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NYTimes’ “Fair” Prices

Today, both Jean-Louis and I struggle with the same topic: last week’s announcement of the New York Time’s strange paywall structure.

For a digital newspaper, there is no such thing as a fair price. Too many questionable assumptions, too many variables, too many ways to play with data. The Monday Note and my day job as the head of the French digital press consortium both gave me opportunities to work on such numbers for weeks. Intellectually stimulating as the exercise might be, when analyzing readers’ migration to digital, you can’t reach useable conclusions through a mere extrapolation of the eroding print model. Nor can you reliably model price elasticity in an electronic medium where “free” is the rule, “freemium” the minority, and paid-for the exception.

Let’s start with the basic problem: the free model (read: advertising supported) cannot provide the financial support for an ambitious, in-depth, global information enterprise. This type of organization is inherently expensive. The depletion of print readership (expect a real 5-8% drop every year), and the corresponding loss in advertising revenue create an urgent need for new financial models. Otherwise, the likes of the Huffington Post will find nothing to aggregate other than the vast echo chamber they built their ephemeral value on.
As the past fails to provide a solid foundation, the most prudent way of building a new business model starts with basic building blocks. For instance, the cost of a high-volume digital transaction platform for news products (all sorts of products, not just dumb PDF shovelware) should be around 8% to 10% of revenue, all included. Then, covering the news should require x hundreds of editorial staff, y dozens of support positions, all costing z. In addition, the news organization’s value proposition need to be factored in these numbers. That value proposition, in turn, translates into who and how many would be willing to pay for such (perceived) qualities. All this leads to the most important task: rethinking the organization in order to achieve these goals — in a context where the print’s old money flow now looks like a dried-up creek in Summer.

Trial and error is the only way to find answers to all these questions. Experimenting requires humility, agility, ability to learn from mistakes. Let’s admit it: such traits are in short supply in century-old news organizations that – until recently – thrived on their unchallenged confidence. In contrast, an ability to adjust quickly is a dominant feature of the most successful digital companies. Another characteristic of the best tech companies being a relentless quest for simplicity. As an example, think of Apple’s fixation on removing unnecessary buttons and dials, or just look at Google’s main search page.

Unsurprisingly, the New York Times chose the opposite path. One possibility entailed weighing how much its large audience of faithful readers would be willing to pay for its content and shooting for a single subscription price aimed at generating volume. Instead, the NYT went for a convoluted pricing structure.

In a nutshell: after reading 20 articles over 4 weeks, you hit the wall. Then you must choose your plan: $15/month for web viewing + smartphone; $20/month for web access + app on a tablet; or $35/month for accessing the NYTimes on all devices (something the most valuable regulars do), details here. It took 14 months, and according to the Times digital czar Martin Nisenholtz, reams of market research to come up with this. I also involved a serious investment : $40m-$50m (!!) according to this Bloomberg story.

The New York Times paywall is like the French tax system: expensive, utterly complicated, disconnected from the reality and designed to be bypassed.

Loopholes abound. To avoid hitting the wall, take your pick:

  • Use different email accounts. If, like me, you own or operate several different domain names, bingo!
  • Easier: use three browsers as the cookies placed by the NYTimes on each are not interconnected; if you have Internet Explorer, Chrome, Firefox and Safari, that’s 80 stories a month! The paywall is fading away.
  • Delete your cookies. Many paranoid users do it every day, sometimes automatically. Deleting cookies introduces several drawbacks for those who want to navigate quickly, but penny-pinchers will like it.
  • Visit the NYTimes from other sites, such as Twitter or Facebook, but in fact from any site, including Google (see Jean-Louis’ view on this below).

This list goes on an on.

Whom is this paywall aiming at? According to the Times itself, about 15% of their current readership will hit the wall. The bet is that segment – affluent, busy, non-nerdy – won’t bother tricking the system and will instead pay up. Let’s accept that assumption and run the numbers (and notice the level of uncertainty):

Global audience for NYTimes.com: in February, according to Comscore, 48.5 million unique visitors worldwide. (Note that no one uses Nielsen numbers any longer.) Should we focus the analysis solely on the domestic market and reduce the UV number to 32m? Advertisers would agree: foreign audiences carry little value. But, when looking at those potentially willing to pay for the NYTimes, the answer is the opposite: let’s stick to the 48.5m.

Now, let’s remove those who just fly-by, i.e. people coming from search engine or social medias: they will look at one story and jump elsewhere. Google accounts for 15% of the NYTimes traffic; Facebook, 4%. Add others such as Twitter and round it up to 25% of the global audience. This leaves about 36m monthly regular users to play with, of which 15% (5.4m), according to the Times’ estimates, are heavy users likely to hit the wall. How many would take the jump and pay? And how much money would they contribute to the Times revenue line?

Here are the numbers for an average monthly spending of $20.00 :

Transformation rate => number of subscribers => annual revenue

5%  => 270,000 => $65m
10% => 540,000 => $130m
15% => 810,000 => $194m
20% => 1.08m => $259m

OK. Let’s stick to a reasonable 10%. How does the extra $130m compare to the current Times revenue structure? In 2010, The NYT Media Group (print + digital) made $1.55 billion all together. $780m came from advertising revenues, of which about $160m from NYTimes.com. Interestingly, 44% of the total  ($683m) came from circulation — at $2.00/day in newsstands, the NYTimes is expensive.

In this case, the Grey Lady’s digital operation would total: $130m+$160m = $290m. This is enough to support the huge 1000+ editorial staff (the newsroom expense line is said to be in the $200m range).

Let’s stop here. The New York Times’ pricing structure, the fact that it is also designed to protect the paper’s physical circulation, the paywall’s porosity all complicate projections. One thing is sure: $35 a month ($420/year — $455 year for 52wks) to view the online paper on three devices is ridiculous, not matter how elitist the target group is fantasized to be. You simply don’t charge such an amount in a (US) market where services like Hulu or Netflix cost $7.99 per month. The Times would have been better inspired to go for a simple $15 a month on all devices. Such a price would allow to shoot for a goal of 2 or 3 million digital subscribers worldwide within three years. This would yield $360m-$540m in extra revenue, corresponding to between 5% and 8% of the regular digital readers mentioned above. For a global brand of the NY Times’ stature, such numbers are not unattainable.

frederic.filloux@mondaynote.com

RSS Lenin’s Rope

As I write this column, I wonder: Am I slipping into schizophrenia? My right brain is frying, overloaded by a never ending whirlwind of new digital tools, from hardware to internet applications. My left brain, which powers both my current daily job and this Monday Note, is cooler, skeptical. Both sides look on as the digital wave devastates professional journalism, shredding all value previously associated to it.

Take RSS feeds.

From a right brain perspective, RSS is an extraordinary invention. It provides all the ingredients of modern news consumption: unlimited choices, free access (including to otherwise paid-for sources), easy setup, inherently up-to-date, etc.

The first RSS iterations were rather crude. “Readers” (RSS client software) were spartan but extremely efficient. Now, we’re entering a new phase: RSS “arrangers” or “organizers” transform raw feeds into a rich reading experience, much closer to a newspaper or a magazine. The introductions of Flipboard and, last week, of Zite make Google Reader look like a Finnish psychiatric ward being replaced by a Norman Foster design.

