Tuesday, March 9, 2010

Newspaper economics: online and offline



It is widely recognized that the news industry is facing financial difficulties, but there is little agreement about the source of those difficulties or what can be done about them. The debate about the role of the web has been particularly heated: is it the source of the problem or the source of the solution? The Federal Trade Commission is exploring questions like this through a series of workshops on the future of the news industry. At the first round in December, Josh Cohen from the Google News team spoke about how we're working with news publishers to help them attract bigger audiences and generate more revenue. The next round of the workshop kicks off in Washington D.C. this morning, and I will be speaking about the economics of news -- offline and online. I first gave this talk at the UC Berkeley Graduate School of Journalism in January and wanted to give you a summary of my remarks here.

The news industry's financial problems started well before the web came along. Circulation has been falling since 1985 and circulation per household has been falling since 1947! Ad revenue for newspapers was roughly constant in real terms up until 2005, and ad revenue per reader actually increased up until that time. Since then, the drop in advertising rates due to the recession, coupled with a significant drop in circulation, has exacerbated newspapers' financial difficulties.

In the last five years many more people have been reading the news online: About 40% of internet users say they looked at online news “yesterday.” Higher income households report even larger numbers, making online news readers a potentially attractive audience for advertisers.

However, visitors to online newspaper sites don't spend a lot of time there. The average amount of time looking at online news is about 70 seconds a day, while the average amount of time spent reading the physical newspaper is about 25 minutes a day. Not surprisingly, advertisers are willing to pay more for their share of readers' attention during that 25 minutes of offline reading than during the 70 seconds of online reading. So even though online advertising has grown rapidly in the last five years, it appears that somewhat less than 5% only about 8.2% of newspapers' ad revenue comes from their Internet editions, according to the most recent Newspaper Association of America data.

There's a reason for the relatively short time readers spend on online news: a disproportionate amount of online news reading occurs during working hours. The good news is that newspapers can now reach readers at work, which was difficult prior to the internet. The bad news is that readers don’t have a lot of time to devote to news when they are supposed to be working. Online news reading is predominately a labor time activity while offline news reading is primarily a leisure time activity. One of the big challenges facing the news industry is increasing involvement with the news during leisure hours, when readers have more time to look at both news content and ads.

What about search engines? Many readers go directly to their favorite news site, but a good fraction use search engines to access news specific news topics. According to comScore, clicks from search engines account for 35-40% of traffic to major U.S. news sites. Since most newspaper ads are priced on a per-impression basis, this means that 35-40% of major U.S. newspaper online revenue is coming from search engine referrals. That is a big fraction of online advertising revenue but, as we saw above, online ad revenue is only about 5% 8% of the total.

Furthermore, the real money in search engine advertising is in the highly commercial verticals like Shopping, Health, and Travel. Unfortunately, most of the search clicks that go to newspapers are in categories like Sports, News & Current Events, and Local, which don’t attract the biggest spending advertisers.

This isn't so surprising: the fact of the matter is that newspapers have never made much money from news. They’ve made money from the special interest sections on topics such as Automotive, Travel, Home & Garden, Food & Drink, and so on. These sections attract contextually targeted advertising, which is much more effective than non-targeted advertising. After all, someone reading the Automotive section is likely to be more interested in cars than the average consumer, so advertisers will pay a premium to reach those consumers.

Traditionally, the ad revenue from these special sections has been used to cross-subsidize the core news production. Nowadays internet users go directly to websites like Edmunds, Orbitz, Epicurious, and Amazon to look for products and services in specialized areas. Not surprisingly, advertisers follow those eyeballs, which makes the traditional cross-subsidization model that newspapers have used far more difficult.

Some have argued that the solution to the financial problems of newspapers is to charge for access. Many people place a high value on news, and there is clearly a significant social value to having a well informed citizenry. The problem is that there is a lot of competition among news providers, and this competition tends to push prices down. News sources that have highly differentiated content may be able to make pay-for-access work, but this will likely to be difficult for more generic news sources.

In my view, the best thing that newspapers can do now is experiment, experiment, experiment. There are huge cost savings associated with online news. Roughly 50% of the cost of producing a physical newspaper is in printing and distribution, with only about 15% of total costs being editorial. Newspapers could save a lot of money if the primary access to news was via the internet.

New tablet computers like the Kindle, iPad, and Android devices may encourage people to read online news at home in the comfort of their easy chairs. At Google, we certainly don't think we have all the solutions, but we are definitely keen on working with the news industry to help it attract bigger audiences and generate more ad revenue. Experiments like Fast Flip, Living Stories and Starred Stories may help pull together the at-work and at-home access to the news. Online news access on handheld device like cell phones and tablets is likely to be quite different from traditional newspapers reading, with much more multimedia content, interactivity and reader involvement. The transition to a fully online news will be difficult, but there's a good chance that we will emerge with a significantly more compelling user experience.

