The sound of trees clapping

The sound of trees clapping

: My friend Dave Morgan, head of Tacoda, writes a devasting analysis of the quicksand newspapers are in.

He begins saying that newspapers are not only losing tremendous classified ad volume to the likes of Craig but, more importantly, are also control of their rate card: That is, without a monopoly, they can’t control prices anymore. This, he says, is what used to happen to the second paper in towns, when there were second papers. But now the surviving papers are second to the internet:

But unfortunately for newspapers, these Internet companies are presenting a competitive profile that is much more threatening than just having another local newspaper to contend with. Google et al. have dramatically lower cost structures. They have larger and more attractive audiences. Their pricing models are more advertiser-friendly–selling qualified leads, not just space. And, they have nicer dispositions.

This dynamic, as it accelerates, will present a serious threat to the viability of a number of newspapers. Given the enormous cost structures attendant to newspaper publishing, from buying newsprint and operating printing presses to paying the salaries of editors and reporters, these companies can sustain price destruction for only so long….

This means that local ad pricing will drop, and competitively driven pricing schemes, like performance-based pricing and auction-based sales, will take hold. Most likely, this means that newspapers’ revenue from their current advertisers and ad products will drop… precipitously. This means trouble, because while revenue from existing operations will likely be cut, there is almost no way to make comparable cuts in cost structures. Too much of newspapers’ cost structures are fixed.

Will newspapers die? Morgan hopes that it doesn’t take dead dead-paper to wake up the news business as the ends of Eastern and Pan Am woke up airlines… and look how healthy they are today.

: A few of my earlier posts on the need for new business models for news here, here, here, here.

  • Damn, great minds think alike, and the rest of us do to. :) Last night, I finally realized I should put some money where my gabber is, so blogged a quick list of newspaper stocks to short. Any thoughts from the front lines? The risk, of course, is that prices could already overdiscount the next two or three years of decay.

  • Newspapers currently run on something like a 50% yearly profit model. They won’t die, at least not anytime soon. The Internet is just bringing the bean-counting paper companies like Gannett and Knight Ridder and their Joint Operating Agreements and their Quarterly Budget Reviews a little bit of humility, like any normal business. Maybe they’ll only make a 20% profit … oooooooh, shoot.
    The newspaper’s economic model has needed to be shaken up for some time.

  • keats

    I think that the “blogosphere” is even more guilty of hubris than newspaper editors but that’s not my point.
    I disagree that the peoblem here was the the LA Times did wikis wrong. The issue was indeed that they did it at all in this medium. An editorial wiki? That has two outcomes — an ugly exercise in Godwin’s Law on one extreme end or a circle-jerk of nodding heads on the other.
    News content could be well served by wiki techniques and Wikipedia is doing this. However, editorial writing, even if it’s broken up into pro and con isn’t going to break any new ground – it’s going to devolve into talk radio caliber camps where the opinionated go to have their opinions validated.

  • Neal

    In fact, what American industry is healthy today?

  • Wayne

    Having worked in newspapers all my life there are a number of assumptions that have been recently written that are just plain wrong concerning the business model. First, newspapers aren’t anywhere near a ‘50% profit model’ as stated in a previous post. Most run between 11% and 25%, which is still a pretty good return. Second, circulation is dropping intentionally because there is a lot of so called ‘unprofitable’ circulation that is being dropped because of newsprint increases ($USD600/ton). Newspapers are being squeezed pretty hard by that. The newsprint industry has learned from the electric power debacle in 2000 how to artifically jack up the price of paper. Shutdown mills for ‘maintenance’ and artifically reduce supply.
    Regarding the internet, newspapers have embraced the web with great enthusiasiam. All newspapers have web sites that are quite enjoyable to read.
    They spend a lot of money to maintain those sites.
    One question that is never asked, where will the non-newspaper web sites get their news if newspapers go away? Most of the non-newspaper sites either have links to newspapers or scan newspaper sites looking for news. Some get free feed from the wire services. Basically newspapers are subsidizing those sites. Large newspapers have tremendous investigative capabilities for most of their content although some use mainly stories from the wire services. The wire services stay in business by subscription fees from the newspapers and, to a lesser extent, from tv fees. What happens to the cost model for the web sites when they are made to pay for their ‘news’ sources or have to assemble their own investigative reporters. They will probably have to charge for access and/or raise the fees they charge to advertisers for click ads, and we all know that neither of those will work, so the news-based sites will lose their audience and will fold. Specialty “commerce only” sites probably will survive as they can maintain the low cost model.
    We’re on the ‘bubble’ right now, where web sites have low cost, are able to provide more targeted advertising to site visitors, and are enjoying the “spirit” of the web, mainly free access and information. Soon, after the novelty of the web wears off, people become bored with it and financial reality sets in, that bubble will break.