Sunday, February 9, 2014

Thoughts on the News Industry

I think everyone pretty much agrees that the economics of news making has been going through a long evolution. Several decades ago the newspaper was a lucrative industry that sat at the intersection of two very strong and largely unsated needs: the need of the consumer to get information about the world around them and the need of aspiring companies to educate those consumers on the goods and services they offered. Further through the economics of news acquisition, printing, distribution, and advertiser relationships, the newspaper industry enjoyed a series of simultaneous barriers to entry while these investments drove growing economies of scale. This allowed the a large breadth of local newspapers to flourish without really competing directly and growing profitability across the board.

While for many years the newspaper industry looked nervously to the growing threat of TV news, it was the internet of course that turned the entire business upside down. Suddenly print content became easy to produce and distribute digitally with past investments in print facilities and distribution networks becoming irrelevant almost overnight. The elimination of these barriers meant that just about anyone could produce written content that would be accessible to the masses without acquiring printing facilities and delivery networks and distribution centers and this led to a mass influx of writing and content creation by old and new players. At the same time, the inherent locality of information consumed on a physical medium was eliminated and a consumer could easily browse content from the New York Times, The Guardian, Al Jazeera, The Huffington Post, and countless other organizations as easily as the local paper, turning the once largely complementary news players in direct competitors.

This of course led to the general commodification of news as these players competed for the audience’s attention. Since the incremental cost of serving another customer a given article was virtually zero and a fact-based account of the same event from two different news orgs lacked significant differentiation, newspapers were incentivized to price at zero and consumers quickly began to expect free access to the news since why would you pay one company to read about the latest declaration from the White House, when there were countless other sites carrying the exact same story.

At the same time that the ability of newspapers to charge for their content was decimated, their leverage on advertisers was almost completely eliminated. First the internet as a medium for exchange proved vastly superior to the long-standing newspaper classified business and you saw the eliminations of personal ads, real estate listings, ads for consumers reselling stuff including collectibles, cars, and whatnot which all found new homes in focused online sites. While in the past the newspaper had essentially sold these small advertisers access to their consumers, access to consumers was now cheap and plentiful and these classified ad based businesses moved relentlessly into this brave new world.

For more established businesses focused on brand and promotional advertising, they were slower to abandon the newspapers because they still needed a way of capturing the consumers attention and while internet alluded to exciting new ways to capture attention, they were unproven and the infrastructure to execute a campaign was lacking. Then slowly came new tools including display ads with online portals like Yahoo and MSN, Google search and the novel adwords business, the rise of social networks and the ability to execute campaigns through Facebook and Twitter, video ads on YouTube and the like, and finally distributed ad networks across a multitude of sites and blogs and content creators allowing ad networks to follow their targeted consumers from site to site. As consumer identification, tracking and ad serving gets even more sophisticated, big business will become even less dependant on any given source for capturing the consumers attention and newspapers will become just another source of content, competing directly with amateur videos, social conversation, and countless other distractions for the consumer’s attention and advertiser’s dollar.

The evolution of the industry started slow and came in fits and starts, but by the late 2000’s the entire business model of the traditional newspaper had been decimated with news organizations left with little of value to offer either consumers or advertisers. The results were to be expected. Massive drops in subscribers. Massive drops in advertising revenue. Layoffs. The shuttering of newspapers. News organizations desperately experimenting with new business models. Opportunistic billionaires like Rupert Murdoch, Warren Buffet, and Jeff Bezos acquiring storied brands for a pittance.

However, despite all this change, the tone of discussion in the past few years has begun to shift. The dire accounts of an industry’s death began to wane, and a new optimism began to flourish. Growth areas began to be identified, several large newspaper brands successfully implemented paywalls and began acquiring a growing subscriber base. Digital ad revenues began growing and offsetting the continued decline of print. And finally a handful of brands like the New York Times and the Guardian have begun to look ascendant again. What has changed?

Well the first thing to think about is how newspapers began to combat the commodification of the news. Almost anyone can accurately report what new statement was made by Obama in the White House press conference, or what were the earning results were announced by a major corporation, or the details of a major crimes, so as a result the internet is flooded with articles that are nearly identical in content. This essentially eliminates any leverage the news organization has to charge for this content because the consumer has plenty of substitutes. But not all news reporting fits into the vein.

Analysis and Opinion: While almost anyone can recount facts in an article, it is much more challenging to provide compelling analysis of those facts and extract meaning from the information provided. Effective analysis requires deep knowledge of a topic, the ability to identify the larger forces at work in a situation, and the ability to articulate these ideas clearly and concisely. As consumers have faced a deluge of free information from the internet they increasingly see value in someone who can compile all this information for them and just tell them what it means. Based on this, it’s not surprising that The Economist, for instance, which is entirely focused on analysis and opinion has enjoyed consistent worldwide growth throughout the entire time period where traditional newspapers have struggled.

In addition, this emphasis on analysis has helped lead to the rise of the celebrity journalist. The nature of analysis is incredibly personal to the thought process and views of the author and consumers are quite aware of this. As a result people like Nate Silver, Cliff Mass, David Brooks, Kara Swisher, Tyler Cowen, Ezra Kline, and others have become news brands in their own right and command increasing influence both with their audiences and with the news organizations that support them.

Credibility: One consequence of the lowering of the barriers of entry for news production is that anyone can easily get into the game and they don’t always hold their work to the same standards that consumers might expect. In an effort to capture a bit of the consumers attention, some news sites will resort to tactics like playing to the consumer’s fears and ignorance, playing to their personal biases, or just plain lying. Without context, a consumer has a very difficult time assessing whether a given article is correct, contains bias, or is otherwise dependable. As a result of this confusion, hardly a day goes by without spotting numerous posts on my FB feed by unsuspecting people who not only read and believed a less than credible news account, but further shared the account with their friends.

