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Memo to Newspapers: Incremental Change is Not Helping

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Making the transition from being traditional print publishers to digital-first media outlets hasn’t been easy for newspapers — in fact, many have stubbornly resisted, and tried to dip their toes into digital waters gradually without investing any substantial effort or resources. As media analyst Frederic Filloux pointed out in a post yesterday at The Monday Note, this strategy (or lack of a strategy) is turning out to be a slow-motion train wreck. As author Clayton Christensen described in The Innovator’s Dilemma, it is almost impossible to cope with market disruption by making incremental changes, and newspapers are a perfect example.

Filloux uses financial results released last week by The Washington Post (s wpo) to make the point. In some ways, the newspaper company is a lot better off than many other other media entities, because it generates a lot of revenue from its educational arm — more than 60 percent of the company’s revenue comes from it, as well as 60 percent of its operating income — which creates a nice cushion for its newspaper business. And that business needs all the help that it can get, Filloux notes, because advertising revenue for the paper side of the business has continued to decline at a rapid rate, and even though online revenue has grown, it hasn’t even come close to making up the gap. This is the “digital pennies in exchange for print dollars” problem:

As Filloux points out, the math in this graph is not pleasant: over the last seven years, The Washington Post has lost five dollars in print revenue for every dollar that it has added in the form of online ad revenue — losing almost $90 million in print revenue while its online business has grown by less than $20 million. Other newspapers may have somewhat different numbers, but the trend is likely to be very similar. And Filloux correctly diagnoses the main reasons for this online-revenue problem:

  • Too much free content, which has diluted the value of editorial brands like the Washington Post.
  • The rise of competitors such as The Huffington Post, which have taken advantage of digital technology to build audiences at much lower cost.
  • The downward pressure on ad prices created by the explosion of content, as billions of pageviews depress the market for banner ads.

The dilemma for newspaper companies is that incremental change is not really helping them adapt, or as Filloux puts it: “mere adaptive tactics won’t save the traditional news industry in their multi-front war against disruptive technologies.” The Washington Post has done as good a job as any paper of trying to build a business online — online accounts for 43 percent of overall revenue, up from just 10 percent in 2004, according to the figures that Filloux quotes — but overall its business continues to decline because online ads are worth so much less than their print counterparts.

There are no signs that this is going to change any time soon — if anything, online advertising just keeps getting cheaper (newspaper companies are forming private ad networks, but this seems both too little and too late) and that means newspapers are fighting the law of diminishing returns.

So what is to be done? Many companies, including Rupert Murdoch’s News Corp. (s nws) and the New York Times (s nyt), are trying to fight a rear-guard action by putting up paywalls to protect some of their print revenue, or pinning their hopes on iPad apps and subscription revenue, despite Apple’s 30-percent fee for doing business on its platform. Filloux, however, argues that “radical re-engineering is needed,” and I think he is right — print may still be producing a large proportion of revenues for newspapers, but it is also the source of a large proportion of the costs at any traditional media company, and that spells doom if you are competing with digital-only publishing outlets such as AOL (s aol) and Yahoo (s yhoo).

The radical restructuring that Filloux describes, which involves a much smaller newsroom, lower costs and a digital-first approach to publishing, sounds very much like what Journal-Register CEO John Paton is trying to do with the company he took over last year after it emerged from bankruptcy. Above all, Paton says, media outlets need to become digital-first, because the print side is only dragging down their businesses and preventing them from being as competitive as they should be. So far, that’s a message too few traditional newspaper publishers have heard.

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Post and thumbnail courtesy of Flickr users Sandy Honig and Zarko Drincic

12 Responses to “Memo to Newspapers: Incremental Change is Not Helping”

  1. Chanson de Roland

    Newspapers do need radical change to adapt to the digital age, but their problems are much more ones of law than of business models. In devising and promulgating the Copyright Act, Congress addressed the concerns of protecting an author and, in the case of newspapers, a publisher’s value in its/his (author) work in an age prior to the Internet. Before the Internet, protecting against infringement of an author’s exclusive right to make reproductions of his work, while being a legally enforceable rights, was protected not so much by law as the prohibitively high costs, transaction costs, of making copies. The federal courts were there to mostly protect an author’s right in the rarer instances where transaction costs weren’t enough or where an infringer tried to get cute by making a derivative work that he would try to pass off as his original work. Before the Internet, the Copyright Act, as interpreted by the U.S. Supreme Court (the Court) and its subordinate courts, worked pretty well to protect an author’s rights and thus, the value of his licensed copyright.

