About Frédéric Filloux

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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

Le Monde: a blueprint of a turnaround

The iconic French newspaper Le Monde is about to begin a new chapter of its complicated history. Last September, what remains France’s most influential paper changed hands (see previous Monday Note Le Monde’s escape velocity and story in NY Times’ DealBook).

Le Monde is now owned by a triumvirate: Xavier Niel, a telecom entrepreneur, provided the bulk of the €110m ($130m) injected in the venture; Matthieu Pigasse, head of Lazard France, and Pierre Bergé, co-founder of Yves Saint-Laurent fashion house. Now, as the paper prepares to replace its editor, the new owners’ turnaround operation faces tough challenges.

But, before we continue, a disclosure that might influence the way you read this column:

Over the last few days, I have been on the receiving end of feelers from both insiders and outsiders: they wanted to gauge my interest in Le Monde’s editor job. (None of these informal conversations directly involved the owners.) For reasons I’ll discuss towards the end of this note, I made it clear I wasn’t interested.

With this out of the way, let’s look two sets of problems at Le Monde: editorial and industrial.

The editorial one is a relatively minor. Le Monde prides itself in remaining the “Paper of Record”. Unfortunately, such posture encourages more arrogance than it spurs innovation or a burning desire to win. Le Monde’s morning e-mail sent to digital subscribers exemplifies this hauteur; it says: “Que dit Le Monde?” (What Does Le Monde Say?) ; it’s not “What’s in today’s paper”, “What we’ve got”, “What we scooped”, “Selected legwork”, or “You might like…” No. It is: “The State of the World according to Le Monde”.

Quite logically, we get headlines that pontificate about yesterday’s news (Le Monde is an afternoon paper, oddly enough). Rolling your eyes, you still buy it at your favorite kiosk hoping to find good reading material. Most of the time, you actually do. Le Monde still manages to retain a great editorial team, one able to produce and edit high-quality content. But such capability is no longer sufficient to keep (and preferably expand) its readership.

On weighty topics, The Guardian or The New York Times are just as solid as Le Monde, but they are also way more fun to read. By “fun to read” I mean these newspapers are more willing to assign valuable journalistic resources to subjects popular with readers but belittled by French journalists. (For more on what readers actually like, see a previous Monday Note: What do they read – actually ? ).

Again, dusting off this slightly austere and pretentious worldview is no big challenge; it only requires minor adjustments to the daily mix. And probably a bit of reorganization. Le Monde is notorious for its uneven workload distribution. On one extreme, we have toilers who feed the beast on a daily basis, always on the edge of burn-out; on the other, there are those who maintain a more epicurean approach to their job. Among the latter, some will have evidently to be let go; others will have to accept changes to their working conditions and contracts.

The industrial problem is far more critical. In the next few months, management will make decisions likely to seal the paper’s fate. These decisions will pave the way to a new era, or lead to extinction. (So far, the latter has been the unfortunate “natural” course: we’ll recall Le Monde was on the verge of bankruptcy last Summer).

The new shareholders — who define themselves as owners — were first viewed as saviors. Plenty of money, a strong industrial and financial track record for Xavier Niel and Mathieu Pigasse. As for the older Pierre Bergé (81), he was portrayed as the gentle philanthropist who arranged for Le Monde’s staff to retain a minority stake in the new capital structure. These idyllic feelings quickly evaporated as the paper’s management proved unable to present a well-thought-through strategic plan to their new bosses. After dawdling for a few months, the owners jumped to action, the hard way. Xavier Niel, the entrepreneur, lost patience and launched one of his former lieutenants on an expeditious cost-cutting operation. The gent — a French-Israeli entrepreneur — went after low-hanging fruits such as management perks, travel expenses and stationery (really!). In passing, as a way to squelch resistance, the new owners resorted to the classy expedient of leaking juicy details about the cost-cutting operations. They knew media reporters would parrot every bit of gossip without bothering with lowly fact-checking. Good old eighties tactics: publicly humiliating management.

