Publishers and the Pursuit of the Past

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David Chavern, the president and CEO of the News Media Alliance, a trade association representing 2,000 North American newspapers, has an op-ed in the Wall Street Journal that I’m going to take a longer-than-usual excerpt from:

The rapid growth of digital connectivity has pushed demand for information to unprecedented heights. Never in history have so many people consumed so much news. This is a boon for democracy. Although reporting is often an irritant to those in power, high-quality news and analysis is essential to any political system that depends on giving citizens the facts so they can draw their own conclusions.

The problem is that today’s internet distribution systems distort the flow of economic value derived from good reporting. Google and Facebook dominate web traffic and online ad income. Together, they account for more than 70% of the $73 billion spent each year on digital advertising, and they eat up most of the growth. Nearly 80% of all online referral traffic comes from Google and Facebook. This is an immensely profitable business. The net income of Google’s parent company, Alphabet, was $19 billion last year. Facebook’s was $10 billion.

But the two digital giants don’t employ reporters: They don’t dig through public records to uncover corruption, send correspondents into war zones, or attend last night’s game to get the highlights. They expect an economically squeezed news industry to do that costly work for them.

The only way publishers can address this inexorable threat is by banding together. If they open a unified front to negotiate with Google and Facebook—pushing for stronger intellectual-property protections, better support for subscription models and a fair share of revenue and data—they could build a more sustainable future for the news business.

But antitrust laws make such coordination perilous. These laws, intended to prevent monopolies, are having the unintended effect of preserving and protecting Google and Facebook’s dominant position. The digital giants benefit from legal precedent against collective action that has a chilling effect on publishers. Yet each newspaper or magazine on its own has only limited negotiating power.

Chavern’s solution is twofold: one, that regulators should do a better job of enforcing antitrust laws against Google and Facebook, and two, that Congress should grant publishers a safe harbor to negotiate collectively with Google and Facebook.

That a safe harbor is necessary to negotiate collectively was made apparent in the Apple ebooks case; while reasonable people can disagree as to whether or not Apple was rightly found to be guilty, no one disputes that the publishers colluded to raise prices, a per se violation of the Sherman Antitrust Act.1

Aggregation Theory Redux

That publishers feel the need to pursue the same strategy is driven by the reality of Aggregation Theory. To quickly recap, in a world of abundance, as long as the aggregator controls demand, suppliers have no choice but to commoditize themselves according to the strictures of the aggregator, which is another way of saying that suppliers have no choice but to engage in perfect competition. This is extremely ruinous for publishers in particular:

  • In a perfect market, the price of an undifferentiated commodity will be its marginal cost
  • The marginal cost is the cost to produce one more item (as opposed to the total cost, which includes the fixed costs necessary to create the item; those fixed costs, though, are already spent whether or not an additional item is created)2
  • The marginal cost of a digital item is zero, which means in a perfect market the inevitable price of a digital item is zero

In short, aggregators are market makers, and the markets they make — thanks to the aforementioned lack of distribution costs and transactions costs — are pretty darn close to perfect, particularly in the case of purely digital goods. The problem is that publishers have huge fixed costs, even if you ignore old world infrastructure like printing presses and delivery trucks; specifically, publishers have to pay salaries, but those costs, by virtue of being fixed, not marginal, have zero impact on a publication’s pricing power in a perfect market.3

The end result is dire for newspapers in particular: in commodity markets the winning companies have superior cost structures, which means they can sustainably sell at the market-clearing price; newspapers, though, by virtue of being built for a world of print, will never have the cost structure or mentality to succeed in the long run.

Thus this solution: Chavern and the big publishers want permission from Congress to escape the perfect competition fostered by Aggregation Theory via collusion. The theory seems to be that, were the 2,000 newspapers party to this proposal able to present a unified front, they could force concessions from Google and Facebook that would make their businesses viable.