Zite has generated a great deal of reviews (see Fast Company’s ). It’s a marked improvement over Flipboard. The latter is better designed, but offers not hierarchy to help arrange RSS feeds and other sources (such as Twitter, Flickr of Facebook feeds). Zite creates a magazine-like table of contents and, using a recommendation engine, appears to learn from your reading patterns. Further dissection is left to learned tech bloggers debating the pros and cons of the latest iterations of these multi-sources readers.

No matter how perfectible these personal readers are, they undoubtedly gestate the news publishing industry’s future. They successfully address two key factors in today’s media consumption:

- time allocation — I’ll tend to pick the service that helps me to be more productive
- the interface dimension, i.e. the increasing appetence for sleek and fluid designs.(Something Google still doesn’t get: instead of sticking to their Blue Cross Blue Shield-like, data-centric color code, they ought to go get their own Jonathan Ive).

Now, the left brain speaks up and asks two questions:

- what business model for the apps developers?
- how does this way of reading the news impact (positively or negatively) the business models of existing medias?

Advertising is the most likely answer to the first query. In theory, huge readership should yield nice revenue streams. At some point, B2B licensing could become feasible; large firms could fill bespoke versions of Flipboard with internal information, catalogs, manuals, etc.

The second issue is more tricky. Here are some examples.

Below is the Business home page in Zite. No ads, no nothing. In the red rectangle, a headline from Business Week:

Next is the Business Week article as it appears in Zite:

Look, Ma: No ads! No money!

Now, the original story as it appears on the BusinessWeek site:

As you can see, there are ads. Expensive ones, actually. According their official rate cards,  Bloomberg Business Week expects to charge a CPM (Cost Per Thousand) of respectively $115 for the banner and $144 for the square in the right column. OK. These are before-negotiation rates. But even after a 50% rebate, this is still huge: in Europe, rates for business sites are more likely to net a CPM in the $20-$30 range. Bloomberg Business week supports this price with its 12.9m unique visitors audience and its enviable  demographics. BBW brags it reaches 638,000 millionaires, which is half the Wall Street Journal’s purported score of 1.38m millionaires.

The wall Street Journal, precisely. As it appears in the Zite business page:

….Then, in a Zite full story page:

… and the original story, as you can see full loaded with ads (but, for some reason, not behind the paywall):

You get my point: by reinserting a story from an external source in its interface, Zite strips it of any value to the original publisher. Here, I refer to the ads sold in this particular editorial environment. And Zite isn’t even substituting its own value — thank God…

This could be fine for a Twitter feed, Facebook babbling, or any kind of user generated gruel. But it is not fine at all for professional publishers such as The Wall Street Journal Gigaom or Business Insider (I performed the test above for all three.) To a varying extent, these organizations line up writers and editors in order to produce their content. For them, this is the perfect lose-lose situation since their news material leaks into Zite, resulting into content they won’t be able to monetize. In return, they get nothing: no fee, no revenue share, zip.

The agent responsible of this economic absurdity is the RSS system. Medias are profusely generous with their RSS feeds. The New York Time offers no less than 167 streams of various natures. You can reconstruct an entire digital newspaper with those. In doing so, you remove all the value that was sold with this content by the NY Times ad sales people. And if you add feeds provided by great newspapers and magazines such as The Guardian, The Financial Times, The Economist (50 feeds!), The New York Review of Books and some good pure players and professional blogs like Slate, Poltico or TechCrunch…. You’ll end up making the best digital daily you can think of, because, you will end up to be the ultimate editor.

I cant’ help but consider the RSS  generosity shown by all medias (main street traditional as well as digital natives) as another iteration of Lenin’s rope: “Capitalists will sell us the rope with which we will hang them”…

At the risk of repeating myself, from a user’s perspective, I find this abundance of great content just fantastic. And as a journalism freak, I carry no nostalgia for the good old days. My concern is simply for the news business, for its ecosystem’s sustainability — i.e. the ability to collect and produce original information. That’ll be the subject for a next column.

frederic.filloux@mondaynote.com

Mobile First, and a Mag

Two French journalists come to me with a question: which business model for their new project? They are about to resuscitate a fairly well-know trade journalism brand, planning to go mostly online — and marginally on dead trees.
As an answer to their new investor’s questions, they first considered the “tried and true” formula: free website + advertising support + hope for the best.
I cut them short: No.
Forget about the typical website: Go mobile first.
With an smartphone app, or a mobile website, you’ll have room to maneuver. Unless you are concocting a clicks machine targeted at a huge audience, there no longer is money to be made in classical web advertising. And your specific project adds two challenges. First, living outside English-speaking markets. Second, targeting a niche market: a business audience.

Audience-wise, a paid-for, mobile-based service is the best vector for business people who want permanent access to news relevant to them, especially as they are constantly on the move. For such a target group, speed is key. People love the feeling of being “first to know”, or of getting “exclusive content”. All of the above feeds the compulsive need to glance at one’s Blackberry. And not being elsewhere on the web reinforces this “I’m special” feeling.

In such a context, having people pay for content becomes feasible. For one, chances are the mobile phone subscription is picked-up by the employer. That’s why business papers such as the Wall Street Journal or the Financial Times are thriving on the paid internet. (25 years ago in France, this difference between user and paymaster led to the Minitel’s immense success.)

Start with two products. On the mobile device, it has to be straightforward. Compact, exclusive, proprietary, preferably on top of the news cycle. A significant portion of the content is pushed to the user, with carefully designed default settings, and options to select the type of news and the timing of delivery.
The paper product would be fairly compact as well. Something like a 24 pages weekly, 60% editorial, 40% advertising, built around a small number of value-added stories, mostly long-form, written and edited by well-paid freelancers. No newsstand sales. The magazine has to find a way to be free: ad volume, average revenue per page, printing costs. No mass-market distribution either: the mag is actually subscription-based and it is designed to complement the mobile-subscription for which it will be the most potent incentive.

As many mobile platforms as needed. To be decided using the latest market research (to get an idea, see this  interesting map provided by ReadWriteMobile (click to enlarge).

The ideal triptych being Android, iPhone/iPad and Blackberry. A significant number of business people have two phones: an iPhone for fun and a Blackberry for serious communication. IT goes without saying the UI should be consistent across all devices.

The business model. In a nutshell: pay-per-view for new and occasional readers, but leading to a subscription model (I’ve addressed the issue in a previous Monday Note).

At the beginning, for a relatively small publication, the best way is to go along with the Apple system for both pay-per-view and subscription. 30% fee but no hassles and quick set up. Of course, do not expect to get customer data (Apple’s policy is definitely quite discouraging in that matter — unless you give an incentive to provide personal data, which is precisely what your ingenious paper mag name/address subscription does). As soon as possible, try to switch to an HTML5 based mobile site. It might be a while for reliable development tools to be available. But once it will be, even small publishers will have access to inexpensive transactions platforms and all customer data they need.

Pricing. It depends upon the scope of the product. Let’s try a back-of-the-envelope calculation for the specialized publication mentioned above. It could be manned by a staff of 25, including techies and administrative. Expect $100k per head, all included, that is $2.5m a year. Add another 20% for additional expenses. You end up with a mobile operation costing about $3m a year. Add another million per year for the magazine. Total is 4m a year. (Again, the print run for the magazine will  be fairly small since it is adjusted to the number of subscribers to the mobile service).