Until then, people at Le Monde had only seen pictures of cost-killers; they got a rude wake-up call: gone is the era of passive shareholders and out-of-the-way board of directors. The general manager of the group was demoted two weeks ago, and the current editor has been stripped of its top attributions and is about to leave.

Now comes the hard part. The cost-killer is back in Israel but the really important decisions remain to be made.

#1 The printing plant. Le Monde still owns a cathedral that is both obsolete and costly to operate. The facility, controlled by the omnipotent Printer’s Union, is plagued by productions inefficiencies and loses its clients one after the other. The plant currently employs 300 people where 100 would be more than enough. That’s about €12m a year in potential savings. The choice is between injecting dozens of millions of euros to modernize the plant or closing it down. By any measure, this is a no-brainer: the plant has to be closed. Any Western publisher dreams of dumping his printing plant (many groups such as the Norwegian Schibsted no longer own any printing facility).

In Le Monde’s case, as part of the industry’s restructuring plan, the French government has set aside adequate funds and is ready to pick-up most of the tab. (For the long run, the Sarkozy administration wants to reduce the subsidies that accounts for 12% of the French dailies revenues but, in the interim, will provide financial support for transitions towards more durable structures.) This could free Le Monde to hand over its print job to the new facility built by Le Figaro eighteen months ago — one that begs for an accelerated amortization (see our story about Le Figaro’s strategy).

#2 The digital strategy. Last summer, investment bankers came up with the following valuations for the Groupe Le Monde: €10m for the newspaper itself, €30m for the magazines and €80m for its digital subsidiary, Le Monde Interactif (MIA). Problem is: 34% of MIA is owned by Lagardère Groupe, a diversified media company still in search of a viable digital strategy (despite numerous and costly acquisitions). The reason for this odd capital structure? The old guard at the newspaper was reluctant to fund Le Monde Interactif, which had to find external financing.

Now, Le Monde faces a weird situation: a third of its most valuable asset is controlled by another company and, with each passing quarter, the price for that stake goes up. Any new management would have to make sure it reassumes full ownership of such a critically important business unit. The urgency could justify a bold arbitrage move such as selling the cultural weekly Telerama acquired years ago. No synergies whatsoever have emerged from that takeover — except siphoning cash from Telerama to the perennially money-losing daily.

Le Monde needs to regain control of its digital strategy both from a capital and a product aspect. Le Monde Interactif grew up feeling like the illegitimate offspring of a noble family. No wonder why it now fiercely defends its autonomy. With a dual ownership – largely played by MIA’s management for its own political ends – and a profitable operation, the digital arm of Le Monde operates in its own ways. Unfortunately, not for the best results. Editorially speaking, the site remains below the newspaper’s standards, and it doesn’t look good when compared to the Guardian Unlimited or the New York Times Digital. Its content is uneven (to say the least), often remotely related to the paper’s editorial treatments; many blogs are weak, and the entire interaction with readers is messy. In short, a platform with great potential, technically and financially strong, but one that calls for more discipline and a greater strategic editorial alignment with the flagship.

In addition, Le Monde Interactif prides itself with a rebellious online appendage: LePost.fr, a website targeted at young audiences. Originally designed as a kind of innovation lab, LePost in fact became a place for gossip and unverified stories (labelled as such!) — and for bleeding money (€2m operating costs for €200,00 revenue in 2009). This excrescence only needs to be sold or closed-down. (Its staff could be efficiently reassigned to beef up Le Monde’s  presence in social and participatory medias.)

Within five years, Le Monde will be read mostly on mobile devices – smartphones tablets – and supported by a mixture of free and paid-for contents. In the meantime, the newspaper will undoubtedly continue to lose some of its readers, even though a core audience, mature, educated and affluent, could slow down the process. The paper’s pricing/distribution therefore needs to be reassessed. It is likely that it could sustain significant price hikes without major readership erosion, probably coupled with distribution focused on major cities. At the same time, the weekend edition — a strong advertising vehicle — should be expanded.

There is no room for procrastination. Le Monde needs to act decisively to preserve its brand and editorial influence. It needs to reconsider its perimeter to address a critical issue: the Paper of Record is now challenged; it must morph into the Permanent Media of Record, online and offline. This requires a serious rethinking of asset allocation.