News Versus Advertising

There’s just one problem with this analysis — and that problem extends to Chavern’s proposal as a whole: it’s based on a myth. Specifically, newspapers have never succeeded by selling news, a point I made explicitly in The Local News Business Model:

By owning printing presses and delivery trucks (and thanks to the low marginal cost of printing extra pages), newspapers were the primary outlet for advertising that didn’t work on (or couldn’t afford) TV or radio — and there was a lot of it. Maximizing advertising, though, meant maximizing the potential audience, which meant offering all kinds of different types of content in volume: thus the mashup of wildly disparate content listed above, all focused on quantity over quality. And then, having achieved the most readership and the ability to expand to fit it all, the biggest newspaper could squeeze out its competitors.

Too many newspaper advocates utterly and completely fail to understand this; the truth is that newspapers made money in the past not by providing societal value, but by having quasi-monopolistic control of print advertising in their geographic area; the societal value was a bonus. Thus, when Chavern complains that “today’s internet distribution systems distort the flow of economic value derived from good reporting”, he is in fact conflating societal value with economic value; the latter does not exist and has never existed.

This failure to understand the past leads to a misdiagnosis of the present: Google and Facebook are not profitable because they took newspapers’ reporting, they are profitable because they took their advertising. Moreover, the utility of both platforms is so great that even if all newspaper content were magically removed — which has been tried in Europe — the only thing that would change is that said newspapers would lose even more revenue as they lost traffic.

This is why this solution is so misplaced: newspapers no longer have a monopoly on advertising, can never compete with the Internet when it comes to bundling content, and news remains both valuable to society and, for the same reasons, worthless economically (reaching lots of people is inversely correlated to extracting value, and facts — both real and fake ones — spread for free).

A Better Solution for Publishers

I just said that “good reporting” has never had economic value; this wasn’t quite right. Rather, the articles that result from “good reporting” don’t have economic value: once published on the Internet they have zero marginal cost in a world of perfect competition. This is why publishers have to shift their mindset about their product and their market.

Specifically, publishers should be selling “good reporting”, that is, the commitment to the regular production of content that the buyer would like to see. This is a slight distinction but a critical one: successful subscription products do not sell content but rather the production of the content, and that production, unlike the articles themselves, can be differentiated and sold as a scarce product. That, though, means knowing who the buyer is: it’s not advertisers, but rather readers.

Moreover, this approach addresses the Facebook and Google problem: the issue with Aggregation Theory from a supplier perspective is that the aggregator owns the consumer relationship; however, because Facebook and Google are advertising companies, they are not even competing in the subscription market. They, like advertisers, only care about content that has already been produced, not how it came to be.

In fact, this is the single most ridiculous part of this proposal: one of the issues Chavern wishes to collectively bargain with Facebook and Google about is “better support for subscription models”. In other words, Chavern wishes to bring in Facebook and Google as an aggregator in the one market — subscriptions — where newspapers actually have a viable business model.

It’s easy to envision how this could play out: Google and Facebook set up subscription offerings for publishers, eventually create the bundle of the future, and, by virtue of owning the consumer, skim off most of the profits, leaving publishers desperately pursuing page views to get their minuscule share of revenue. Sound familiar?

The fundamental issue is this: there is a business model that works for publishers, but it requires a dramatic shift in mindset and the long hard slog of building a business. That means understanding what customers want, building a product that appeals to them, reaching them, moving them down a sales funnel, and retaining them. What it does not mean is the suffocating sense of entitlement and delusion that underlies not just this proposal but the majority of commentary from newspapers themselves that expects someone — anyone! — to give journalists money simply because they are important.

That’s the thing: journalism is important. It is so important that the sooner publishers let go of a long-gone world where publications earned advertising simply by existing, and actually build publications that can not just survive but thrive on the Internet, the better off society will be. And, in that fight, this move by the News Media Alliance is actively hurting the cause.

  1. Apple was ruled to have been a co-conspirator which meant they were per se guilty; the company argued their relationship with the publishers was a vertical one, which would have led to a rule of reason analysis that I suspect would have exonerated the company. I wrote more about the case here
  2. Technically all costs, at least in the long-run, are marginal costs; however, in the short-run, the determination of whether or not to produce one more item is based purely on the cost of that item alone; a useful overview of the difference is here
  3. Salaries are fixed costs in terms of producing one more article; they are much closer to variable costs, though, than something like a printing press