    A word about newspapers, which are a special case. For fully creative, usually meaning invented works of expression, the Court and the Congress grant the full protection of copyright. However, with news reporting the Congress, in an effort to avoid giving anyone a monopoly on the news, abrigded the rights of news publisher, who did original reporting and others who did re-reporting, by eliminating certain rights to relief, and the Court reinforced that lessening the protection the news publishers have under the Copyright Act. To wit: Congress deprive everyone, including news publisher, of any claim sounding in the law of equity, and the Court held that anything other than virtually verbatim reproduction would not be an infringement of copyright in the sole context of news reporting. And, of course, there are Fair USE exception, but FAIR USE arguably wouldn’t apply to defeat a claim in equity, at least where re-reporters are generating revenue by re-reporting the news of news organization that do the original reporting.

    Then along comes the Internet, and it greatly impaired, if not destroyed, a news publishers rights in and ability to profit from its work. The Internet lowered the costs reproduction, the costs of copying, to nearly zero and made it much more difficult to identify and punish infringers, even where a publisher would have a claim of infringement, which, under current law, it/he probably doesn’t. The Internet also dramatically lowered the cost of distribution for copiers. Combined those facts with the Court’s precedent on copyright for publishing news, and publishers are screwed: They originally report news at great expense and sometimes at great personal risks to their reporters (e.g. Laura Logan), yet others can now take their original reporting, make easily done changes in wording, and sell it for ad revenue without paying the publisher, who originally reported the news, anything.

    The proposed changes in businesses models that so many in new media, especially those, like the Huffington Post, that get most, if not all, of their ad-revenue-generating content by misappropriating others’ original reporting, won’t, indeed can’t, work. While digital publishing lowers costs, printing all the news that is fit to print and/or all the news that citizens of a democracy need to manage their affairs, sensibly pursue their legitimate interests, and discharge their civic duties is a vastly expensive enterprise, which can’t be supported by any new media business model, as long as the work of original reporters can be had pretty much for free, and with those original reporters having no effective remedy in the courts.

    Therefore, the radical change that publishers of news need is a radical change in the Copyright Act so that they can protect at least the value of their work, while not depriving others of the right to discuss and re-report the news for free. Congress can do that by repealing Section 301 of the Copyright Act so that publisher of original reporting will at least have equitable claims against others who re-report for profit. The Court and its subordinate courts can and will protect against anyone, e.g., Rupert Murdoch, acquiring a monopoly in the news.

  2. Matthew, I think your recent statement about book publishers applies to newspapers too- it’s time to wake up and smell the disruption.
    The resistance of legacy media to becoming digital-first means that extremely valuable journalists are being forced out of the field by shrinking revenues and slashed newsroom budgets- right now. Successful new models are needed sooner rather than later.
    There are a lot of companies throwing out solutions right now, and hopefully one will take. Personally, I’m expecting great things from Repost.Us, the new monetized instant syndication platform from my employers, Free Range Content, Inc. Repost.Us is an iTunes style solution, breaking the news unit down to the article level. These portable, monetizable content units create value for high-quality long-form content and flagship publishing brands. Instant syndication means legacy brand content goes wherever the readers are, rather than the publishers struggling to draw readers to their sites.
    We’re working with a variety of content creators, including those like Spot.Us who are themselves experimenting with new approaches to funding quality journalism. It’s my greatest hope that the widespread efforts being focused on finding a new business model for journalism will coalesce into many solutions, and that ours will be one of them.

  3. Matthew, these are good points, well made but i don’t think they are anything new.

    Every newspaper executive is living and breathing these threats and challenges. It is easy to sit on the outside and criticise them, but it is a really tough challenge to address. They know the world is going digital, but two thirds of their revenue is still in print. They have no choice but to manage this decline and squeeze as much money as possible out of the business they know and understand. They would love to reap the benefits from going digital, but as you rightly point out the revenues available don’t come close to the ones they are losing. Closing down the print operations won’t make the advertising rates go up or change the public’s willingness to pay for online subscriptions.

    The newspapers have not helped themselves in the way they have blamed everyone but themselves for their demise (Google, bloggers, content aggregators, content pirates, Arianne Huffington, etc). Their whinging has lost the sympathy of the media and a lot of the internet-using public. However I do think recognition needs to be given to the scale of the threat they face and the huge risks that they will have to take to become digital.