Update 1 (3/10/10): Listen to audio of Hal's presentation.

Update 2 (3/16/10): We have revised this post and the embedded slide deck to correct an inaccurate figure. The percentage of U.S. newspaper revenue generated by online is 8.2%, not 5%.

12 comments:

cbseattle said...

It seems like the definition of news is left somewhat ambiguous and might effect the way we talk about the solution.

But any way you look at it, you're right about "experiment, experiment, experiment".

The Stranger, the largest alt-weekly, based in Seattle has done that with great success. It's a great model for how a paper can make the transition and stay profitable along the way.

They have their super popular blog, SLOG, they have a nationally syndicated relationship/sex advice columnist (Dan Savage of Savagelove). They have Questionland for community Q&A and for community interaction with local experts and VIPS (including the Mayor): http://questionland.thestranger.com. They have StragnerMart, they sell teickets to local events, the facilitate dating through LoveLab, the list goes on. Brilliant.

They are not obsessed with technology like the iPad, they are obsessed with fostering and serving their community.

mike said...

love to see this discussion! It’s great to see you all working through the issues and also, it’s great to see recommendations for testing. In the end, it’s what your actual users do and prefer that should be your biggest driver in making these decisions.

get level

filmtech15 said...

I've come to the conclusion that all the experimenting is a waste of time in terms of business models for the moment. The best model to support these publications has probably been around for some time. That is the Washington Post. Because they are financially diversified in companies like Kaplan they have some stability that other publications only wish they had. I feel this is the future of newspapers. In order to provide the type of coverage that we are used to receiving from publications they will have to create other sources of revenue that are not directly connected to the publication itself. Otherwise in order to make money a publication may have to sell their journalism ethics(their soul) in order to make a buck, which we are seeing more and more of.

Jody Brannon said...

That statistic about the average reader engaging for only 70 seconds on a newspaper is so frustrating. I fear one of the news industry's biggest problems is that presentation of so many headlines enables scanning behavior. Sure it's convenient for skimmers, but it does little to encourage people to dig deeper into complex stories.

That's our goal with the Carnegie-Knight News21 program, where nearly 100 of the nation's top journalism students are asked to experiment in ways to do in-depth journalism in innovative ways. The fellows are then expected to explain how they tackled their project and why, plus provide code to anyone who might want to take the concept to a new level or in a different direction.

One of the industry's biggest challenges with regard to experimentation is figuring out ways to share lessons learned, so we can move forward and engage readers in new ways. Collaboration is key. An universities have a lot to offer by tasking next-gen journalists with invention.

News21.com is part of the Initiative on the Future of Journalism Education, sponsored by the Carnegie Corporation and the Knight Foundation, and involves 12 of the largest graduate journalism programs in the country.

Patrick Stähler said...

Very valid points. One can see the problems of paper newspapers in the Internet very easily when we dissect the business a newspaper is in.

Actually, a paper newspaper is not one but three businesses. The first is the readers' market. The reader pays the newspaper for the physical paper to get content he/she wants. The second business is the sales of the readers' attention to advertisers. And the third business of a newspaper is or better was to bring demand and supply together in the form of classifieds.

All three businesses are glued together in the past by paper. You needed the reach of the newspaper to get the attention of your target customers. You needed to reach a lot of people via a paper to get the right person for the job opening you had.

Not anymore. Now, we have niche markets with special interest were we can target much better our potential customers. And even worse, the Internet is much better in matching demand and supply in what used to be called classifieds.

The problems of the newspapers is that their business and content model was perfect for the paper age, but the Internet unbundles their business into three rather independent businesses. You do not need a newspaper website to run a market place for used cars. You find more on this subject on http://blog.business-model-innovation.com/2009/09/who-says-paper-is-dead-business-model-innovation-in-the-newspaper-industry/

Sorry, it is the changing economics that harms newspapers not search engines.

Milton said...

The biggest reason for newspapers' decline is very simple: loss of monopoly. For years each newspaper had a built-in monopoly because they were bound by physical location.

It didn't matter that the New York Times or the Washington Post had better news coverage. You couldn't get them. At most your local newspaper subscribed to their news service (not available to the general public) and published a few of their articles.