The putative P&L looks like this :

Mobile operation:
- target number of subscribers: 25,000 readers
- subscription price: $100/yr (realistic for a business publication; that’s $0,40 per working day, not much for a stream of specialized business news)
- ARPU (after platform costs, VAT, etc): $70
=> Net revenue / year: 1.75m

Magazine:
- number of issues per year: 45
- number of equivalent full pages per issue: 11
- average yield per page:  $5,000 (rack price at $10,000; expect a 50% discount; could be seen as expensive, but this is a high-value target group)
- number of pages sold per year: 495
=> Net revenue for the magazine: $2.475m
=> Net revenue for Mobile + Print: $4.225m. Again, for an estimated cost of operation of about $4m.

This will need fine-tuning. Reaching break-even will take a while; subscriber acquisition costs can be high, and the expenses related to the print will vary. On the more positive side, high CPM ads can work on mobile contents and ancillary revenues such as e-books publishing or conferences can come into the formula.

This admittedly crude example is meant to highlight three things:

  1. The traditional web is not likely to offer the best approach for niche products.
  2. A “mobile-first” system is a good way to reach a valuable and captive audience generating a strong ARPU.
  3. The hybrid formula, digital + print, is important as well. In our case, being able to offer a magazine, compact but with a significant editorial value, acts as a booster to attract subscribers — and advertisers.

Overall, it shows the print model can retain some business sense — if managed in a different way: no kiosk sales, only in bundle with a digital product and designed to complement it.

frederic.filloux@mondaynote.com

The Publisher’s Dilemma

Today’s title pays homage to The Innovator’s Dilemma, Clayton Christensen’s seminal 1997 book. In it, the Harvard Professor describes the effect of what he calls “Disruptive Technologies” on pre-existing markets or businesses. Fifteen years after the concept’s emergence, the impact of digital media on the news industry could be added to the list of most quoted examples of disrupted (devastated?) sectors.

Before we go further, let’s pause a moment and reflect on the Washington Post Company’s latest financial statements: the Q4 2010 earnings released last week. The “WaPo” is the only major US newspaper to provide helpful P&L data (multi-publications media houses usually don’t go into the same level of detail).

Here are the key figures for the full year 2010:
- Revenue for all activities: $4.7bn  (+8% vs 2009)
- Operating income: $546m vs. $259m in 2009
- The Kaplan Education division accounts for 62% of the revenue and 61% of the operating income.
- The Cable television business accounts for 16% of the revenue and 30% of the operating income.
- Broadcasting television revenue increased by 25% to $342m (7% of the total) and its operating income rose by 72% to $121m and accounts for 22% of the total operating income (most of the Y/Y growth is due to an improving advertising market, especially in the automotive sector).

For the newspaper division (mostly the eponymous daily): 2010 revenue was stable at $680m (14% of the total) and the operating loss was reduced to $9.8m — against the 2009 hemorrhage of $163m.
In passing, the Washington Post’s situation shows the importance of a diversified structure; without its education unit, the company might not have survived the last few years. The acquisition of Kaplan Inc. was suggested by Warren Buffett in 1984 and it was the best advice the Post’s owners ever got. (The great billionaire sage is due to step down from WaPo’s board later this year).

Let’s now look at the underlying trends: a persistent erosion in circulation (-7.5% in 2010) and the growth in the Post’s online activities.

The good news: on the fourth quarter of 2010, online accounted for 43% of the newspaper’s revenue, the result of seven years of steady improvements:

Now the bad news: this trend is more a reflection of the print’s business continued erosion than of a sufficient growth on the online side. The next chart shows the parallel evolution of print advertising and online revenues (the latter is totally ad-based). These are quarterly figures are from Q4 2004 to Q4 2010.

Over the last seven years, for each dollar added to online revenue, the WaPo lost five dollars on print. During that time, the Post has lost $88m of print ad revenue and it improved its online business by only $18m. This leads us to a key realization, a sobering one: there is no hope current online revenue stream will someday offset the past decade’s tremendous losses.

Let’s face it: the online advertising business model, when applied to the transformation of the newspaper industry, is largely failure. The reasons are well known:
- The profusion of free, news-related contents diluted the perceived value of editorial-rich “trusted brands”.
- More agile competitors, quite adept at using sophisticated audience-catching techniques (that are implemented at a fraction of the cost of a modern printing plant).
- The endless stream of pages with hundreds of URLs added each day ended up destroying any balance in the supply vs. demand mechanism.
- The resulting pressure on prices, as “premium” ad formats slowly yielded to bulk fire sales.
- An unreliable audience measurement system that rewards cheating instead of editorial quality or relevance.
- The advertising community’s inability to base their purchases on solid market analyses.

Still, publishers had the means to attenuate the effects of this unfortunate conjunction.

For instance:
- Cutting down at their inventory by at least 50% in order to revive a sense of market scarcity.
- Investing much more in technology in order to match the sophistication of clever pure players.
- Refusing to sell the lower end of their inventories to bottom-feeding “ad networks” that act as powerful deflationary engines.
- Getting out of the audience-measurement systems that are ridiculously inaccurate and setting up their own system of traffic analysis.

That’s the theory. In reality, all of the above implies a kind of collective action that is beyond the intellectual and emotional reach of the newspaper industry (although it is not a given that such set of measures could have reversed today’s trend).

Which brings us back to the title of this column. Mere adaptive tactics won’t save the traditional news industry in their multi-front war against “disruptive technologies”.

Some radical re-engineering is needed.

For instance, very few publishers of money-losing dailies can elude the following question:  Wouldn’t it be smarter to accelerate the downward spiral of their print activity in order to feed more oxygen and nutrients to the emerging online business? Each time I’m testing the idea with my fellow European publishers, I’m getting a straight answer: “No f**** way, pal. Print is still where the revenue is!”  I politely refrain from saying “so are your losses, pal “. Beyond this thin-skinned reaction lies a more rational fear: brand dissolution into the digital maelstrom. And there is no successful example of the kind of bold move I recommend.

Still.

I don’t see any newspaper surviving without a major structural change in its business. An example: Being published every day will make less and less sense as most of the developing and breaking news is read (and heard or viewed) on a smartphone. On the contrary, long form reporting, or visually rich storytelling could still thrive on paper, a format in which glossy ads will stay in high demand and command correspondingly high prices. Such publications — one or two days a week — have the ability to remain powerful brands vectors.

Don’t dream on it, it’s over


In parallel, newsrooms will have to adapt.
Gone are the football-size open spaces with hundreds of staffers, a small fraction of which work extremely hard and burn themselves out while legions of others parsimoniously manage their output. The next breed of newsrooms will be smaller, more agile and decentralized; it will be built around an inner core of seasoned editors managing in-house or external — and decently paid — reporters and writers (I’m not referring to today’s low cost digital serfs toiling in writing pens, endlessly recycling second-hand material).