  4. pixelgeeek

    Your post (and the comments attached) are all very interesting – however…

    You treat the concept of going “digital only” as if (in itself) it were the Holy Grail. To imply that “If those dinosaurs in traditional publishing would only pull their heads out and turn everything digital the world would be a profitable place again” – magically – is unrealistic.

    Bad news guys… it isn’t just switching platforms that will make content creation profitable again. It is – As the referenced Clayton Christensen might point out – changing the business model/s based on the change in consumer behavior – “What job does the consumer need done?”

    Don’t drop print – change it. Make it more relevant in the lives of the consumers. Print has its place. It is a unique and powerful tool for consumers, advertisers and publishers. It just isn’t the ONLY tool anymore. No matter how much reach an article on Huff Post has… It still doesn’t carry the credibility of a printed article. Especially in a local/regional community. Niether do local or regional TV stations or their websites.

    (Ask yourself – If you told someone you were mentioned on Huff Post – sure that is good – But if you told them that you were written up in The NYT. Which has more credibility? It is much harder to be “in the paper” than mentioned “on a site”.)

    Don’t go all digital just for the sake of being digital – Use its reach and traffic numbers to create value. Not only will advertisers want to be there (because it works for them), but so will consumers.

    If you have consumers… what ELSE can you sell them while they are there? Make money the old fashioned way – monetize your (foot) traffic in your “store”. (In the old days… Print used to call this – The Classified Ads – and it was where the true money in print was).

    AKA – Make your digital offerings relevant in the lives of the consumers – and while they are there – then get them to buy a discount coupon, or purchase products in your sites online “store”. Or even sell them a subscription to premium content not available anywhere else.

    It begins with understanding EXACTLY what are consumers using handsets for when it comes to content consumption. What EXACTLY are they using tablets for? Websites? TXT’s? Geo fenced push? Digital out-of-home? Apps? … (Re Clayton again – “What’s the job to be done?”)

    Having teased the Digirati here enough – IMHO your article does still point out the remarkable lack of change that traditional print houses have shown. But really. Do you think that a company who makes millions of dollars on a product, and employs hundreds of people doing it, can just simply turn on a dime and “cut off their arm” by going towards new technology alone? It isn’t that simple. Change of that nature (with the responsibility of hundreds of jobs at stake) requires viable new business models – not just technology for the sake of technology. Technologists need to grow up.

    Read Clayton’s book and you will see plenty of case studies about how well run companies simply were unable to adapt to disruptive change. It’s like saying – “In order to survive – you need to grow your arm longer.” They may be all bought in… they may REALLY want to grow their arm longer… but they just don’t have the capability to do it.

    Saying to them, “Well – just invest in this or give up that” doesn’t solve the arm growth problem – it (like the troubles vexing traditional print publishers) is a neophytes way of seeing/solving a bigger problem – reinvention of business models and products that have worked for over 150 years.

  5. When the last member of the current generation of newspaper executives retires, the industries slow death by a thousand paper cuts will end.

    Eastman Kodak’s failed attempt to slowly transition from analog film to digital sensor technology should have served as a warning to print publishing companies. Digital publishing has to be ramped up quickly and become the primary business; print publishing needs to be become secondary.

    The only way to accomplish this is to quickly invest more money, time and people in online publishing and ramp down print editions. These companies should have done this already by producing more polished print publications just one day a week instead of seven.

    Radical, yes. But it results in the very same end game that is destined to occur anyway AND it would allows their digital publishing businesses to gain a quick foothold. As it is now, most of the traditional print publishing company’s Websites are being rendered all but irrelevant by new, smaller and more nimble digital publishing companies that don’t have to support old-fashioned paper editions.

    It may be too late for most daily newspaper companies already.

  6. Thanks for the post!

    The points you make are unfortunately (or fortunately) true. This could be seen as a good thing to encourage companies to be more innovative in how they approach business but detrimental in how much time it would take to develop these ideas.

    A great company that blends the technology and print well is a Michigan company You should check them out!


  7. Thanks for the post.

    The points you make are unfortunately (or fortunately) true. Pending on your perspective this could be a good thing in order for print companies to be more innovative in their approach to business or detrimental because of the time it takes to experiment and find these innovations.

    A great news company that blends the technology and print well is a Michigan company ( make sure you check them out!


  8. “Too much free content”

    As a subcategory, competition from TV stations. They have stories, text, video, classified ads and even televised obituaries, all of which are free and there are typically more local TV stations in an area than newspapers.