You are reading Part 1 of a 3-part series on the publishing industry.
Part 1 is about the past. Specifically, the internal mechanics of publishing and the forces that defined the industry’s response to Google and Facebook.
Part 2 is about today. How has publishing adapted to the change, what is working and what is not?
Part 3 is about tomorrow and what sustainable news & content publishing can look like.
If you thought Google and Facebook killed the news industry you’d be right; but only partially right.
It is true that the internet nullified the raison d’être of buying the paper. It’s also true that these two internet behemoths robbed the publishing industry of its audience and the attention that came with it.
Disruption is the inevitable outcome in the life of any company. It is not possible to predict the future; it is within the realm of possibility to respond to the present. And that is where news has failed; in providing no response of their own for the past 27 years.
This is a story of games, corporatism, and misaligned incentives. Let’s start at the beginning.
The business model of news
The first colonial American newspaper was printed in 1690. The New York Times is 169 years old. The industry itself is 330 years old.
As it often happens, the news revolution was kindled by matching idealistic founders with a technological revolution; in this case, the printing press.
In the process of distributing the news, the founders of the first newspapers were the first to capture public attention en masse.
And in doing so, in these past three centuries, newspapers have enjoyed their fair share of influence, and profits. So much so, that there is a special term for their importance in our society. “The fourth estate” was coined to denote their crucial role in regulating our society. There was no other industry that enjoyed this level of attention.
If anyone understood the importance of how stories underpin economic value, it was news publishers.
The news was immediately entrenched in society and publishers exerted a strong influence in the public sphere. With an addictive product, the revenue model was simple. Want the paper? Pay per unit. Want to read more newspapers? Buy more units. Circulation became the core metric. And circulation skyrocketed.
At the beginning of the 20th century, advertising found its natural place within the newspaper and the combined business model exploded. Advertising had zero marginal costs from a print and editorial perspective but all the upside. The news started selling the attention it captured.
And the cherry on the top? Starting a newspaper was hard. Matched with a high barrier to entry due to fixed costs (printing press, distribution) news publishing offered a recipe for a long-term oligopoly.
The news business model had been on an unstoppable growth trajectory that would last almost 100 years.
Internally, the job of a journalist was perceived as an elite craft and the editor’s job was revered. Editors commandeered the nation’s attention and journalists instigated commercial, political and social action one word at a time. The editorial team were the superstars of their industry basking in the widespread belief that revenue and influence stemmed from their actions. This level of attention is addictive and when the individual finds themselves in the middle of change, change is not welcome.
News itself was a cornerstone of society, a part of the system. The most brilliant of the institutions. The blueprint of a corporation.
Fast forward to the end of the 20th century.
The market had reached peak maturity. Revenue concentration, combined with barriers to entry has led to consolidation leaving a few despots and trusts running the show. They had become part of the establishment.
And then the internet arrived.
Going free online (1994 – 2006)
Today it’s clear that the orchestrators of the internet, Google and Facebook, won our attention and the advertising dollars that come with it. In hindsight this is obvious. However, it could have been different. It started with one crucial decision: posting online for free.
The Telegraph started posting online in 1994. The Guardian in 1997. Both for free. Reading the news online for free is a given today but at that point paying for news was standard behavior. In fact, the only behavior. So why go free?
It is true that payment technology was embryonic (PayPal didn’t exist) and people’s appetite for transacting online was nonexistent. But even then, there could have been simple ways to work around this. News publishers had tight relationships with distributors and could reach corner stores, kiosks, and off-license shops. Selling a digital subscription through print would require a passcode within the newspaper to access a site. Or one providing yearly access. Cash could be exchanged physically at the point of purchase. Technicalities were not the sticking point.
The first reason that emboldened publishers in going online early and free was conflating the notion of readership with that of a loyal audience. This is justified as in the past circulation was the only measure of both revenue and attention. Paying for information was a good enough signal the customer cared. And so, the presumption that readers would be loyal online too was not scrutinized. Circulation online was named traffic – the new core metric that mattered.
Since traffic was important, missing out on the new way to capture the audience bred fear. Fear of missing out. Every major publisher was petrified by the “what if” scenario where the internet explodes (hint: it did) and they missed out on following their audience (online).
The reasoning went as such:
“If we go online, we can capture a new audience. And if we go free and the competition goes paid, we could capture their audience. In the likely scenario our competition goes free as well, we find ourselves in a good position for the future. This is more important than payments for now.”
So before understanding the threat of Google and Facebook, the news publishers viewed the internet as a Zero-sum game between themselves; one in which they were compelled to participate.
To exemplify, assume a total market of 100 readers. Then a simplistic version of the publisher’s perceived payoff of going online in 1997 would look like this:
From a short-term perspective, publishers were incentivized in going free. Going paid was also tricky as no one could predict the trajectory of news monetization online. What would be the right business model and how many people would be interested in reading online was unknown. In fact, buying a paper every morning was more convenient than downloading the news via a clunky modem on a slow churning PC.
But in fear of their competitors thriving in the new medium, going free was a “what if” inspired action, a defensive play. Assuming a static order of things, there is certain merit to this logic.
This period lasted approximately 15 years. It was not until 2010 when it became clear that the drop in print revenues was not a blip but rather a combination of broadband penetration, Google’s search dominance, and Facebook’s 600 million friends.