Change is also needed on the business side. As the failure of advertising-based  models sinks in, the paid-for model is gaining traction. It is not likely to work on the web but it is finding its way on mobile devices where payment is (slightly) more natural and easier to implement. But prices will have to adjust (downward). Today, the vast majority of publishers are tempted by a mirage: they think they can “protect” their eroding print business by setting high prices for their digital products; others invoke the need to support the industrial costs of print as a reason to oppose low prices on digital.
As long as this mentality prevails, the transition from print to digital will keep stalling — and low-market pure players will thrive. Dinosaurs: It’s time to edit your DNA, or face a world with more HuffPos and no WashPo.

frederic.filloux@mondaynote.com

Bloggers, publishers and the Apple lockdown

Bloggers like simplicity. They view themselves as computer industry geniuses, as the embodiment of a fantasied future, vectors for all forms of intellectual life, culture, news, entertainment… Bloggers believe in a world where traditional publishing will soon meet a well-deserved death.

Last week, this Manichaean worldview reached a paroxysm: many self-proclaimed digital pundits were celebrating Apple’s move to lock the tablet business down, at the expense of the ever-caricatured “old media”. I’m of course referring to Cupertino’s new policy on subscriptions.

This “us vs. them” is both exasperating and completely misguided.

Last Thursday in London, I attended an INMA conference on tablets strategies — focused on dealing with Apple new rules. About fifty people, all of them using at least one Apple device, all of them eager to make their contents available on the iPad and the iPhone — as long as it is economically tolerable.

For traditional media, the transition to digital boils down to a simple equation. The industry needs to mutate from a business models that used to generate a revenue of 100, to a new one that will only yield 30 — while preserving its core product features and values.

Today’s problem is not one media versus another, it’s the future of journalism — it’s finding the best possible way to finance the gathering and the processing of independent, reliable, and original information. This is emphatically not the blogosphere’s mission statement.

We all agree: for anyone, the no-intermediary ability to reach a global audience is an exhilarating revolution. And, for old-fashion journalism, it’s been the most beneficial kick in the butt ever. Having said this, I don’t buy into the widespread delusion that legions of bloggers, compulsive twitterers or facebookers amount to a replacement for traditional journalism. No question: these new the tools accelerate the news cycle in a stunning fashion — as we can see today with Libyan tentative to cut the internet off, something the Egyptian government did with frightening efficiency ten days earlier. Social networks and microblogging services helpfully supplement the work of journalists when those are no longer able to do their job. But they can’t replace professional reporting. The echo chamber’s sound volume should not be confused with journalism’s unique combination of skills and resources.

Reporting is a métier. No one could become a decent magistrate after reading a couple of law books. In a similar way, good journalism can’t happen without training and experience. Nothing is trivial: handling sources, avoiding manipulation, watching out for ethical traps, managing the distance from facts, and their context…

Without five major newspapers lining up dozens of editors and foreign affairs specialists able to redact and contextualize the Wikileaks trove, the “cablegate” would still be a 300 million words useless swamp –  while still putting at risk the life of hundreds of people. (If you want to grasp the complexity of the operation, read Open Secret, War and American Diplomacy published by the New York Times, or the symmetrical Guardian account Wikileaks, Inside Julian Assange War on Secrecy.)

Blogging zealots will object: Julian Assange could have used the vast powers of crowdsourcing to retrieve and analyze the assembled material. Sure thing. Just consider how the “collective wisdom” would have handled cables pertaining to Middle East politics. Assange knew what he was doing when he decided to work with professional news organizations.

Similarly, consider last week’s investigative piece in the NY Times. It uncovers Google’s strange blindness to JC Penney “black hat” practices. The NY Times described some of the cheating used to unnaturally push a company or a product towards the top of ordinary, “unsponsored” search results. Such an exposé is the product of painstaking journalistic legwork. It didn’t come from the many blogs covering the search business.

This isn’t an exception, it is the rule: talented as they may be, bloggers can’t provide this type of service to society.

How does this relates to the business model of news? One word: Costs. Maintaining and nurturing competencies in a large newsroom costs millions…. which have yet to materialize in digital media. In the transition to the new internet-based world, the failure of advertising and of paid-for models both threaten to make digital journalism insolvent.

Which brings us back to Apple subscription policy. Why were my colleagues at the INMA conference so upset?

Five reasons

#1  The introduction of the iPad led publishers to believe that Steve’s tablet could — finally — be the magic trick to get readers to pay for news. They’re not so sure now.

#2  As we discussed in a previous Monday Note (see Apple’s bet on publishing), subscription is the model of choice for digital publishing, as it is for most of the content industry.

#3  Arguing that publishers who pay 40%-50% in printing and distribution costs should be elated to see Apple charging “only” 30% fee is ludicrous. For one, the true number is 39% here in Europe after taking in account the Luxembourg VAT. Secondly, readers expect (rightfully so) a big discount over the price they used to pay at their newsstand. A lower price tag combined with advertising yielding a third or a fifth of the dead-tree model would call for a platform costing no more than 10%-12%.
For that matter, I totally agree with James McQuivey’s analysis published by PaidContent who says the cost structure of a digital platform should be closer to the credit card processing business (McQuivey, a Forrester analyst, predicts distribution platforms fees falling below the 10% mark at some point).
A 30% rate could be acceptable for managing complex applications such as games that requires sophisticated development tools and technical approval; but not for contents-based apps such as newspapers.
No one says Apple should have left a backdoor for digital subscriptions open, but the Cupertino guys should probably consider a more flexible approach based on real costs.

#4 The same blogosphere misconception applies to the collection of customer data. Many digital pundits praise Apple’s Opt-In for allowing the release of customer data, arguing that medias are responsible for the deluging mailboxes with unwanted mail. That, again, is nonsense. A newspaper or a magazine subscriber costs as much as $300 to recruit. Does anyone really believe that a subscription department will try to squeeze a few dollars per record by leasing its precious database ? Of course not.

And by the way, I find quite funny to see such idea propagated by those who lay socially naked on Facebook, enjoy sharing their breakfast menu on Twitter or flock into email sucking engines such as Groupon.

#5  The least acceptable part of Apple subscription policy is the impossibility for a publisher to propose a cheaper subscription elsewhere. This is probably the most legally challengeable aspect of the newer terms of service. It goes against one of the most basic laws of retail: prices reflect the cost of the distribution platform. The Korean convenience store open 24/7 is more expensive than WalMart.
In itself, this restriction could be the main motive for publishers to quietly exit an overly constraining App Store.

At last week’s INMA conference in London, most the people I spoke with were considering alternatives to Apple’s lockdown. Others solutions are emerging. The most obvious ones rely on HTML5. Today, a set of pages and UI functionalities reproducing the deepest iOS features (such as GPS or sensors management) can be downloaded with a single http request and allow 15 or 20 megabytes of offline reading — sufficient for a digital publication with no video. Of course, such wizardry is still in its infancy and development requires a great deal of tinkering, but it’s improving fast.
There is no such thing as a durable lockdown in the internet world.

frederic.filloux@mondaynote.com

The Traffic Bubble

The new high tech-bubble might not be the one you’re thinking of. Measuring the bubble’s size and inner pressure of is a delicate exercise. For today, we’ll consider two sectors: social networks and online media — such as the Huffington Post acquired last week by AOL for a stunning $315m.

In the valuation game, social networks are in a league on their own. A month ago, Sharespost, the ghost-trading site for private companies, gave Facebook a valuation of $82.9bn (see this Bloomberg story). Now, for unknown reasons, the figure is back to $53bn. Twitter is said to be worth $5bn to $10bn, depending upon Facebook’s or Google’s competing appetites. Ordinary rules of arithmetics don’t apply when pondering the wisdom of such figures. To sort this out, let’s see if we can come up with other metrics.