The technologies of the past decades have changed all that. It started with TV and news radio competing for our news reading time. Now the internet has put the final nail in the coffin. Every newspaper in the country is available to everybody. Suddenly the model went from monopoly (or at most a oligopoly) to a free and open market. The chaos that resulted (the closing of newspapers, the floundering of attempts to provide different revenue streams, etc.) is just the natural result of all that. It looks messy, and the "cause" of this demise is hotly debated today, but decades from now this will become a classic case study of what happens when monopoly is suddenly lost.

cbseattle said...

@milton

Say what? At the height of the newspaper there was an endless battle among competing papers. Newpapers didn't succeed from monopoly, if anything that was the beginning of the end.

Mary Kay said...

Great read. Raises questions about why WSJ is gaining readership. I think it's a great niche product and that's what makes its business model work. What's the parallel for NYT? Washington Post? LA Times? What niche could they each own? -- Mary Kay (Hi Hal---you were my professor at MIT in the 1970s. Ph.D. program)

jamais said...

Publishers + news corporations deal in information, whether it's news or advertising. Their customers are companies trying to sell a product, and the reader who's looking for information.

Google deals in information as well. They provide information on what we're looking for, and we pay for that with information on what we're looking for and where and how long etc. This information is fed back into the information we get from Google. The deal works as a give-and-take-model, based on the feedback from the customers.

The basis for the feedback-model of Google is learning from the customer, and responding to what the customer tells us.

Why not try to learn from the winner? If you connect the idea of the web as a platform for selling content with the idea of the web as the source of content where (new) content is generated, you may add the idea of Google (and others, like internet providers, as well) to offer storage space on their servers for users to store, share, administer and process their data they got from us > outsourcing their hard disc drives > providing a platform where users with an account

- can find and search content in any form (text, audio, video)
- buy it for further use like reading, storing, sharing, copying, editing etc.

and where providers/publishers of content in any form

- can offer and sell their product (news, music, film, books) on their own terms.

Taking that idea another step forward, you/we will provide an opportunity for our customers to exchange and interact with each other on our platform > a community > generating new content that will help us target and serve the interests and needs of our customers.

We, the publishers, may yet have to learn how to learn, and listen to our customers. They will tell us what they want, and it's up to us to come up with ideas on how to offer them more than what they are looking for > enrichment of our content > thus getting them hooked and coming back for more ...

What will ultimately get them hooked, I guess, is the chance to define themselves and be present as who they want to be > as Facebook's success tells us. If we can establish ourselves as a platform/community where they can find what they're looking for and where they can find people who listen to them > not least among them us > why should they go elsewhere, and where would that elsewhere be?

blog tester said...

Q: why did the average reader engage for only 70 seconds

A: Our data shows the average search engine reader engaged for less than 7 seconds

---

Q: is a bigger audience the solution?

A: Nope. YouTube has 360M + users, 2Billion videos a day, and...they're still not profitable.


---

Q: Has Google made any money from information search?

A: No, their $20B/year is from ads for products, aka shopping. Their free scraping is the equivalent of the newspaper's news.

---

Q: Does anyone (even Google?) make serious money with content on the web?

A: Nope. Remember, YouTube is losing money. And although consumers like the instant-access, only 21% of people PREFER to consume content online.


Solution:

Don't try to put valuable entertainment or news content online. Consumers don't prefer it, and nobody (not even google) has made any money trying.

It's not an ad model problem, or a content problem. The simple fact is that the medium (PC/Browser) isn't preferred.

tl;dr
Rupert, follow your instinct. The data supports you.

Parka said...

Here's an excellent article on the death of the Rocky Mountain News:
http://www.johntemple.net/2009/09/lessons-from-rocky-mountain-news-text.html

The lessons mentioned in the article are easily applicable to any newspapers out there.

Newspapers need to find a new business model fast, to survive n the new competitive environment.

Experimentation is the way to go, as mentioned. It's all about trying, trying fast enough in hope to hit the jackpot.

While tablets might seem like the popular thing right now, they are just about distribution - getting content to people. That doesn't change the way how people will want to part their money.

Let me end with two quotes from Albert Einstein which I think are applicable here:

"Insanity: doing the same thing over and over again and expecting different results."

"The significant problems we have cannot be solved at the same level of thinking with which we created them."

M said...

My question about this: if going only online is such a huge cost savings then why do newspapers do this? What is holding them back?

A close family relative passed away a few years ago and part of closing her estate was ending her multi-decade newspaper subscription. While doing so I asked who unsubscribes the most and the clerk said people like my relative.

Are the news papers really trying to hold on to those readers? People of that generation are dying at an exponential rate and that day of reckoning has to come soon (if what I said is actually true).