About Frédéric Filloux

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It’s the Competitive Spirit, Stupid

 

Legacy media suffer from a deadly DNA mutation: they’ve lost  their appetite for competition; they no longer have the will to fight the hordes of new, hungry mutants emerging from the digital world. 

For this week’s column, my initial idea was to write about Obama’s high tech campaign. As in 2008, his digital team once again raised the bar on the use of data mining, micro-targeting, behavioral analysis, etc. As Barack Obama’s strategist David Axelrod suggested just a year ago in Bloomberg BusinessWeek, compared to what they were working on, the 2008 campaign technology looked prehistoric. Without a doubt, mastering the most sophisticated practices played a crucial role in Obama’s November 6th victory.

As I researched the subject, I decided against writing about it. This early after the election, it would have been difficult to produce more than a mere update to my August 2008 story, Learning from the Obama Internet Machine. But, OK. For those of you interested in the matter, here are a couple of resources I found this week: An interesting book by Sasha Issenberg, The Victory Lab, The Secret Science of  Winning Campaigns, definitely worth a read; or previously unknown tidbits in this Stanford lecture by Dan Siroker, an engineer who left Google to join the Obama campaign in 2008. (You can also feast on a Google search with terms like “obama campaign + data mining + microtargeting”.)

I switched subjects because something jumped at me: the contrast between a modern election campaign and the way traditional media cover it. If it could be summed up in a simplistic (and, sorry, too obvious) graph, it would look like this :

The 2012 Election campaign carries all the ingredients of the fiercest of competitions: concentrated in a short time span; fueled by incredible amounts of cash (thus able to get the best talent and technology money can buy); a workforce that is, by construction, the most motivated any manager can dream of, a dedicated staff led by charismatic stars of the trade; a binary outcome with a precise date and time (first Tuesday of November, every four years.) As if this was not enough, the two camps actually compete for a relatively small part of the electorate, the single digit percentage that will swing one way or the other.

At the other end of the spectrum, you have traditional media. Without falling into caricature, we can settle for the following descriptors: a significant pool of (aging) talent; a great sense of entitlement; a remote connection with the underlying economics of the business; a remarkably tolerance for mediocrity (unlike, say, pilots, or neurosurgeons); and, stemming from said tolerance, a symmetrical no-reward policy — perpetuated by unions and guilds that planted their nails in the media’s coffin.

My point: This low level of competitive metabolism has had a direct and negative impact on the economic performance of legacy media.

In countries, regions, or segments where newsrooms compete the most on a daily basis (on digital or print), business is doing just fine.

That is the case in Scandinavia which enjoys good and assertive journalism, with every media trying to beat the other in every possible way: investigation, access to sources, creative treatment, real-time coverage, innovations in digital platforms… The UK press is also intensively competitive — sometimes for the worse as shown in the News Corp phone hacking scandal. To some extent, German, Italian, Spanish media are also fighting for the news.

At the other end of the spectrum, the French press mostly gave up competing. The market is more or less distributed on the basis readers’ inclinations. The biggest difference manifests itself when a source decides to favor one media against the others. Reminding someone of the importance of competing, of sometimes taking a piece of news from someone else’s plate tends to be seen as ill-mannered, not done. The result is an accelerating drop in newspapers sales. Strangely enough, Nordic media will cooperate without hesitation when it comes to sharing industrial resources such as printing plants and distribution channels while being at each other’s throat when it comes to news gathering. By contrast, the French will fight over printing resources, but will cooperate when it’s time to get subsidies from the government or to fight Google.

Digital players do not suffer from such a cumbersome legacy. Building organizations from scratch, they hired younger staff and set up highly motivated newsrooms. Pure players such as Politico, Business Insider, TechCrunch and plenty of others are fighting in their beat, sometimes against smaller but sharper blogs. Their journalistic performance (although uneven) translates into measurable audience bursts that turn into advertising revenues.

Financial news also fall into that same category. Bloomberg, DowJones and Reuters are fighting for their market-mover status as well for the quality — and usefulness — of their reporting; subscriptions to their service depends on such performance. Hence the emergence of a “quantifiable motivation” for the staff. At Bloomberg — one of the most aggressive news machine in the world — reporters are provided financial incentives for their general performance and rewarded for exclusive information. Salaries and bonuses are high, so is the workload. But CVs are pouring in — a meaningful indicator.