With Facebook, investors buy size and dominance. 600m members all over the world; more than 60% of all web users; on some markets, a quarter of users’ internet time. Facebook is the nets’ biggest gravitational attractor, the web’s ultimate rizhome: sooner or later, most of the world’s sites will be connected to one or more of Facebook’s services.

The main danger lies in the usual toxins of success: arrogance, inability or unwillingness to   give more than lip service to users’ concerns and sensitivities, defiance of written and unwritten market rules. Facebook’s biggest threat is Facebook itself. But none of the above matters today and high expectations lead to a stunning valuation of $80 per member.

Is it excessive? Well, in october 2007, when Microsoft assigned a $15bn value to Facebook by investing $240m for a 1.6% slice, everyone mocked both the move and the number. At that time, each Facebook member carried a valuation of… $300, almost four times more than today’s — and the company was losing money.

In other words, Facebook looks (relatively) cheap today, especially since it is now profitable. On the operational side, though, Facebook’s ARPU (Average Revenue Per User) remains at around $3 per year and per member, quite high by internet standards.

Twitter’s ARPU is about one tenth of Facebook’s: $0.28 vs. $3.30. But the microblogging service carries a stunning valuation. If Facebook and Google are indeed about to wage a bidding war for the little bird and willing to cough up $8bn to $10bn, it could put a valuation of $50 to $60 on each of its 160m members (actual users are a fraction of that). For a company that doesn’t have a proven business model and  is hemorrhaging money, this feels ridiculously high. But Twitter’s simple yet extremely powerful medium could be a natural fit for Facebook and, to a lesser extent, for Google — as long as the search engine is able to get out of its current one-trick-pony situation.

The third strong player in the social network field is LinkedIn. The social network for professional is now preparing for its IPO (see story in DealBook and its SEC prospectus). Sharespost sets its value at $2.51bn. Each one of its 90m registered members carries a valuation of $28 and generates an ARPU of $2.00-$2.50. What investors are about to buy is a unique position in the professional social network sector, and a three digits annual growth rate which now threatens the highly lucrative business of jobs classifieds.

Is this a social network bubble? I’m not so sure. Thanks to its size, to its footprint on the internet, Facebook effectively bars anyone from getting into its own business. Twitter seems overvalued as a stand-alone business (no viable revenue stream), but not necessarily as complement to one of the web’s behemoths. And LinkedIn is likely to possess the greatest potential for growth.

If there is a bubble, it must lie in a collective hallucination over traffic and audience valuations. See what happened last week with the Huffington Post. The $315m acquisition by AOL puts a value of $13 per unique user, each bringing an ARPU about of $1.20. These numbers are in line with most news-related internet properties. (I already said what I think about the journalistic dimension of the Huffington Post; see Aggregators: the good ones vs. the looters.)

The HuffPo is a digital sandcastle. Its three pillars are:
- Unabashed aggregation machine recycling roughly 300 stories a day from other medias;
- A modest amount of original production (largely drawn from newswires) that forms the kernel for a vast debating space involving thousands of unpaid bloggers (who now feel cheated and are about to create their virtual Tahir Square);
- A powerful and well-managed stream of celebrity stories, thanks to Arianna Huffington’s connections in Hollywood and in left-wing political circles. (See blogs by Alec Baldwin and by Bill Clinton’s former Labour Secretary Robert Reich).

Amazingly, one of its staffers candidly exposed the Huffington Post’s M.O.

First, the aggregation process.

“All day long, [front page editors] receive emails from reporters, editors, publishers, publicists and flacks from organizations that include but are not limited to, the following: The New York Times, The Washington Post, The Wall Street Journal, The Chicago Tribune, McClatchy Newspapers, the London Guardian, USA Today, CNN, MSNBC, ABC News, CBS News, C-SPAN, Time, Newsweek, Rolling Stone, The Atlantic, etc. Those emails all ask the same thing: Would you consider placing this content on The Huffington Post? The front page editors work each day to separate the wheat from the chaff, and get the most timely and interesting stuff on the web. (And depending on how specific the section you are working in, say Books or Entertainment, the sorts of sources expand dramatically.)”

Great. Most of the HuffPo’s editorial tinkering consists in repackaging the work of others, producing stand-alone stories whose only aim is generating comments and internal blogging. In effect, original publishers are giving the “aggrelooter” the rope it will use to hang them.

And then :

“All of the above — the original content that drives the entire business and the aggregation that sends readers out into the world of news and information — helps to build an architecture that enables thousands of other people to have a space to come and write and play and inform and start conversations. Those people are the Huffington Post bloggers — who flock to the site for a chance of being heard.

If you are, say, the communications director of NARAL, you get paid for your contribution to the Huffington Post… by NARAL, the organization that gives you a salary to disseminate your message.”

How naïve is this exposure of the Huffington Post’s ethics! Put another way, the HuffPo doesn’t mind propagating the “message” of lobbies such as the pro-choice NARAL organization presented as a blog! (It could have been worse, a Sarah Palin affiliate for instance).

What ailing AOL bought is vapor. About 35% of the HuffPo’s users come form Google. They land on cleverly optimized content: stories borrowed from other (and consenting) medias that mostly generate blogging and comments. This is the machine that drove 28m unique visitors in January, which makes the HuffPo close to the New York Times/Herald Tribune audience of 30m UV.  With one key difference: each viewer of the NYT websites yields an ARPU of $11, ten times more than the Arianna thing. Based on the HuffPo’s valuation, the NYT Digital would be worth billions. That’s a consolation.

frederic.filloux@mondaynote.com

Tear down this PDF

The PDF document format is digital publishing’s worst enemy. For a large part, the news industry still relies on this 18-year-old format to sell its content online. PDF is to e-publishing what the steam locomotive is to the high-speed train. In our business, progress is called XML and HTML5.

Picture today’s smartphone reading experience. We’ll start with a newspaper purchased on a digital kiosk. For a broadsheet, a format still largely used by dailies, the phone’s “window” covers 1/60th of the paper’s page. Multiply by 30 pages of news. You’ll need 1800 pans and zooms to cover the entire publication (plus, each time time you pinch out, you can take a leisurely sip of your coffee as the image redraws).

Next, we have two iPhone screen captures of American Photo, purchased on Zinio. The more compact magazine format doesn’t help. Note that you need to scroll laterally to read a full line (as for the “Text” function, meant to insure easier reading, it is ineffective) :

Am I being too derisive, or can we say this is not the best way to read?

The battle for online news will be won on mobility. We’re just at the beginning of the smartphone era. We can count on better screens, faster processors combined to extended battery life, more storage, better networks… The bulk of news consumption will come from people on the move, demanding constant updates and taking a quick glance at what is stored in their mobile device — regardless of networks conditions. Speed, lightness and versatility will be key success factors. There won’t be much tolerance for latency.

In that respect, PDF is just a lame duck.

Back in 1993, the Portable Document Format was a fantastic digital publishing breakthrough. All of a sudden, using a sophisticated mathematical description of images, texts, typefaces, layout elements, the most complex graphic creation could be encapsulated into a single file. Large font sets and dedicated software were no longer needed. The PDF reader, licensed from Adobe Systems under the name of Acrobat, soon became free or pre-loaded in various OS platform. PDF became an open standard in 2008. As for the performance, it was stunning: see a 6400% magnification below:

Great for high-quality book publishing… And a completely pointless stunt for a mobile news product.