Why I felt I shouldn’t even think about the editor job:

1 / The editor’s job, as it is now defined, has been stripped of any influence on the company’s strategy. Such a job needs a say on essential matters such as the printing plant, or the way Le Monde controls its digital unit. We need to know the new owners will involve the editor in such matters. For their defense, most journalists are totally divorced from any kind of management culture. In my case, I don’t believe a media can be effectively managed solely by making decisions for the main editorial or the home page.

2 / The selection process is just terrible. First, candidates have to declare themselves publicly. Then, they are auditioned by a kind of ad hoc committee. Next, they are presented to the owners and to delegates from the newsroom. Finally, the appointee has to be approved by a majority of 60% of the staff. The result is the primary factor in picking a candidate will be his or her ability to get those staff votes. For the selection committee, using other criteria bears the risk of being discredited. Good luck with that.

The need to appoint an editor aligned with the newspaper’s core values is understandable. But, rather than electing an editor by popular vote, it would be much better to have a candidate: (a) probed and interviewed by a selection committee led by the board of directors — like in most companies — and, (b) approved by a board of trustees whose mandate is promoting the paper’s independence and integrity.

3 / There is no shortage of candidates inside and outside. The owners might prefer an outsider, which could further complicate the game. (The triumvirate is said to put a high priority on hiring a forty-something. Such focus is questionable: Alan Rusbridger, the Guardian editor, 57 years old, is at the top of his game on all facets of the paper’s business.

Unfortunately, the process as it stands today carries a high risk of morphing into a bitter campaign. The bloodied winner will then face a gauntlet of frustrated apparatchiks only too eager to question his/her authority since, of course, the defeated candidates won’t leave. It can’t work that way. Especially for a media group facing such daunting challenges.

frederic.filloux@mondaynote.com

iPad publishing: time to switch to v2.0

There is no way around this fact: the first batch of magazines adapted to the iPad failed to deliver. Six months after the initial excitement, the mood has turned turned sour. See the figures below, they show the downturn in circulation for the much publicized iPad versions of a few American magazines:
- Wired: 100,000 downloads in June, 22,500 in October and November : down 78%. According to the Magazine Publishers Association, that’s not even a meager 3% of the average print copy circulation for the first half of 2010 — for an iconic tech magazine…
- Vanity Fair: 10,500 in August, 8,700 in November, down 17% and less 1% of the print sales.  (These numbers include single copy sales and subscriptions, which represent the bulk of the print revenues for US magazines).

According to WWD, using figures from the Audit Bureau of Circulation, several high profiles glossies show the same pattern: iPad downloads are in sharp decline everywhere.

For this regular user, such numbers do not come as a surprise. I’ve been reading Wired and Vanity Fair in paper form for years. As a non-US reader, the benefit of the iPad version was obvious: instant availability, no need to look for a higher-end newsstand providing international fodder. Plus a serious discount: at a European kiosk, a glossy can fetch €9 or $12; on the iPad, it’s $3.99, I was getting a bargain for my monthly fix. Plus extras such as the occasional video, and the convenience of back issues loaded in the memory chip of my tablet…

What went wrong, then?

1 / Comparison kills. I began to harbor some doubts when traveling to the United States: I realized that, instinctively, I was picking up the very same magazines at newsstands. With the product available at the right combination of time, price and location at nearby kiosks, having it on my iPad suddenly lost its appeal.
A (retroactively obvious) fact emerges: a magazine designed for print is much better on, ahem… paper than on bits. The browsing experience, the photographs, even the sensation of reading long form articles are all more enjoyable on a physical glossy. Publishers lured themselves into thinking electronic convenience plus a dash of add-ons would fill the gap between paper and tablet. Nope, they didn’t. Once ubiquitous availability removed the storage advantage (which only appeals to the road-warriors segment), the magazine on paper won. (Newspapers are a different story).

