penetrations in the country. His advice on the paid versus free issue:
“We are, de facto, the originators of most of the news in our region. Our franchise is unique. Regardless of distribution channel, relevant, timely and valuable content is the arbiter of the free or paid question.

“If a newspaper publishes a lot of easily available, non-exclusive material from other sources, and in general, a mediocre report for its readers; it will be difficult for readers to find sufficient value in that content to sustain their patronage. When they quit reading, the newspaper platform loses its power as the best medium for advertisers.

“Content is king in my book – regardless of distribution channel. It escapes me why anyone would allow the use of valuable, exclusive, costly, unique and presumably credible content by some other organization that will just beat you over the head with it as a free enhancement to its advertising platform.

“Giving content away is bound to shrink market dominance and ultimately lead to the loss of uniqueness that sustains the readership needed to stay in business. Our business is, after all, advertising distribution, and it requires the presence of a significant number of ‘consumers.’ It is the unique content and character of a newspaper’s report that enables the success of the advertising platform.”
A bold look at traffic
Most people still think it’s important to drive traffic and the money will eventually, magically follow, even though there’s no evidence to support that theory after a decade of online news experimentation. However, there’s increasing agreement that we’d like to turn back the clock 10 years and charge for access as part of an online business model. Alan Mutter has called the free online content model newspapers’ “original sin”.

As part of a value-added ad package bundled around print, online advertising for us and our clients potentially has some modest benefit. Otherwise, there may not be much. So, let’s maintain a web presence, reduce our investment of time and other resources, and put out a damn good paper that reaches the broadest possible market.

The key is this: If we don’t put out a “newspaper” regardless of the medium on which it ultimately gets “delivered” that contains compelling, necessary, unique information that local readers need to have, none of our strategies will matter. Content (news and information, including advertising), is, indeed, king.

And finally…
Industry pundits, all of whom have been at least partially wrong right from the start, need to begin each analysis with this acknowledgment: Newspapers of 100,000 circulation and smaller are almost always a different matter than the 100 or so (out of 1,400 total) that serve larger markets. Like most smaller newspapers, the Post Register produces more local content in a day than our broadcast and print competitors produce in a week. We have the largest newsroom in our half of the state. We are the best in the world at covering eastern Idaho, and we ought to act like it. That’s what sets us apart from any other medium and what sets 1,300 other local newspapers apart from their competitors. For heaven’s sake, apply a simple value principle to what you do.

1 comment:

  1. Exactly right, thank you. we've been beating that drum for the past 8 years.

    Our site is set up to tease the reader into subscribing to our e-Edition and to help new potential advertisers find us and to help our current advertisers reach more readers.