The newspaper industry jumped on PDF. The new format let a production crew send the full publication to the printing plant using huge, high definition PDF files directly transferred to the printing plates. When the web arose, the industry kept using the same format to make the publication available for downloading. After years of file optimization, a newspaper or a magazine still weighs 20 to 50 megabytes. The download is manageable over ADSL or cable, but impractical on a mobile network. But wait, it can get worse: on the Android platform, for example, the reader can actually ad weight to the original PDF file. This is the consequence of a good intention: giving the publisher the choice between a finished product that is easier to leaf through, but requires a heavier file, and one that downloads faster, but is more difficult to read.

Publishers’ inclination to keep using PDF is based on one idea: the graphical elements of a publication — layout, typefaces — are an essential component of a printed brand. By extension this visual identity is seen as a “label of trust” for the news brand, with the design-perfect PDF being the medium of choice.

Now, three things:
#1, this widely shared assertion is not supported by strong facts. There is no survey (to my knowledge) that links visual identity to reader loyalty, to feelings of trust;
#2, on this matter, if there remains any lingering bond with readers, it will fade away with the new generation of news consumers: they are much less sensitive than their elders to the notion of “trusted brand”, let alone to any design associated to it;
#3, the web has evolved. The HMTL5 standard has shown the ability to render any graphic design without the PDF format’s downsides (see this previous Monday Note: Rebooting Web Publishing Design).

Why not, therefore, jumping off the PDF train? The short answer is XML management. Our techiest Monday Note readers will forgive this shortcut: the Extensible Markup Language is a version of the web language readable by both machines and humans. An article encoded in XML is not an image but a set of character strings associated to various “tags” that describe what they are, where they belong; the description also provides contextual information to be retrieved at will. In theory, any publishing system, big or small, should be able to produce clean XML files. It should also be able to generate a “zoning file” that maps the coordinates of a story, or any other element in the page (see the red box below that indicates the position of the story in a newspaper front page). Armed with such position data, smartphone software can provide the right reading experience, limiting the need for the painful panning and zooming I mentioned above.

Unfortunately, no one lives in theory’s wonderland.

In fact, very few newspapers are able to produce usable XML or zoning files. Part of the reason lies in outdated editorial systems that were not designed (not upgraded either) to handle such sophisticated, web-friendly files. IT managers have been slow to embrace the web engineering culture and it didn’t occur to publishers than a “human upgrade” was badly needed deep in the bowels of their company…  (This, by the way, leaves another wide open field to internet pure players and their web-savvy tech teams).

This backwardness has created its own ecosystem… in low-wage countries. Every night, all over the world, highly specialized contractors collect the PDF files of hundreds of newspapers and send them to India, Romania or Madagascar. Down there, it takes a few hours to electronically dismantle the image files and to convert them to dynamic XML text files, with proper tagging and zoning. Thanks to the time difference, the converted static newspaper is sent back to the publishers by dawn, ready to be uploaded on an internet platform, right before the physical version hits the streets.

Many will find these shortcomings appalling. For a large part it is. The good news is the evolution has merely begun. Still, very few publishers realize that upgrading of their production chain is a crucial competitive asset. As for the PDF, it remains immensely useful for many applications, but it is no longer suitable for news content that thrives on nomadic uses.

frederic.filloux@mondaynote.com

Ongo… where?

Ongo is an ambitious digital kiosk. Launched last week, it was founded last year by Alex Kazim, a high-tech executive who worked at Ebay, Skype and PayPal. Kazim lined up an impressive group of investors: Gannett, The New York Times, The Washington Post and the venture capital firm Elevation Partners whose portfolio includes Facebook, Yelp and Palm (now part of HP). Altogether, Ongo raised $12m, an unusually large amount for such a project (marketing activities will consume a large fraction of the company’s funding). Headquartered in Cupertino, California, led by a mechanical engineer, Ongo carries more Silicon Valley DNA than its media siblings. As an advocate of greater technology input in media companies, I’d say it’s a good thing.

Up to a point. I see Ongo as too much of an automated aggregator as opposed to an edited news product. In this respect, Ongo might be a good start, supported by a neat tech implementation (both on the web and on the iPad), but we’re not there yet.

Let’s have a look.

Business-wise, Ongo is a paid-for kiosk. For $6.99 a month, it includes a basic set of  publications. Then, you add titles of your own choosing. As you’ll see below, the bill builds up quickly:

In this simulation, I’m getting five publications for free. Then, for a hefty $35.96 per month, I get four more titles… that are available for free on the web!

Am I missing something?

This is counterintuitive enough to force to make two assumptions:
– Some of these titles will soon switch to paid-for models; this could be the case for the Boston Globe (part of the New York Times Company, itself about to roll-out its paywall next month — is the $14.99 rate a prelude to the coming standalone price?). Most of Ongo’s catalog is likely to follow; otherwise, there is no point in subscribing to the service. (As for the Guardian, to my knowledge, it is meant to remain free).
– Ongo founders bet the true value of their service is harboring in a single place paid-for publications that are currently disseminated all over the web (and therefore require separate logins and, soon, payments). This is a huge bet on the value of simplicity and convenience.

Strange pricing choices aside, Ongo’s concept faces two big challenges: interface design and the commitment of its main editorial drivers.

First, on the web or on the iPad, Ongo is flat and dry. Its designers have deliberately chosen to remove the layout or the visual identity that defines a title. Again, they bet on the convenience of having everything displayed on the same site. In another departure from the usual web page structure, they opted for a “skimmer” style, based on a panel-like navigation: no more scrolling here, you jump from one screen to another.

The result isn’t convincing. Ongo’s iPad edition shows every story at the same level. In the example below, the second screen of yesterday’s “Page One” (2nd screen of page 1, that’s novelty) mixes up a Taco Bell story drawn from USA Today and pressure on the White House to condemn Hosni Mubarak.

And should you select navigation by title (in the example below: the Washington Post), you will get this bizarre page structure in which a US representative’s dental ordeal is displayed on the side of the main Egypt article — while the secondary Egypt story is sent at the opposite corner of the page:

This is a perfect illustration for the limits of automated aggregation. Without a proper dose of human editing, of rearranging news streams to make them consistent with the news cycle hierarchy, any machine-driven system will inevitably produce contents structures disconnected from readers’ expectations. Serious news websites rely on well-trained editors for their home page or use A/B testing procedures, to determine on the fly which headline is the most likely to be clicked on. Even a captive — i.e. subscription based — clientele will not easily abandon its ingrained news reading ways.

The same applies to visual references. Print or digital newspapers, or web pure players, all give a great deal of thought to interface design. They strive for a combination of unique visual identity and easy navigation. Ongo simply cannot expect to attract or retain readers by encapsulating everything into the same dull layout. (We’ll come back to the issue of merging design and digital constraints in a future Monday Note).