Monetization online was still a question mark albeit one thing was clear; the open web was not good for business. Print circulation and ad revenues had been in decline for the past 5 years, quickly depreciating the once most valuable assets of the corporation, the printing press.
The time to be nonchalant and experimental had run out. Still, no business innovation. The News industry decided to chase pageviews instead of long term viability. This time it was not games of fear but rather corporatism and misaligned incentives that got in the way.
Why the publishers didn’t react: an ode to corporatism (2006 – today)
This might not be obvious yet it’s not an overstatement; the executives were, in fact, incentivized to avoid innovation. Here’s why.
The executive team (CEO, CFO) would set a strategy. Since they are appointed by the BoD, this is who they answer to. Their career success hinges first on staying in good terms with their managers, secondarily with the City of London (or Wall Street if you’re in the US), and then and only then with their customers.
Of course, where you pay attention defines what you see.
Inevitably a CEO who wants to maintain their position has to keep the BoD and thus the stock at a stable level. How is this going to happen? Generally, there are two options: go after the market or go after internal mechanics. The former involves increasing market share, product innovation, and revenue with customers. It assumes entrepreneurship, innovation, and taking uncomfortable bets. The latter implies cost-cutting. And it bodes well with the corporate management approach.
See, under the corporatist view, the interrelation with large institutions is the primary driver of value rather than market competition and innovation. Customers are simply in between and disposable. And institutions want to see higher earnings per share. And so innovation was too risky. It could rock the boat.
And there was the spin. Traffic was growing rapidly and despite digital advertising margins squeezed by Google and Facebook, the digital ads revenue was growing too. So, it was easy to present a story hinged on digital ad growth as a deus ex machina somewhere in the future.
In parallel, circulation was plummeting for every publisher and the return of the fixed assets -printing, factories & distribution- is diminishing. This means one thing: an opportunity for consolidation. Consolidate printing and distribution, reduce the number of employees, increase prices per unit, and increase operating profit in the short-term leaving the long-term business model question to the successor. Such is the corporation.
In the UK, there’s a perfect example: Reach PLC (FKA Trinity Mirror). In 2015, Reach PLC acquires Local world, a large regional publisher. In 2017, the Guardian scraps their £80m printing facility in Manchester and outsources printing to Reach PLC. In 2018, Reach PLC acquires the Express and other core publishing assets from Northern & Shell, combining circulation and revenue. Their operating profit margin increases almost every year whilst revenue like-for-like (revenue without the contribution of the acquisitions) drops sharply.
Meanwhile, quantity over quality becomes an unspoken rule. Journalists are judged by the number of pageviews they rack up. Each journalist is required to publish multiple times per day at an average reach of 10,000 views per article, so that a stifling number of ads can be inserted and the short-term digital growth bubble won’t burst. The editorial department sees its craft slowly commoditized and finds itself ensnared in an existential crisis. A once symbiotic relationship between them and their corporate patrons becomes a balancing act ahead of a rift.
The effect on the product is also clear. Bounce rates are higher than ever, brand loyalty eroded and publishers are commoditized further, one post at a time. Editorial is not allowed to invest in what they do best; corporate is focused on margins and technology is a catch-up play. No hint or attempt for product innovation.
The new strategy and story to stakeholders is simple: maintain a strong cash-flow position derived from the declining print revenues until digital revenue takes off. The elephant in the room is this won’t happen and it’s obvious both for strategic reasons but also by looking at the numbers. Given the digital advertising value chain, ads revenue for newspapers will never take off to cover for the loss of print revenue.
Yet, this is a long-term problem. In the short-term these moves have a positive effect. Operating profit is increased and that is the goal. So much so, that the new CEO’s bonus is 70% influenced by operating profits and only 15% by “strategic goals” i.e. product innovation. The other 15% is revenue. However this is the same remuneration structure the previous CEO was offered. Perhaps an optimistic bet – if not naive – to replace the individual instead of the goal structure, especially since the CEO’s goals cascade over layers of the business stifling innovation. Then there’s the cynical view: pointing the finger at an individual is more convenient.
The narrative was found at last. But it was not one to inspire editorial, employees or customers. It is one of a beleaguered, ailing industry that is willing to do anything to survive. Erode its core value, destroy product integrity, and trust. A narrative suitable for Boards of Directors and investors. Publishers can keep on painting a positive picture of recovery whilst fundamentally passing the pressing question “what are we doing in the future” down to their successors.
Financial analysts herald consolidation and cost cuts as moves to efficiency. The exec team will be deemed successful by executing on the strategy they set out and approved from the beginning.
But in truth, at this rate, most news publishers will not make it.
At last, startups are making shy steps towards a sustainable business model. Fake news, clickbait, and rigidity in news reporting have intensified the necessity for quality news and thus, business innovation. New organizations are embracing the world of social media and leverage niche audiences. It is still to be seen whether news publishers can ever reach their old glory and society can maintain the integrity of the fourth estate.
In the next part I examine news (and general content publishing) revenue models of today. What works, what doesn’t, and why.
Disclaimer: From 11/2016 till 6/2018 I acted as an Entrepreneur in Residence at Reach PLC working under the CTO to diversify the revenues of the business. The above post only reflects my personal beliefs.