This morning brought Eleanor Clift's reminiscence about 50 years at Newsweek to my Twitter feed. Those words alone seem to tell the story: Newsweek was a phenomenally successful product designed for a world that no longer exists. It was an amazing world for journalists, to hear the great Clift describe it. But it couldn't survive the new financial realities.
In the Washington Post last week, my friend Tim Lee argued that we shouldn't mourn the old world; we should celebrate a vibrantly competitive market. Newspapers made so much money in the late 20th century, he points out, because they effectively had a monopoly on most local markets (ironically, because competition for television and radio meant that most markets could support only one newspaper). That allowed them to charge a lot for ads and spend a lot on reporters. Those days are over, he says, precisely because there are now so many ways to get news:
Imagine a world where there was only one news organization in the world. Obviously, this news organization would be extremely profitable. Not only would it get 100 percent of the advertising revenue, but its monopoly status would let it demand a high price per advertising impression.
But as more news organizations entered the market, the former monopolist's revenues would decline for two reasons. Most obviously, it would have fewer eyeballs to sell to advertisers, as some readers shifted to competing news outlets. Even worse, the competition among advertisers would push down advertising rates.
That double whammy means that the profitability of the news business is highly sensitive to how competitive it is. Late-20th-century newspapers were extremely profitable because they had a lot of readers and the ability to charge a lot for each impression. Today, it's hard to make a profit in Internet news because there are so many news organizations competing for advertising dollars, reducing each publication's traffic share and pushing down the amount outlets can charge for each impression.
I think Tim is right about one thing: The last 10 years have been an extremely exciting time to be a digital journalist, because we can do so much more. Policy journalism is better than ever, because reporters can easily access data and research that would have been difficult and time-consuming to track down even in the 1990s. Digital has also allowed us to develop narrow and deep niches, instead of pitching our writing to the proverbial old lady in Dubuque. Economics and finance blogs assume a level of background comfort with technical terms and concepts that would have been impossible in the days of print for anyone except trade publications -- something I am vividly reminded of every time I write a magazine feature.
("No one wants to read this," said the editor who excised 1,000 words on the intricacies of calculating confidence intervals for small samples. I protested. He responded with a raised eyebrow, which brought me to my senses. But I bet if I'd put it on the Web, I would have gotten at least 50 comments, proving that some people -- however few and brave -- do want to read that sort of thing.)
And Tim is right that this is all to the good, however much print journalists dislike the haste of digital journalism. But he is wrong to say that this flowering of competition is the reason that so many news media outlets are in trouble. Or rather, he's right about the competition, but wrong about the source. The competition does not come from other news producers; it comes from other people selling ads. And most of those companies are not in the business of producing news.
The accompanying is a nice chart of ad spending in 2011, lifted fromthis presentation by Microsoft Advertising.
Over the next few years, they expect newspaper ad spending to decline by 7.1 percent and spending on magazine ads to decline by 8.1 percent, while digital rises 27 percent. Yet who will be getting those dollars?
According to eMarketer.com, the answer is "big technology companies." Google Inc., Yahoo! Inc., Facebook Inc., AOL Inc. and Microsoft Inc. took in almost two-thirds of U.S. digital ad spending in 2012. And the New York Post reports that Google and Facebook account for basically all of the growth in digital ad revenue; without them, according to an analyst at Pivotal Research, web ad revenue grew just 1 percent last year, even slower than our slow economy.
The problem for newspapers and magazines and websites is not that other people are in the news business. The problem is that in the days of print, a newspaper or a magazine controlled a valuable distribution channel -- its printing presses and delivery vans. People would pay a lot of money to use that distribution channel to spread news about their products and services. They owned "the pipes," as we used to call them, back in my brief summer internship as a technology investment banker. But now the cable company owns the pipes. All the media companies have is the news. And that was never a very good business to be in -- which is why it was getting subsidized by advertising copy about Chevrolets and GE stoves.
In some sense, Facebook and Google are "pipes" -- at least as long as they're dominant, they can sell a lot of ads, because they are the mechanism by which we access information. And data services such as those provided by Bloomberg LP and Thomson Reuters Corp. are pipes, because they control proprietary software. But Bloomberg and Reuters are in a somewhat unusual position: They make money because they sell people information that they can use to make money. That information has a short half-life; you can copyright a story, but you cannot copyright facts, so once information has appeared on a market data service, it propagates pretty quickly. Given the speed at which the markets move today, that really doesn't matter for market data services. By the time you have rewritten their story and posted it online, the financial value of that information has already fallen to zero.
But that's not the business that newspapers or magazines were in -- at least, not since the 1960s. They were in the business of giving ordinary people news. That worked as long as they could also sell those eyeballs to advertisers. That's getting harder and harder, because the Washington Post is no longer a pipe. Newsweek is no longer a pipe. They produce the stuff that travels down the pipes. And because the people who actually control the pipes are not willing to pay them for the content, that makes it pretty hard to monetize.
And it's getting harder all the time. Ten years ago, there was a plausible story where great news media brands transferred their advertising to the web and still got paid almost as much. That story is no longer believable, partly because of the ad inventory glut that Tim mentions, but mostly because people no longer access stories the way we thought they would. Instead of turning print Washington Post readers into digital Washington Post readers, we've turned them into consumers of stories that they find via Google and Facebook and Twitter. Saturday night, I was at an event with a bunch of bloggers and Web journalists. We started talking about the demise of Google Reader, and I turned out to be one of the few people who still uses an RSS reader every day. They figure they'll get what they need off Twitter and Facebook. I defended the usefulness of RSS, but it felt a bit like the old doctor in the period movie arguing that horseless carriages will never catch on.
So now two layers of pipes are between us and our readers. Each layer takes away some of our ability to get revenue. We can't get readers to pay us for the product, and we lose leverage with advertisers. So even as more people than ever are reading stories from the New York Times, less revenue exists to support reporting those stories. Fitful attempts to raise a paywall have stanched some of the bleeding, but they don't alter the underlying terrible economics.
Question: Why does nytimes.com allow me to read stories for free if I come in via Google?
Answer: Because search is too important a component of their traffic to cut off.
And there you have the underlying paradox of the news business: Google is selling ads against content that the New York Times provides to it for free. Those ad sales hurt the New York Times's ad sales. But the Times cannot afford to cut off Google, because then it will lose the pitiful amount of ad revenue it collects from all the eyeballs that Google sends them. It's like the mordant old economist's joke: "We're losing money on every unit -- but we'll make it up in volume!"
If the problem was competition from other news providers, it would be self-correcting (as Tim notes): Eventually, the market would shake out, and the winners would have enough money to live on. Maybe the market wouldn't be ideal -- maybe it wouldn't be able to support the kind of deep, careful reporting that wins prizes, or have reporters spending months sitting around waiting for the president to do something.
But that's not the problem. The problem is competition from people who are not in the news business. Which at least raises the possibility that they will compete us right out of existence.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Megan McArdle at firstname.lastname@example.org