Google’s chief economist understands media better than some industry executives do

30 Comments

Hal Varian, the chief economist at Google (s goog) and a former MIT professor, isn’t a practising journalist and has never run a media company (unless you see his current employer as one, which many people increasingly do). But he knows a lot about information theory and network effects, and he made it clear during a recent presentation in Italy — where he received a journalism award — that he has a better grasp of what those two factors are doing to the media industry than many of those who run media companies.

In his presentation, Varian not surprisingly focused on the economic aspects of the journalism and media business, and his first point was very much in line with one that British journalism professor George Brock made recently: namely, that the internet is not to blame for killing newspapers or even causing the majority of their decline. In terms of circulation, that has been going on for some time — since long before the internet started to become a factor:

“In the US, newspaper circulation reached its peak in 1972 and it has been all downhill ever since. Experts agree that most of the decline during this period was due to competition from broadcast TV news and cable news, with the internet contributing only in the last few years.”

The internet is superior to print

newspapers

It may not be something that traditional print-media supporters like to hear, but Varian also argued that the internet is simply “a superior way to distribute and read news.” Over half the cost of producing a newspaper is wrapped up in printing and distribution, he said — and on the reader’s side of the equation, publishing online provides a host of things that print doesn’t, including hyperlinks. It provides, he said, “the emotional immediacy of TV along with enhanced interactivity, personalized content and the analytic depth of the printed word.”

Varian also noted something that I and others have tried to argue for some time — that newspapers have never really made money from news, and so the idea that they can suddenly flick a switch and start charging for their news content online (or that some kind of “original sin” was created by not charging for it in the early days of the web) makes no sense. The news business was always cross-subsidized by classifieds and stock listings and the travel, section, Varian says, something media theorist Clay Shirky has also pointed out a number of times. That cross-subsidization doesn’t work as well online:

“Traditionally, newspapers made money from ads in the finance section, home and garden, automotive, entertainment, travel, classified and fashion sections. Why? Because that’s where advertisers could target readers interested in those subjects. But what sorts of ads can a newspaper show next to a “pure” news story on an earthquake in Haiti or a bombing in Baghdad? “Pure news” has very high social value to interested readers, but has low commercial value due to the difficulty of showing contextual relevant ads.”

Google’s chief economist stumbled a bit with some of his later points, however: for example, he argued that the main problem for media companies in the age of the internet is competition for attention (which is clearly true), but said that the only way out for newspapers was to “increase the time people spend on their content” — the implication being that the only way to generate more revenue from advertising is to boost the amount of time that readers spend on a site reading the news.

Costs have decreased, but competition has increased

As News Corp. executive Raju Narisetti noted on Twitter, this is a tad ironic coming from Google — the company whose programmatic ad products have driven down the price of all online advertising by orders of magnitude, so that the same number of pageviews or unique visitors is now worth a fraction of what it used to bring in. And as journalism professor Jeff Jarvis pointed out, it also ignores the fact that the real value in advertising online isn’t in raw numbers like time spent but in targeting those ads using data, the same way that Google does.

That said, however, Varian still clearly grasps the essential elements of what has happened to media producers like newspapers: their exclusive or semi-exclusive control over the flow of news and information has vanished, and so has the premium that used to be attached to that control, both in terms of brand value and economic value from advertisers.

While the web has dramatically reduced production and distribution costs, it has also expanded the competitive playing field massively — and some of those competitors understand the web far better than the old-media companies they are competing against.

Varian doesn’t mention it, but Google itself falls into that category. Not only has the company taken advantage of what the web has done to advertising (it now makes more from online advertising than the entire newspaper industry makes) but with products like Google Now it is coming closer to filling the real-time information needs of users than many traditional media players.

Post and thumbnail images courtesy of Shutterstock / nopporn and Shutterstock / Ruggiergo Scardigno

30 Comments

boomafaat

This is the 1st time I witness a troll-free comment section on the Internet.

Gary Winters

Fact: According to the Newspaper Association of America, daily newspaper circulation peaked in 1984 and held steady for the next 10 years. Sunday circulation peaked in 1993. Both have been in steady decline since then, and this timing does correlate to the widespread acceptance and use of the Internet.