Digital newsrooms are much more inclined to performance measurements than old ones. This should be seen as an advantage. As gross as it might sound to many journalists, media should seize the opportunity that comes with modernizing their publishing tools to revise their compensation policies. The main index should be “Are we doing better than the competition? Does X or Y contribute to our competitive edge?”. Aside from the editor’s judgement, new metrics will help. Ranking in search engines and aggregators; tweets, Facebook Likes; appearances on TV or radio shows; syndication (i.e. paid-for republication elsewhere)… All are credible indicators. No one should be afraid to use them to reward talent and commitment.

It’s high time to reshuffle the nucleotides and splice in competitive DNA strands, they do contribute to economic performance.

frederic.filloux@mondaynote.com

 

The press, Google, its algorithm, their scale

 

In their fight against Google, traditional media firmly believe the search engine needs them to refine (and monetize) its algorithm. Let’s explore the facts.

The European press got itself in a bitter battle against Google. In a nutshell, legacy media want money from the search engine: first, for the snippets of news it grabs and feeds into its Google News service; second, on a broader basis, for all the referencing Google builds with news media material. In Germany, the Bundestag is working on a bill to force all news aggregators to pay their toll; in France, the executive is pushing for a negotiated solution before year-end. Italy is more or less following the same path. (For a detailed and balanced background, see this Eric Pfanner story in the International Herald Tribune.)

In the controversy, an argument keeps rearing its head. According to the proponents of a “Google Tax”, media contents greatly improve the contextualization of advertising. Therefore, the search engine giant ought to pay for such value. Financially speaking, without media articles Google would not perform as well it does, hence the European media hunt for a piece of the pie.

Last week, rooting for facts, I spoke with several people possessing deep knowledge of Google’s inner mechanics; they ranged from Search Engine Marketing specialists to a Stanford Computer Science professor who taught Larry Page and Sergey Brin back in the mid-90′s.

First of all, pretending to know Google is indeed… pretentious. In order to outwit both competitors and manipulators (a.k.a, Search Engine Optimization gurus), the search engine keeps tweaking its secret sauce. Just for the August-September period, Google made no less than 65 alterations to its algorithm (list here.) And that’s only for the known part of the changes; in fact, Google allocates large resources to counter people who try too game its algorithm with an endless stream of tricks.

Maintaining such a moving target also preserves Google’s lead: along with its distributed computing capabilities (called MapReduce), its proprietary data storage system BigTable, its immense infrastructure, Google’s PageRank algorithm is at the core of the search engine’s competitive edge. Allowing anyone to catch up, even a little, is strategically inconceivable.

Coming back to the Press issues, let’s consider both quantitative and qualitative approaches. In the Google universe — currently about 40 billion indexed pages –, contents coming from media amount to a small fraction. It is said to be a low single-digit percentage. To put things in perspective, on average, an online newspaper adds between 20,000 and 100,000 new URLs per year. Collectively, the scale roughly looks like millions of news articles versus a web growing by billions of pages each year.

Now, let’s consider the nature of searches. Using Google Trends for the last three months, the charts below ranks the most searched terms in the United States, France and Germany (click to enlarge):


Do the test yourself by going to the actual page: you’ll notice that, except for large dominant American news topics (“Hurricane Sandy” or “presidential debate”), very few search results bring back contents coming from mainstream media. As Google rewards freshness of contents — as well as sharp SEO tactics — “web native” media and specialized web sites perform much better than their elder “migrants”, that is web versions of traditional media.

What about monetization ?  How do media contents contribute to Google’s bottom line? Again let’s look at the independent rankings of the most expensive keywords, those that can bring $50 per click to Google — through its opaque pay-per-click bidding system. For instance, here is a recent Wordstream ranking (example keywords in parenthesis):

Insurance (“buy car insurance online” and “auto insurance price quotes”)
Loans (“consolidate graduate student loans” and “cheapest homeowner loans”)
Mortgage (“refinanced second mortgages” and “remortgage with bad credit”)
Attorney (“personal injury attorney” and “dui defense attorney”)
Credit (“home equity line of credit” and “bad credit home buyer”)
Lawyer (“personal  injury lawyer”, “criminal defense lawyer)
Donate (“car donation centers”, “donating a used car”)
Degree (“criminal justice degrees online”, “psychology bachelors degree online”)
Hosting (“hosting ms exchange”, “managed web hosting solution”)
Claim (“personal injury claim”, “accident claims no win no fee”)
Conference Call (“best conference call service”, “conference calls toll free”)
Trading (“cheap online trading”, “stock trades online”)
Software (“crm software programs”, “help desk software cheap”)
Recovery (“raid server data recovery”, “hard drive recovery laptop”)
Transfer (“zero apr balance transfer”, “credit card balance transfer zero interest”)
Gas/Electricity (“business electricity price comparison”, “switch gas and electricity suppliers”)
Classes (“criminal justice online classes”, “online classes business administration”)
Rehab (“alcohol rehab centers”, “crack rehab centers”)
Treatment (“mesothelioma treatment options”, “drug treatment centers”)
Cord Blood (“cordblood bank”, “store umbilical cord blood”)

(In my research, several Search Engine Marketing specialists came up with similar results.)