2 / Convenience. OK, videos or interactive graphics are fun, but they can feel gadgety, creating a kind of visual noise that detracts from the reading experience. Also, the convenience of back issues stored on the device is oversold: in the paper world, when it comes to retrieving an old article, no one will dive into a pile of magazines anymore, that’s the internet’s job. Similarly, due to the rigid browsing experience on a tablet, very few will be tempted to leaf through back issues stored on their device. Carrying a year’s worth of non-searchable issues is therefore useless.

3 / Execution. As I write this column, I download the January 3rd edition of the New Yorker. At least, I’m trying to. The mostly black & white weekly weighs about 100 megabytes and the download stream is erratic. The latest issue of Vanity Fair took several days to finish downloading. (To be fair, the 700 Mb of the latest Wired issue, loaded with videos, was done in a matter of minutes, while the previous one took a solid hour).
Here is what is acceptable: The Economist. Wether I pop up my iPad or my iPhone, the app knows I’m a subscriber and prompts me, showing with the latest issue’s cover. One button. Download. Twenty seconds on a wi-fi, less than two minutes on a 3G network. No login, no purchase confirmation. In addition, my subscription grants me constant and seamless access to the magazine’s web site.

4 / Price. Asking the consumer to pay the same price for an electronic product with a debatable advantage is a bad idea. Two ill-advised concepts (also applicable to newspapers) are at stake here.
Even if they deny it, many publishers are still in the “let’s defend the paper” mode. From a theoretical strategic perspective, a bold move would call for accentuating the decline of the doomed part of the business to give more oxygen to the promising one. Even though a measure of caution is understandable when going through such a transition, the dominant sandbag posture is by no means justified. Its effect is simply to delay the inevitable.
The second idea reflects a related tendency to yield to short-term financial pressures: an electronic magazine costs less to produce? Let’s first and foremost restore our depleted margins. This will have two dangerous consequences: for one, it discourages true innovation; and second, it opens a wide field for pure players unburdened by the past. Until now, publishers have been somewhat preserved by the high barrier to entry into their business: their financial power and business acumen notwithstanding, tech companies have been consistently unable to build a serious editorial venture. This might not last as traditional publications are shrinking and as a new breed of journalists will be more than happy to forgo some of their elders’ prestige in exchange for the freedom to create new and exciting publications.

It would be unfair to blame publishers such as Condé Nast for the the disappointing performances of their iPad first steps. Six months to adjust to a completely new medium seems acceptable. And the current experiences still produce some helpful lessons.

#1 Don’t try and replicate old concepts. Go for new ones. The balance between text and photographs, for instance, needs to be reinvented. The way images are presented and even produced must also be adapted to the new medium. This would be a better use of an art director’s team than, month after month, redesigning a landscape version of a magazine originally intended for a page, like Wired or Time have been doing.

#2 Make up your mind. For tablets, the choice will be between rich media magazine — again, yet to be invented – and content centric, Economist-like, i.e. less sexy but efficient. Ideally, news content for nomad devices should come in two flavors: one, loaded with multimedia, dedicated to tablets that will mostly connect through wi-fi, and another lighter version designed for the mobile phone’s small screen, which relies on low-speed cellular networks.

#3 Encapsulate the web. Personally, right before catching the subway, for a speedy and efficient offline reading, I’d love to have my iPad quickly download a set of 200 URLs of my favorites newspapers web sites. (In real life, cellular data networks still are painfully clunky). With the web, we take for granted things such as multi-layer reading, search and recommendation engines. Unless tablet publishers find a way to offer a unique e-magazine-like experience, these features will be missed.

#3 Price wisely. Don’t expect a wide adoption for the e-version of a magazine (or a newspaper) priced at the same level as the paper version. The pricing structure for online news content begins to emerge. In its recent report (PDF here), the Pew Research Center released data consistent with most publishers’ estimations. People who regularly buy content on the net are willing to spend about $10 a month, which could translate to a yearly ARPU of $100-$120.

If you thing that’s small, just consider the ARPU of advertising supported websites: very few are above the $10/year water line. Another conclusion of the Pew survey: the paid-for market remains highly segmented. Have a peek at this table:

Those who are willing to pay for content are definitely the richest and the most educated. Not necessarily bad news: after all, many businesses thrive in luxury markets….

frederic.filloux@mondaynote.com