Observation: Mr. Varian notes that “pure news” has low commercial value due to the “difficulty of showing contextual relevant ads.” In the real world, the value comes from the number of eyeballs reading each section. That’s why advertisers have always requested the “A” section? Because that’s where the eyeballs are.

danielocceno

A waste conscious society might also contribute to the decline in newspaper circulation even though the paper coverage obviously has more coverage.

Paul Gillin

“The internet is not to blame for killing newspapers or even causing the majority of their decline.”

Huh? While it’s true that newspapers have been in steady decline since the 1970s, the industry has fallen off a cliff since 2006. Revenues have contracted by more than 50% in that time. Classified advertising, which traditionally carried 80% profit margins, has all but disappeared thanks to Craigslist and other free outlets.

The cost of advertising has plummeted because advertisers have so many alternatives. Search advertising is far more efficient than traditional display advertising, which is why Google is now bigger than the entire newspaper industry.

While I agree with most of Varian’s remarks, it simply wrong to say that the Internet didn’t inflict the mortal blow on the newspaper industry.

roshaven

I think the underlying problem is that we are so overloaded with information that most of us have simply turned off the news in all formats, other than reading a headline here and there or a tweet. I’m not sure that there is an “on” button. Too many talking heads, too many journalists trying to sound erudite, too much celebrity “news”, very little soul.

SocraticGadfly

Actually, it was a sort of original sin, based not only on the “TV model” but also on the American hypercapitalistic idea that ads always would and should be the primary revenue stream. Well, as online newspapers who have robust paywalls in place know, that’s not true. And, it’s going to remain not true. Digital dimes aren’t getting any fatter, and the mobile nickels that are replacing them will remain nickels for the foreseeable future. http://socraticgadfly.blogspot.com/2013/09/newspapers-are-like-automakers-suvs-and.html

Pierre

This is clearly a defense of Google’s modus operandi to suck up everything they can scan either by bot or by Maps car, and then regurgitate it in their own network. Really the internet is becoming the Ginternet. Given the huge datacentres Google deploys with the infrastructure they have invested in to deliver it. Really they are creating a platform for computing inside out. Traditional computing was personally centred and controlled by your own device. They are rapidly shifting the world to computing in their cloud. Content still retains it Intellectual Property regardless of the biased ingratiating defense Varian is presenting. Remember, computers and databases are exceptional at calulating and tracking. Its a matter of time that Google gets a harness. Pierre Little, Publisher

Tom Foremski

News is a loss leader you need something else to sell, but classified ads, etc, have been cherry picked by others without requiring a newsroom.

It’s a bit disingenuous to say news never made money because it takes Google’s role out of the blame game. It’s a little like saying movie theaters don’t make money from showing movies but from the popcorn and soda they sell.

And as for newspapers needing to make sure readers spend more time on their pages, how does that translate into more money?

For an economist, he doesn’t say much about how a newspaper business should make money. And economists are hardly a science-based or even data-based discipline. After all these years, Shaw’s quote about if you laid all the economists in the world end-to-end they still wouldn’t reach a conclusion, is true.

AFter the crash of 2008 Greenspan was pulled into Congress to answer questions and he said all his models of the economy over a 40 year period were wrong! Yet he adjusted interest rates based on those models.

I’m surprised you are impressed with Varian and his “knowledge” of the newspaper business because he certainly hasn’t demonstrated it in any way or been able to offer any insights.

jon Richardson

“Pure news” makes money for a newspaper when the reporter presents the story in a way that the reader wants to read it driving readers to the paper and than in turn finding the advertising in the paper, reporters cost the paper money by forgetting who their audience is, and not writing to them driving away the readers..

Paul Sweeting

I think there’s a difference between putting up a paywall and selling content online. The problem with most online paywalls is that they charge for the wrong thing in the wrong way. By and large, online paywalls are one-size-fits-all pricing schemes for a one-size-fits-all bundle of content. But content isn’t consumed in bundles on digital platforms, so trying to charge for it that way will have very limited appeal.

There might be a market for disaggregated news content, however, if it were packaged, priced and offered in a way that better aligned with how people actually use that content, either directly by news organizations or licensed to middlemen who provided or enabled customized aggregation, archival search, social network integration, etc.

Google itself, in fact, might make a good middleman in that regard (if publishers were willing to try sleeping with the “enemy”).

Larry North

In reading through the text of Varian’s remarks at the Milan “È giornalismo” awards, he claims that “[the costs of newspaper] printing and distribution are essentially eliminated by moving to online distribution.”

