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

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Hal Varian, the chief economist at Google 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

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