The second challenge is what I’ll call the “broken toys pawned off to poor kids” syndrome. In 1990, when the world discovered the horrendous living conditions in Romanian orphanages, European families began giving toys to charities. Used toys, of course. Broken toys, in fact. Charities were understandably pissed. In business ventures, the “broken toys syndrome” occurs when a partner is so reluctant to play its role, that it keeps its involvement to a bare minimum. In Ongo’s case, two critical audience attractors — the New York Times and The Financial Times — are not really playing the game. The NYTimes feeds the platform with a selection of stories, many of them one or two days old. As for the FT, it provides so little content that it doesn’t even fill its allocated space on Ongo’s iPad screen (see below).

These two institutions should make up their mind: either they are on board with Ongo for a price consistent with their current (or future) rate — perhaps applying a discount if they want to push the new platform — or they stay inside their cosy walled garden and established brands. At this stage, Ongo presents the two “Times” as being part of its product. But, at this stage, these iconic papers are far from being really there. As readers quickly see through the scheme, this type of incentive isn’t going to help.

As far as subscribing to Ongo, although I expect to cough up about $600 this year for a wide range of digital news contents, I won’t flash my Visa card for Ongo — yet. Tomorrow, perhaps: this one-week old site has the brainpower, the backers and the funding to become the powerful platform for online news this industry badly needs.

frederic.filloux@mondaynote.com

Apple’s bet on publishing

Apple’s upcoming subscription plan is making large publishing companies hysterical. Rightfully so. Some of them built a complete business model for the iPad based on a commercial agreement that is now being revoked. Apple is not only changing the rules, but it does so in the worst possible way — in their usual cold My Way Or The Highway manner. But one of the most interesting aspects of the maddening change is the strategic thought behind Apple’s move.

Let’s rewind the tape.

When publishers began to create content applications for the iPhone and the iPad, they found the in-app purchase feature was the perfect monetization tool: one click on the “buy for $0.99″ button… another on “confirm”… Done. Simple, seamless, friction free. And a 30% cut for Apple’s content delivery and payments services.

Weirdly enough, breaking its well-known controlling habit, Apple left open the possibility for the publisher to sell subscriptions directly to the reader. From the app, the user who wanted to buy a subscription was redirected to the publisher’s website. There, bypassing the iTunes payment system, the publisher collected the required personal and billing data. This direct connection to the reader was so attractive it drove many publishers to build their own subscribers recruiting machine on it (some even take inspiration from wireless carriers and  subsidize iPads in exchange for a two years subscription).

In the treacherous transition to digital, retaining control over subscriptions is crucial. Magazines, whose historic readership is mostly based on subscriptions, insist on preserving this model in the digital world. To get an idea of the subscriber’s importance, consider the following: a newsweekly will spend $150-200 to recruit a print subscriber through tons of direct mail, gifts, special offers and incentives. For a yearlong subscription, all bonuses included, the per-copy price could go as low as 30 cents, while the newsstand price will be around $4.00 or $5.00. The explanation for the gap: advertising money, which represents the bulk of the industry’s revenue. A subscriber is, by definition, a regular consumer; it is part of a well-defined readership that won’t require a complex supply chain able to adjust the number of copies shipped to European airport kiosks or Chicago newsstands.

For daily newspapers, the equation is more complicated. With a few exceptions, their subscription base is not as strong as the magazines’s. This makes dailies more sensitive to copy sales fluctuations influenced by the news cycle, the look of a front page or even the weather. And, above all, the advertising market likes regularity. In the digital world, those who choose the paid-for model therefore want to gather as many subscriptions as possible. Forget the clever the single copy micropayment system, for digital publishers, subscriptions are the Holy Grail. A strong subscriber base will provide: a) a recurring revenue stream, b) a more attractive delivery medium for advertisers who like the subscription’s predictability and, c) cash “float” because subscription fees are paid upfront. In addition, the smartest publishers use CRM to increase the per-subscriber yield and sell ancillary products.

For publishers, regardless of price consideration, subscribers and their related data are critically important.

The bad news hardly came as a surprise to many of us who found strange that Apple allowed content providers to bypass its transaction system for the most promising part of their revenue stream. In the long run, how could Apple limit itself to its 30% cut on a $0.99 purchase, and leave a $100 or $150 yearly subscription unmolested? It was just a matter of time before Apple decided to plug this revenue leak. The grace period was probably the time needed to build a subscription system able to match the App Store’s global scale.

Apple could have acted nicely and notified publishers that, sometime in the first half of 2011, it intended to deploy a new version of its App Store along with its own subscription system — with the unpleasant effect of closing down the direct subscription loophole. Publishers would have bitched and moaned, but the parties would have negotiated a deal in which the Cupertino guys would have yielded one sixteenth of an inch to frustrated but resigned contents providers (come on guys… we all know it had to end that way). This is just a matter of balance of power. Apple will soon be a $100 bn/year company and the combined revenue of the US publishing industry both for magazine and dailies is less than $60bn.

No kid gloves in Apple’s secretive world. Three months ago, without explanation, Apple began withholding approval of new apps using the subscription loophole. Wondering publishers were left without answers.

Then came terse emails recalling the §11.1 of the App Store Review Guidelines :

11.2     Apps utilizing a system other than the In App Purchase API (IAP) to purchase content, functionality, or services in an app will be rejected

with the following the punch line :

For existing apps already on the App Store, we are providing a grace period to bring your app into compliance with this guideline. To ensure your app remains on the App Store, please submit an update that uses the In App Purchase API for purchasing content, by June 30, 2011.

Bam! Publishers, consider yourself “served” — as in subpoena, not service…

Needless to say, most media companies went ballistic. On this side of the Atlantic, anti-trust watchdogs have been called in. Last week, the French National Daily Publishers Association (SPQN) — encouraged by the Finance Minister Christine Lagarde(!) — said it will ask the Competition Authority to look into the matter. In Belgium, the Minister of Economy is prompting an inquiry into Apple’s possible breach of the law. The European Commission’s involvement is likely — and should not be overlooked by Apple.

Multiple lawsuits by antitrust bodies or trade associations could be seen as pointless: it will take years — in a market that moves at lightning speed — and it will burn huge sums in attorneys’ fees. On another hand, it could be a way to obtain better conditions in the App Store subscription system: a better rate than the usual 30% and, even more important, access to user data.

Frustrations aside, Apple’s move is not the end of the world. For the App Store, if Cupertino relinquishes control on a minimum of consumer data, the damage is bearable. As for pricing, a well-managed transaction platform with big volumes could cost as low as 15% of revenue, or less. If customers want the comfort and the ease of use of the App Store, fine. It would be foolish to ignore them. Simply, as a rule of good management, a premium platform should be reflected in the retail price: a subscription priced at $99 on the publisher’s platform should be set at $119 on the AppStore — this is similar to the situation where a MacBook is more expensive than a comparable Wintel laptop.

From a broader standpoint, Apple’s move could even result in an opportunity for publishers. Apple’s Apps system is fantastic for software or games, but not necessarily for content applications (see previous Monday Notes on the subject:  iPad publishing: time to switch to v2.0 , Rebooting Web Publishing Design , Key Success Factors for a tablet-only “paper” ). In fact, an HTML5 website, designed for the iPad and the iPhone could be a good solution: it could give access to any kind of store — proprietary or multi-titles such as a kiosk — in which publishers will retain control over every critical dial. For media store development, the technology is on the publisher’s side. Scores of vendors are about to propose one-click payments, from PayPal Mobile Express check-out to… cell phone carriers working on systems where users buy online and are charged on their mobile bill.