I’m sure that Varian believes that there are replicable studies with detailed calculations based on actual company data that can be used to verify this claim. However, I’ve never seen a single such study.

Most people who make this claim simply handwave away (as Varian does here with his weasel word ‘essentially’) the enormous costs that it takes to maintain a globally-distributed data network, with security, and redundancy, and high availability, supporting readers from many countries in multiple languages.

(To be sure, most of these people don’t even bother with the hand waving. Most of them are willfully ignorant of the costs such technical infrastructure needs because it undercuts large portions of their argument.)

None of what is handwaved away is cheap.

It requires servers, firewalls, load balancers, data centers, content distribution networks, and many other pieces of hardware and software. Tens and hundreds of thousands of dollars of hardware and software.

It requires replicas of this complex environment for testing and for backup. Many tens of thousands more.

It requires a commitment to regularly upgrading all of this hardware and software to keep up with volume and availability. No infrastructure can remain static and survive online.

It requires highly trained developers, testers, and administrators to keep everything running smoothly. Literally the most expensive part of the equation.

These are some of the basic requirements. There are many more.

Hal Varian: please provide valid, independent studies that help you to prove your claim. I, for one, don’t believe you.

danielocceno

I cannot access my Gmail and Google+ and Blogger for more than two weeks now. (This webpage is not available) I have a Windows 7. Does anybody know what is going on? You need their “log in” page for tech support (This webpage is not available) and they do not reply to messages on FACEBOOK. When I use the YAHOO search engine for GMAIL, I get https://mail.google.com/mail/ and “This webpage is not available”
“The webpage at https://mail.google.com/mail/ might be temporarily down or it may have moved permanently to a new web address.”

kevin r foote

Yes. The newspaper has been declining since the 70s due to broadcast and cable penetration. An interesting question, that is somewhat related, is how the internet is affecting the latter. I believe that the greater convergence of the web, TV (and print) will ultimately result in an advertising and targeting model that content producers can view, irregardless of medium. @mathewi – I would value your perspective on this.

Henry Hank E Scott

what the writer (and apparently Varian ) doesn ‘t address is that digital media largely retransmit news produced by traditional media companies. If the New York Times and orher newspaper newsrooms disappear what news will Google. (or HuffPo, Yahoo, BuzzFeed etc ) jave to deliver ?

vishwas kumar

Print newspapers need to re-invent it’s story telling methodology in the digital era. It has to re-invent itself by taking advantage of the digital’s dis-advantage! The biggest disadvantage of digital media is flood of information. It simply confuses the readers/consumers. It doesn’t get help in picking right or wrong or half-truths information. Therefore the print-media had to shift focus from covering traditional routinue stories because it is not not the first source of knowing them. Since print-media (daily newspapers) works in 24-hours cycle, it has to discard all routinue stuffs already up on digital media and focus on exclusive stories, analysis and making sense of things happening around. Basically it need to clear confusion and give a reader clarity on subjects or top news/issues etc.
If newspaper can survive tv, I am sure it can do the digital age. It just need to start re-thinking and re-inventing. And they should start doing so from their offices since most of them are controlled by corporate who are always resistance to new ideas or change. Moreover they need to see the reality and not think that the digital revolution is a fancy item. without much impact where it matters,

randybennett

I agree with Tim. I don’t understand this continuing fascination with looking in the rear view mirror. I can’t imagine there is a single media player that doesn’t know why the newspaper industry was disrupted or how the business model can no longer sustain the operation. There is no doubt that newspapers did not innovate fast enough or take the risks to disrupt its own business. I’m not an apologist for the industry, but transforming a multi-billion dollar business who’s model is broken will take more than theoretical recommendations on how to monetize, distribute, inform and engage. This is not a case of newspaper industry executives not understanding the media business. This is executives trying very hard to retain the practice of high-quality journalism while the ground continues to shift beneath them.

Mathew Ingram

I disagree, Randy — I think in many cases media executives don’t understand the fundamental shifts in the way information works, or they wouldn’t be so quick to put up paywalls, etc.

randybennett

Mathew: Look how long it took newspapers to construct “pay walls.” The wave didn’t begin until the NYT launch in 2011. I wouldn’t call that quick — it was a very considered (and resisted) strategy to shore up the underlying business. And I’m not so sure that a bundled subscription strategy indicates a lack of understanding for the “way information works.” Many (not all) newspapers have set up systems that allow them to lessen their reliance on advertiser revenue and still distribute their content to increase loyalty and exposure. Adopting a strategy to maintain profitability for a legacy business while the new business grows does not, to me, demonstrate a lack of understanding.

