I love this year-old Warren Buffet quote: “If Mr. Gutenberg had come up with the Internet instead of movable type back in the late 15th century, and for 400 years we had used the Internet for news and all types of entertainment and all kinds of everything else, and I came along one day and said ”I have got this wonderful idea: we are going to chop down some trees up in Canada and ship them to a paper mill which will cost us a fortune to run through and deliver newsprint and then we’ll ship that down to some newspaper and we’ll have a whole bunch of people staying up all night writing up things and then we’ll send a bunch of kids out the next day all over town delivering this thing and we are going to really wipe out the Internet with this”… It ain’t going to happen”.

As a member of the Washington Post’s board of directors, Buffet knows quite a bit about converting trees into reading material. He saved the Washington Post Company, literally, by suggesting the acquisition of Kaplan Higher Education. Now, Kaplan accounts for 57% of the Post’s revenue and its operating income exactly offsets losses at the newspaper division (see 2009 earnings report).

A week ago, echoing Warren Buffet, Netscape co-founder and multi-board member Marc Andreesen, reiterated his recommendation: “Burn the Boats”. In a statement reported by TechCrunch, he used Hernan Cortes as a model. This is the explorer who, in the 16th century, after landing in Cuba, wanted to remove any other option than moving forward: he ordered the destruction of all ships.

Andreessen gets credits for persistence. A year earlier, he called publishers to “stop the presses tomorrow”, saying to TV host Charlie Rose: “…I’ll tell you what. The stocks would go up. The investors are through [with] the transition. You talk to any smart investor who controls any amount of money, he will tell you that the game is up. Like it’s completely over. And so the investors have completely written off print operations. There is no value in these stock prices attributable to print anymore at all. It’s gone. (…) How many years of chronic pain do you want to take to avoid taking a year of acute pain?” (video and transcript here).

Let’s take a closer look at delivering the final injection to print. In the United States, if we consider the newspaper industry as a whole, it’s a no brainer. As Alan Mutter explains on his blog, “some 93% of the industry’s $45 billion in sales were associated with the legacy print product”. True, but that’s for all US newspapers, including a large chunk of local outlets who offer nothing more than a token presence on the web.

Now let’s refine our thoughts by adding two ideas to these facts. The first one is the size factor. The bigger the media brand, the higher its online revenue climbs when compared the core business. And, at the same time, the more likely its online operation is to be profitable. Going back to the Washington Post, the entire newspaper revenue landed at $679m for 2009, including $317m in print advertising and $100m from the online operation. Interesting. We are no longer in the old configuration where one-tenth of the revenue came from online operations, we’re now at 14% of the entire newspaper revenue; and the online advertising share is now 31% of the paper advertising revenue. This changes the landscape.

The second idea pertains to the Innovator’s Dilemma theory, with dealing with disruptive technology: maintaining both the old and the new at any cost is usually lethal. Preserving co-existence is often pointless. Take the classifieds business: clear winners are the ones who deliberately accelerated the natural depletion of the paper medium in order to provide more oxygen to the emerging e-classifieds. My former employer, the Norwegian group Schibsted ASA, did just that. Consequences? It now enjoys a dominant market share in many countries and has a bunch of high margin units in its portfolio. These healthy businesses supply the cash needed to quietly restructure the newspapers, invest massively online, experiment, innovate and secure its position in the news business. (This even though the revenue distribution is shifting in favor of classifieds – in the same way the education business now dominates in the Washington Post’s P&L). This evolution dramatically contrasts with French media groups who stuck to their free paper-classifieds business and now face a dire situation.

Is it therefore realistic to accelerate the shift toward online news? Probably not: the ad revenue erosion affects both print and online. Again, the Post’s example: last year its print ad revenue dropped by 23% but online ads also declined by 8%. More broadly, data from the Newspaper Association of America for Q3 2009 vs Q3 2008 show a steeper drop: –29% for print ad revenue and  –17% online.  As long as the online part of the business is evolving downward, it doesn’t make sense to implement a “forced shift”.

However, two things must be considered:

1 / The adjustments for media consumption time allocation and for the distribution of advertising expenditures are just beginning. Once the economy restarts, let’s forget about the looming global debt for a moment, the transfer will inevitably benefit the internet. And the shift will be massive.

2 / Selling advertising online is about to change. On this, ad agencies and media buying outlets have dropped the ball. For the former, the level of creativity has hit bottom; this is the feeling of every new media executives in France, Scandinavia, Asia or in the US I spoke with over the last months.

The worst consequence is favoring the Google deflationary model: no creativity whatsoever, but a measurable efficiency improvement. In France, for instance, Google ads accounted for 34% of online ads expenditure last year vs. 17% for banners, generating a hefty €800m in revenue.

As for media buying agencies, many of them displayed an inability to go beyond cheap, price-centered intermediation. Many are facing extinction as media will continue to move up the food-chain, working more closely with brands. (See our stories about Australia’s Fairfax Digital and the French social network Syrock to see two companies actively engineering the middleman’s death). Unless it reinvents itself quickly and decisively,  the most traditional part of the advertising community faces a music industry-like fate.

Coming back to this column’s subject. There are alternatives to envisioning the transformation of the print media as only a choice between euthanizing the paper product or putting it on life support. Next week, we’ll see how newspapers’s tendency to become daily magazines could breed a fruitful transformation.

frederic.filloux@mondaynote.com

Print Friendly
Be Sociable, Share!