Saturday, November 27, 2010

Once more, with feeling

There are myriad, mostly mythological, explanations for why the American business model for journalism -- successful for generations -- is undergoing wrenching change.

The Internet, of course, is perceived as the main culprit. The problem with this is that technology by itself changes nothing -- how consumers and businesses respond to technology is what matters. But there are deeper, more systemic issues at play here.

In their recent book, The Changing Business of Journalism and Its Implications for Democracy, two Oxford University professor draw some conclusions that will be familiar to readers of this blog. The most striking is that the over-reliance on advertising revenue by U.S. media -- particularly newspapers and magazines -- has been as much to blame for current business troubles than the Internet.

In Europe, as both this book and previous studies I've noted before point out, only 50 percent of newspaper revenue comes from advertising, compared to 80 percent in the U.S. In many parts of Asia, the ratio is the reverse of the U.S. -- 20 percent of revenue comes from advertising and 80 percent from the sale of the produce to consumers.

Why is this important? First, a huge reliance on advertising sales in essentially monopolistic markets created enormous profit margins for newspapers -- often approaching or exceeding 40 percent. This sort of return eventually led to the creation of enormous newspaper chains that were less invested in the communities served by their newspapers than they were in ensuring increasing returns to shareholders.

But probably more important is that higher cover prices charged and received for newspapers and magazines in Asia and Europe made the news seem less like a commodity and more like something of real value. Of course, particularly in the U.S., the information-as-commodity trend really hit its stride when newspapers put their information online for free beginning 15 years ago.

Here's the book's "nut graph":
While the industry has certainly suffered severe declines in revenues in several countries in recent years, the latest downturns seem to be more closely connected with the relative degree of dependence on volatile revenue sources like advertising and on the differential impact of the global recession than with the spread of the internet.
To be sure, it's oh-so-tempting to reach for simple solutions to complex problems, and the evolution of journalism business models is enormously complex. As the authors note, European models tend to include a high public sector investment (tax subsidies, taxpayer-funded journalism of various sorts) that would never fly in the U.S. -- and rightly so. But, as earlier research has shown, most European and Asian newspapers adopted some sort of online subscription model years ago while U.S. newspapers continue to wring their hands and take baby steps.

As advertising platforms continue to fragment, there's one thing that is remaining constant -- 1,400 daily newspapers in the U.S. continue to provide the best journalism available, and most of those papers are so dominant in their local markets that there continues to be little real competition. What this suggests is that newspapers should ask for more, not less, from their subscribers and not expect the old 80/20 advertising-to-subscription revenue ratio to hold up. Total print circulation numbers may continue to fall, but combined print and online readership and total circulation revenue should continue to rise.

There are really only two things for certain: 1) Clinging to the old model won't work. 2) Giving valuable news and information away in the impossible hope to make up for the lost subscription revenue through increased ad revenue won't work, either.

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