You see where I’m heading to. By construction, traditional media do not bring money to the classification above. In addition, as an insider said to me this week, no one is putting ads against keywords such as “war in Syria” or against the 3.2 billion results of a “Hurricane Sandy” query. Indeed, in the curve of ad words value, news slides to the long tail.

Then, why is Google so interested in news contents? Why has it has been maintaining  Google News for the past ten years, in so many languages, without making a dime from it (there are no ads on the service)?

The answer pertains to the notion of Google’s general internet “footprint”. Being number one in search is fine, but not sufficient. In its goal to own the semantic universe, taking over “territories” is critical. In that context, a “territory” could be a semantic environment that is seen as critical to everyone’s daily life, or one with high monetization potential.

Here are two recent examples of monetization potential as viewed by Google: Flights and Insurance. Having (easily) determined flight schedules were among the most sought after informations on the web, Google dipped into its deep cash reserve and, for $700m, acquired ITA software in July 2010. ITA was the world largest airline search company, powering sites such as Expedia or TripAdvisor. Unsurprisingly, the search giant launched Goolge Flight Search in Sept 2011.

In passing, Google showed its ability to kill any price comparator of its choosing. As for Insurance, the most expensive keyword, Google recently launched its own insurance comparison service in the United Kingdom… just after launching a similar system for credit cards and bank services.

Over the last ten years, Google has become the search tool of choice for Patents, and for scientific papers with Google Scholar. This came after shopping, books, Hotel Finder, etc.

Aside of this strategy of making Google the main — if only — entry point to the web, the search engine is working hard on its next transition: going from a search engine to a knowledge engine.

Early this year, Google created Knowledge Graph, a system that connects search terms to what is known as entities (names, places, events, things) — millions of them. This is Google’s next quantum leap. Again, you might think news related corpuses could constitute the most abundant trove of information to be fed into the Knowledge Graph. Unfortunately, this is not the case. At the core of the Knowledge Graph resides Metaweb, acquired by Google in July 2010. One of its key assets was a database of 12 million entities (now 23m) called Freebase. This database is fed by sources (listed here), ranging from the International Federation of Association Football (FIFA) to the Library of Congress, Eurostat or the India Times. (The only French source of the list is the movie database AlloCine.)

Out of about 230 sources, there are less than 10 medias outlets. Why? Again, volume and, perhaps even more important, ability to properly structure data. When the New York Times has about 14,000 topics, most newspapers only have hundreds of those, and a similar number of named entities in their database. (As a comparison, web native medias are much more skilled at indexation: the Huffington Post assigns between 12 and 20 keywords to each story.) By building upon acquisitions such as Metaweb’s Freebase, Google now has about half billion entries of all kinds.

Legacy media must deal with a harsh reality: despite their role in promoting and defending democracy, in lifting the veil on things that mean much for society, or in propagating new ideas, when it come to data, news media compete in the junior leagues. And for Google, the most data-driven company in the world, having newspapers articles in its search system is no more than small cool stuff.

frederic.filloux@mondaynote.com

The New York Times’ shifting model

 

At the NYT Company, in ten years, the share of quarterly revenue attributed to circulation grew from less than 30% to more than half today… 

The stock market brutally punished the New York Times for its worse-than-expected quarterly earnings. Are financial analysts completely blind? How come they didn’t foresee the decline in advertising revenue that affects the NYTimes — and any publication in the world outside of the BRIC zone? This is incomprehensible. A simple look at the overall ad sector (see the previous column featuring the Internet Split) causes one to realize how much worse the New York Times numbers could have been.

In any event, the demise of the ad market will accelerate the transformation of the Times. Here are the highlights for the third quarter of 2012 that particularly disappointed Wall Street (comparisons are for Q3 2012 vs. Q3 2011, full earnings release here):
– Total revenue decreases by -0.6%
– Advertising revenue drops by -9% across the board. Print ad takes a -11% dive and  digital ad revenue is off by -2.2% (for the second quarter in a row.)
– Costs are not contained enough (again, according to analysts) and rise by 2.3%, mostly because of benefits, performance-based and stock-based compensation and… printing costs.

