Friday, February 27, 2009

Compaine on Paywalls

Over at Rebuilding Media, Ben Compaine gives a pretty compelling breakdown of the sinking ad revenues of newspapers. Doing a little back-of-the-envelope calculation, he arrives at the conclusion
If newspapers have essentially been able to thrive on the revenue from advertisers alone (again, with cost of printing more or less covered by circulation revenue), why are they having so much trouble today? The answer is not one single factor, But a major contributor is that newspapers – whether print or digital—are just worth less to advertisers than they were 20 years ago.
It's yet more evidence that the bubble of the traditional one-way broadcast model of media is bursting. Newspapers are having a terrible time dealing with their business model failing (which Compaine gracefully remarks on, saying editors usually thrive on this kind of economic collapse, except when it's their own).

I have been under the assumption that newspapers could save themselves if they'd just pull their heads out of the sand, and go completely digital. I was working from the same calculations that Compaine noted: The revenue generated by dead tree circulation is roughly equivalent to the cost of the dead tree circulation machine. Therefore, content creation (reporters, editors) were always supported by ad revenue. Distribution was supported by circulation. With the Internet now able to entirely handle distribution (and generate ad revenue), just remove the cost of paper distribution and a newspaper is back in the black. I largely attribute resistance to this idea as some combination of legacy thinking:

1) We're a newspaper! We have to print! They feel that they will lose relevancy if they aren't on paper.

2) Newspaper folk are largely left of center, and the idea of creating mass layoffs on the distribution side of the house is so unpalatable to them that it is unthinkable. They'd rather "go down with the ship" (a la Tribune, Rocky Mountain News, Philidelphia Inquirer, San Francisco Chronicle).

3) Content-generation and distribution are inseparable. This is the crux of the issue for all traditional media. (Just ask the RIAA). Once they lose control of distribution, they lose the monopoly they've held on the monetization of information. This is the bubble that's bursting for television, music, and newspapers.

But yesterday, William Rattray and I were discussing this topic, and something useful fell out of the conversation: The writing in newspapers simply isn't as relevant as it was 20 years ago. Everything has become an opinion piece, and papers just aren't as essential as they once were to the reader, since we're all making our own opinion pieces now.

Then Compaine hits me with this revelation:
Between 1989 and 2007 local cable advertising increased from $500 million to $4.3 billion—or from 0.4% of all advertising to 1.6%. Advertising in newspapers fell from 26% to 15% in this period. Although some of the highly local advertisers going to cable may have taken some of their funds from budgets for radio or other local media, it is probable that a significant share came from the hides of newspapers. I estimate perhaps up to 20% of the decline in local newspaper advertising share can be attributed to local cable spots.

So newspapers are losing ad revenue in traditional markets to local cable spots, and at the same time, don't have the leverage they used to with online editions, because online advertising is so much more efficient than print advertising. Newspapers can't charge for targeted online ads what they once charged for blanket ads based solely on circulation numbers. Online ads have far better metrics, so advertisers can see their ROI (or lack thereof) much better online.

This leads to Compaine's conclusion:
...even an all-digital newspaper may have trouble supporting its economic model with online advertising.
Maybe traditional papers really don't have any way out...

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