In other words, there is life outside Apple.

One of the most interesting questions is Apple’s underlying strategy. In a nutshell, Cupertino is betting on “many small” rather than on “few big ones”. Let me explain. Publishers, such as The New York Times, Condé Nast or Le Monde are good at managing subscribers; they purposely maintain sizable staffs and they want to replicate their know-how online. On the contrary, small publishers can’t come up with the resources required to go after subscribers. The new App Store is designed for them. Suppose a group of 15 good reporters, focusing their work on high value editorial. Monetizing their work is a headache. Now Apple comes and says:

“Guys: our full-feature App Store will take care of all your hassles. For a flat 30% fee of your sales made on iPhone and iPad (and maybe on Macs though the new Mac App Store), we take care of: content delivery, its referencing, the back-office, the payment system, and we wire the money to your bank account every month.  And, Hey!  If by any chance you want to sell ads within your app, we can do that too in return for a 40% fee. All you need to do is to focus of what you are good at –producing a sharp e-publication, whether it is a tech blog, or a nicely designed architecture magazine — and price it wisely (preferably low, forget about the physical newsstand). We take care of the rest. One more thing. Consider what we did with the iPod, the number of iPhone and iPad sold last year [see Jean-Louis' column below],  you get the picture: we are aiming at global domination for content delivery mobile devices.”

Say Apple makes this pitch to a respected blog making a mere ARPU of $2 per visitor and per year from ads. Will it resist?

frederic.filloux@mondaynote.com

The Uncertain Future of Free Dailies

There are signs. Not necessarily good ones. At ten in the morning in Paris, you still find piles of free dailies at almost every distribution point. At four in the afternoon, in the business district, outside one of the busiest subway stations, unopened stacks of copies of Metro lay soaked by the winter rain. Two years ago, subway and commuter trains were filled with people reading a free daily. Now, readership has dropped dramatically. In 2002-2005, to make sure the morning daily was there when its intended target group walked by, the logistics team at 20 Minutes (the market leader) carefully adjusted the number of papers available at key locations using traffic analysis in 15 mins increments. Today, the oversupply is obvious.

What happened to the free dailies that once rocked the press market?

Before I go further, a bit of disclosure. I was 20 Minutes’ editor from 2001 to mid-2007; then, until December 2009, I went to work for Schibsted ASA, the Norwegian group that owns 50% of 20 Minutes.

The French free daily market is a strong one. Here are the main data (source: EPIQ/ Audipresse market research): total readership is 4.5m people (+0.4% from September 2009 to September 2010); this is approx. 9% of the French adult population in about 10-12 major cities.

Ranking……………………Readership…………….Ownership
1- 20 Minutes :………….. 2.7m (+2.2% Y/Y) ……Schibsted/Ouest-France
2-  Metro :      ……………. 2.4m  (-0.7%) …………Metro International
3- Direct Matin: …………..1.7m (+4.8%)……….  Bolloré Média
4- Direct Soir: …………….1.0m.(-5.4%) …………Bolloré Media

Financially speaking, these titles share an advertising market of about €120m ($160m). Their market strategy is built on heavy discounting (about 80% of the rate card vs. 50% for the paid-for press). As a result, a full page in a free daily will net about €10,000-15,000 as opposed to €40,000-50,000 for a major paid-newspaper.
In Q3 2010, for 16% revenue growth, 20 Minutes showed a negative EBIT of €1.3m; it could however turn a small profit for the full 2010 year with revenue in the €50-55m range. Metro showed both a declining EBIT and declining revenue for the same period. The other two papers don’t provide figures but are said to bleed cash.

Where is this going?

#1 Readership. The key issue, obviously, but without a clear trend. The free press is designed to target a young, urban, active audience, one that is in high demand by advertisers. To make targeting more efficient, these papers beg for localization: specific pages for news, culture, services, etc. produced by a small local staff.
On the French market, free dailies show a small year-to-year growth thanks to the opening of new cities. In theory, such expansion is fine.  But going in the second tier of cities means watering down the very demographics the papers rely on for their pitch to advertisers. Plus, in smaller areas, localization becomes economically unviable. Even if, on a spreadsheet, publishers are still able to defend the marginal cost of expanding into smaller cities, the gain in advertising revenues is close to zero (or will get there after few quarters). A perfect example of the law of diminishing returns.

#2 The product. When they commute, what do people do instead of reading a free daily? Their heads are deep down inside their smartphones. Compared to a convenient, permanently updated, set of mobile services, the free press has lost its appeal.
Right now, the free daily is riding a low-cost downward spiral: fewer pages every day, requiring less journalists and editors, at every level cheapest is best, etc. Product people are no longer in charge. The result is seen every day in the product: nothing to retain the reader’s attention, no original treatment or angle, no uniqueness whatsoever; content is flat, bland, and often packaged in an increasingly aggressive ad environment (several times a week, an advertising cover-sheet conceals the content of the front page). No wonder the mobile phone is taking over. The rise of the smartphone took the free press by surprise, both in terms of time allocation (hours spent to text-messaging of Facebooking) and by its ability to provide a competing news product.
In retrospect — always easier than making good predictions — free papers should have capitalized on their brands, built upon millions of daily readers, to develop strongholds in web and mobile, with products targeted at every segment of their audience. In addition, satellite, market driven products in both editorial and services, should have been engineered. Darwin’s survival of the fittest.

#3 Market positions. Revenue and profit numbers show the importance of retaining the number one slot. On the French market, in spite of having a better product and running a tight ship, the n°1 position held from the start by 20 Minutes is likely to change. For one, profitability is fragile with three players on the market — one too many, at least. Two, Bolloré Media — publisher of Direct Matin and Direct Soir — shows both resilience and resolve. Size matters: for the €6bn revenue Bolloré Group, its free dailies weigh about 2% of the conglomerate (two thirds are transportation and logistics). In such a context, the €40-50m poured into the free press is pocket change.

The low barrier-to-entry is one of the most challenging free press features. Basically, you design a product, put together a stable of two dozens journalists, sign a couple of printing and distribution contracts and you’re in business. The rest is a constant adjustment to circumstances. It is very difficult to built a durable, unique and hard to replicate business.
In addition, Bolloré enjoys two advantages: it holds strong positions in the advertising sector (from creation to media buying) and, more importantly, it has the luxury of the time. From its perspective, being the late-comer with a so-so product is a minor inconvenience that can be corrected over time. The 172 years-old Bolloré group is good at the wait-and-adapt game. For instance, the weak evening edition of its free daily (Direct Soir) is about to morph into a theme-oriented daily special (cars, sports, well-being…). In the meantime, it will keep beefing up its circulation and thus could en up in a position to take the critical #1 slot. With a set of editorial products carefully designed to attract advertisers, Bolloré and its Direct papers could disrupt the game.

But in the long run, free newspapers face the tough and delicate challenge of dealing with digital news consumption. They still own great assets: brands (not as diversified as they could have been, still…), huge audiences and healthy shareholder structures. It is “a mere matter” of adapting products and creating new ones. Management by KPI is fine — and necessary. But, in a highly media-diverse competitive market, “painting by the numbers” can’t compensate a lack of product strategy vision and implementation.

frederic.filloux@mondaynote.com