Thursday, Wall Street dumped the stock, causing its biggest drop since 1980: It plunged by 22% to $8.31. Since the beginning of the year, NYT shares are up by about 6% vs. 12% for the S&P index.

On the bright side: Circulation revenue grew by 7% vs. last year. This is mostly due to the rise in digital subscribers. (Print gains reflect a recent price hike). Paid subs for the NYTimes and the International Herald Tribune totaled 566,000 for the 3rd quarter, a remarkable growth of 11% vs. the 2nd quarter of 2012 (+57,000 subs.)

In hard dollars, though, circulation figures no longer offset the loss in advertising. For the first nine months of 2012, revenue coming from circulation grew by $55m to $695m vs. a $47m loss in ads. But, for last three months, the NYT lost more in ads (-$18m) than it added in circulation (+$17m). In the earnings call with analysts, CFO Jim Follo points to a difficulty with his company’s business model: When advertising revenue goes down, 90% of the decrease translates into a margin loss, but circulation revenue gains generate additional costs.

The last 10 years show an interesting evolution for the advertising vs. circulation ratio. Between 2001 and 2011, revenue for the New York Times Media Group (primarily the newspapers and digital operations), fell by 30% in dollars adjusted for inflation. Advertising revenue decreased by 45% as Circulation revenue grew by 9% (and the “Other” category was slashed by 51%.

As shown in the table below, the New York Times’ revenue stream now relies mostly on circulation: 55% today vs. 29% in 2001. As digital subscriptions gain traction and advertising plummets, the trend accelerates when comparing the full 2011 year with the 3rd quarter of 2012:

              2001   2011  Q3-2012 
Advertising    62%    49%   39%
Circulation    29%    45%   55% 
Others          9%     6%    6%
Source: NYT Co. Financial statements

This evolution shows the strategic importance of the digital subscription system setup by the NY Times 15 months ago. So far, it works fine (see also a previous column NYT Digital Lessons). Thanks to its paywall, the NYT collects an average of 4750 new subscribers each week. Even the Boston Globe grew: +13% digital subscribers (currently 3,000) for this quarter when compared to the previous one .

The system has yet to unleash its full potential. For now, the NYTimes maintains a great deal of paywall porosity. Unlike the FT.com, there is no mandatory registration. It is actually pretty easy to circumvent the limit of 10 free articles per month: simply use different computers and devices. But the New York Times execs in charge of the system are in no rush to tighten the reins. They know mandatory registration will boost the transformation of registered users into full-paid-for ones, but it will be costly in terms of traffic.

Audience-wise, the paywall’s impact is uncertain. Times’ insiders said it had no effect. But, according to GigaOM’s Mathew Ingram (who quotes ComScore data), unique viewers would have fallen by 20% since March 2011 (from 34m Unique Visitors to 27m) and page views by 15%. Ingram suggests this trend could contribute to the erosion in ad revenue (although there is plenty of evidence showing that CMPs — cost per thousands page views — are indeed higher behind a paywall.)

One sure thing: before adding further paywall restrictions, The New York Times wants to find the perfect formula. On the Q3 earnings call, Denise Warren, who oversees the revenue side, explicitly referred to the topic: “We are exploring entry level opportunities as well as higher-ends as well”. In other words, her team is testing all possible prices and packages; current offers are likely to be sliced into multiple segments.

Overall, NYT’s management remains bearish on advertising for the next quarter at least. Jim Follo and Denise Warren invoked business leaders’ evaporating trust in the economy and also mentioned the oversupply in digital inventories (too many page views for sale, everywhere). They also point a finger to the shift in buying practices with, as they call it, “programmatic buying channels” (ad exchange, real-time bidding), who take over the market, pushing prices further down. One exception to this deflationary spiral is the luxury segment, stronger than ever, and well-tapped by The New York Times’ ability to provide customized campaigns.

Future Times revenue streams also lie in its ability to expand abroad. Last summer, the NYT.com launched its Chinese version (under Beijing’s strong vigilance). Next year, says Chairman Arthur Sulzberger, the Times will launch a Portuguese version aimed at the vast Brazilian market (and there are rumors of a Spanish language version.)