With the big news brands however, the consumer can at least rest assured that they have a pretty good idea of what exactly they are reading. With the New York Times for instance, they can have faith that the paper has probably fact checked the article, that more than one person at the paper has signed off on that authenticity of what is being reported, and that while there may be a slight liberal bias in the reporting, it will generally report what actually happened. Similarly the WSJ, the Guardian, and other brands offer the same stamp of credibility. Interestingly a few brands such as Forbes and Seeking Alpha have not guarded their reputation for credibility attempting instead to become open platforms in a grab for long tail content creation and I am interested to see how they manage this loss of credibility in the future.

Investigative Reporting/Original Content: Investigative reporting has always been a mainstay of big newspapers and I suspect this will become even more so in the future. While almost anyone can reiterate their thoughts on the news that has been posted broadly online, not anyone can marshal the resources to do a long term investigation on a novel subject. Researching stories deeply often involves weeks or months of time, travel to various locations, the ability to gain access to key players, and a network of sources to help reporters identify where a new story may lie. All of this takes economic support from a news organization until the time in which the reporting will hopefully pay off. Similar to the dynamics of the research of new pharmaceuticals, many of these investigations may not pay off at all, so a news organization becomes essentially an insurance pool for this research with highly successful blockbuster reports helping fund the cost of failed or less popular ventures. All of this helps build a base of differentiation for the newspapers reporting that is not easily duplicated by other competitors.

Filtering/Curation: While there is nearly unlimited information available in the wild internet, it takes time and energy to search and browse this content and often time is wasted consuming trivial content that doesn’t offer the consumer much benefit. This has led many consumers to place increasing value in curation, as individuals take on the role of sampling content on behalf of the consumer and helping them identify what is most important. For instance I often turn to The Browser and RealClearMarkets as aggregators that I count on to surface quality journalism for me rather than diving deep into Google News. Big news organizations are defacto curators, leveraging the limited display space on their site to merchandize the most compelling content they offer and focus the consumers attention on what matters. In this way the big news brands become dependable as a place where a consumer can turn and get the most important information currently available without expending too much energy on search and browsing.

All of these trends are ways in which the big news paper brands are starting to shift leverage in their direction. As they gain leverage as a source for compelling analysis and opinion, home to the most thoughtful writers, defend and build their reputation for credibility, invest in novel investigation and reporting, and ultimately become the defacto source a consumer can turn to find the signal in the noise, they are creating a product that consumers are willing to pay for. And now that the big news organizations have made the jump to limiting their content to paying subscribers they are gaining the resources to further invest in their organization leading to greater and greater differentiation from the broader news market. To compound this, as the audience at brands such as the NYT and WSJ reach even greater levels, they are able to offer a compelling value proposition to advertisers above and beyond what they can get from broadly advertising on the internet.

So where is this all heading? To me the obvious trajectory of the industry now is for more and more influence to coalesce around a handful of super properties that eventually build a wall of differentiation around their content with comprehensive coverage, depth and analysis, and a reputation for credibility. While consumers may be willing to pay for access to a handful of content providers, they are unlikely to pay for dozens or more of new sources. As consumers decide which new source to subscribe to, they are most likely to pick the ones who offer the most compelling content and the best value, suggesting a natural filtering to the best brands. Certainly for national, global, business, tech, health, science, sports, lifestyle and politics coverage among others, the scale benefits of a massive news brand with the resources to dive deep are apparent. To the degree that there is differentiation, I would suspect it comes more in properties specializing one of the specific genres of news rather than in affiliations with specific geographic locations.

It is less clear to me how local news coverage will pan out since the scale benefits of a massive news brand don’t work as directly. Effective coverage of local news requires people on the ground in each market with a specialized understanding of that market, while the demand for that coverage is limited to a relatively small subset of consumers. However my anecdotal evidence in Seattle has been of a level of superior local coverage through passionate neighborhood blogs while the city papers continue to expend resources on non-local coverage they lack a competitive advantage in resulting wide ranging and largely mediocre coverage across the board. Interestingly, the local TV news stations seem to be less beholden to the idea that they have to offer a comprehensive source of news and have generally been more adept at pivoting into the new online news environment and focusing heavily on local news and conversation.

I do see one big opportunity to disrupt this trajectory however through the creation of a collective subscription service for news consumption a la Netflix. Assuming this third party site could focus on helping the consumer to organize and consume media from a wide range of sources, a subscription to this kind of platform could offer a superior news consumption experience. Further this kind of system would help a consumer to effectively sample from a wider range of news organizations than he would be willing to maintain subscriptions to directly, thus helping foster a more diverse and less concentrated news ecosystem than would otherwise result.

Also much coverage of the news industry seems to focus on the growing sophistication of the advertising products that news organizations are offering their advertisers, in an ongoing attempt for these organizations to re-create the dynamic of times past. While I applaud this innovation generally, I am not sure I am fully convinced that owning the relationship of advertisers is the future of news organizations. I could foresee a future where news organizations cease expelling resources on this side of the business and contract it out to other specialized organizations who focus exclusively on ad monetization and manage this business across a wide range of properties. This would greatly simplify the news business and allow them to focus on their one key competitive advantage which is building compelling content to attract a growing share of the worlds attention.

Regardless of this, the one thing that is clear is that the news industry, like most every other industry, is going through significant change and there is no indication that this is going to slow down anytime soon. However, there is much about this change to be optimistic about and I look forward to seeing how things play out.

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