Syed Karim

If legacy media companies truly understood the shifting patterns in information consumption and product development, they would have built the companies that disrupted their revenue streams.

Alice Enders

Newspapers as a generic term for differentiated products is always a bad start to analysis: perhaps Google’s Chief Economist Hal Varian hasn’t noticed the huge success of Mail Online in growing traffic and ad revenues, or noticed The Guardian’s devotion to digital and traction fom NSA thanks to Mr Snowden…But spare a thought for the venerable seniors amongst our midst that still enjoy their print read next to a cup of tea and have no interest in computers or the internet.

Audrey Knox

I agree! Not a senior citizen per say, but there is something romantic about a morning paper that bringing your laptop to the breakfast table just can’t seem to take the place of.

Syed Karim

The vast majority of people under 35 don’t think there is anything romantic about reading a newspaper. Compared to digital, it’s a horrible user experience.

Tim Schreier

Admittedly, I have yet to read the entire presentation but the point you make here is fairly obvious, it is very hard to stuff a genie back into the bottle. Yes, Newspapers did not charge for content early on, the same holds true with the record industry underestimating the power of exponential sharing and doing something about it from the start. Mel Karmazin (then of Viacom, CBS and Infinity Broadcasting) held firm about streaming content and was seen as a throw back because he did not stream until there was a clear path to profitability. In some tech circles he was vilified for that stance.

I think Mr. Varian is also correct in his thesis that the Internet is a far superior distribution vehicle for News. Superior, however, for those who have access to it. But for Newspapers to complain about the shift do so at their own peril. The fact is, few have truly embraced to the capabilities of the Internet and Newspapers. That capability lies in community building according to social impact issues, causes, life events, hobbies, interests and the ability to go deeper than simply a story. I would venture to say that New Organizations have the ability to serve a much deeper and more engaged populous and serve as a catalyst not only for commerce but for tangible action. Until the organizations realize this capability and view themselves as more than an awareness vehicle, that capability will go unfulfilled. Sorry but the game has changed.

Tim Schreier
New York, NY

roshaven

“That capability lies in community building according to social impact issues, causes, life events, hobbies, interests and the ability to go deeper than simply a story.”

This would make a more interesting read, but haven’t newspapers been doing this all along? I think we are inundated with so much information that we are just turning off, off, off. I’m not sure that there is an “on” button, except when some huge tragedy occurs.

Tim Brooks

Varian is clearly supersmart, but I am sightly baffled at the exuberant write-up of his lecture: he is merely restating a series of truisms about the news industry. British newspapers, incidentally, went into decline in 1956 (which turns out to have been irreversible), the year commercial television launched here.

mark

Well of course Google doesn’t want media companies charging for their content, if they do it puts the media companies back in charge of the customer relationship and starts to cut the parasitical middleman (Google) out of the loop.

tetracycloide

On the contrary. The customer is in charge and the failure of paywalls to date demonstrates aptly that search engines is their preferred way to find news. Thus cutting off search engines doesn’t ‘put media companies back in charge of the customer’ it simply looses customers.

Cynthia & Bunny

Hal Varian has associations with both MIT and UC Berkeley but he is specifically professor emeritus at Cal.
http://en.wikipedia.org/wiki/Hal_Varian

“Hal Ronald Varian (born March 18, 1947, in Wooster, Ohio) is an economist specializing in microeconomics and information economics. He is the Chief Economist at Google and he holds the title of emeritus professor at the University of California, Berkeley where he was founding dean of the School of Information.”

I first learned of his work years ago, in 1989, when I was at Sun Microsystems and pursuing how software standards developed. He did some of the seminal work in this
area.
http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCsQFjAA&url=http%3A%2F%2Ffaculty.haas.berkeley.edu%2Fshapiro%2Fwars.pdf&ei=ZgVFUtiWDMKCiwKi8IHwCw&usg=AFQjCNGQXg0Ce5PvmetgrkJU9oiQbMg5qg&bvm=bv.53217764,d.cGE&cad=rjt

(p.s. I have no axe to grind as I am a grad of both universities)

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