Denis Warren, also referred to what she called an “untapped demand in the corporate education segment”. Strangely, her statement echoes Harvard professor Clayton Christensen’s interview with the Neiman Journalism Lab where he discusses his favorite topic, the disruption of legacy businesses:

For the Harvard Business School — we’ve been saying for about 13 years now that management education is going to be disrupted by in-house corporate universities. And nobody just ever imagined that it would happen. In fact, every metric of goodness at the Harvard Business School has been improving and still continues to improve — even as last year the number of people applying to Harvard MBA programs dropped off 22 percent. In the prior year, it went down 11 percent. I really believe that the business schools are just going off the cliff.

I’m concerned: If business schools are going off the cliff, who will produce next generation of media analysts?…
frederic.filloux@mondaynote.com

The Internet Split

 

Web sites will soon fall into two categories: high audience low yield, low audience higher yield. Such a divide will impact digital advertising.

This Autumn, whomever you talk to will tell you this: internet advertising yields are taking a dive. CPMs (cost per thousand page views), now down to single digits, keep falling. This you hear on both sides of the Atlantic. Economic conditions, concerns with the level of debt (both private and public), business-hostile tax policies (see Jean-Louis’ Monday Note on French Entrepreneurs Revolt), the upcoming fiscal cliff in the United States, the fragility of the Eurozone are all pointing in the same direction. Even Google’s cash machine is showing weakness.

In such times, advertising budgets are usually the first ones to get the ax. Slowing down an industrial production line can get complicated, but slashing an ad campaign can be done with a mouse click. In the Fall, when everyone struggles with next year’s projections, a marketing director is inevitably tempted to hit the delete key to embellish his/er spreadsheet (remember: we are all short-termists.)

According to ZenithOptimedia’s recent forecasts, Eurozone ad expenditures will end this year in the red: -3.1% overall. But all countries are not equal: Just to illustrate the reactivity of advertising expenditures to economic conditions, consider three regional economies badly impacted by Europe’s downturn:

Italy:       -6.5% in ad spending vs. 2011
Spain:       -12.2%
Portugal:    -12.2%

And just for the sake of it, let’s award a special prize to the Greek economy: its advertising expenditure will be down 33.2% this year and it will be off its 2007 peak by… 63%! This shows how the ad market reacts and amplifies an economic crisis. (For 2013, Zenith predicts +0.9% growth in the Eurozone, but has since it downgraded its entire Western Europe 2012 projections from +0.4% in June to -0.7% in September. As a result, no one seriously believes Zenith’s projection for upcoming year.)

For digital media, such a trend will be the underlying cause of three evolutions:
- A rise in paid-for-performance advertising
- A rise in alternate formats beyond traditional display — for better or worse
- And a split between volume-driven and quality-driven digital properties.
To an extent, the third trend is a consequence of the other two. Let’s give it a closer look.

First, this graph:

A quick disclaimer: To avoid offending anyone, note there is no scale, nor any proportions between media outlets. The point is to map out clusters among various brands, to see who sits where relatively to others.

On the top left part of the chart, high audience but low yield: The Guardian (£40-50m in revenue for a stunning 60+ million uniques visitors), Business Insider, The Huffington Post and TV networks web sites. However, they have different ways of gathering huge audiences: The Guardian does it thanks to its fantastic journalistic machine and its unabated investment in digital (read this interesting story in last summer’s GQ); as for the Huffington Post, it has elevated clicking-techniques to an art.

Business Insider has become a class in itself. In the last two or three years, it drifted from a good tech/business blog to a compilation of eye-grabbing-headlines (a rather profuse one: I counted more than 90 items on BI’s home page this weekend.) Having said that: it remains interesting reading, and its crew sometimes gets scoops. But the entire editing is built on grabbing attention. And it works beautifully, so to speak. Here are some examples of stories and how they score:

12 Long-Dead Brands That Are Ripe For Resurrection:
55,000 views
Stunning Images From The Best Wildlife Photo Competition Of The Year:
78,000 views
19 Chinese White Collar Criminals Who Were Handed The Death Sentence :
104,000 views
There Is Simply No Other Plane In The World Like Air Force One :
650,000+ views
These Pictures May Give You Nightmares About Canada’s Oil Sands :
1.17 million views

Buried deep inside this accumulation of SEO-dreams-come-true items, there are some serious stories, but their scores are paltry:

Here’s The Big Mystery With Google’s $8 Billion Mobile Business :
7000 views
Jeff Bezos: People Who Are Right Are People That Change Their Mind A Lot :
6400 views

Well, you get my point. Again, I’m not judging here. With incredibly hard work, Henry Blodget and his team have built a great franchise, and I’d wish more business sites would learn — just a little bit, say 5% — how to stage business news and catch readers. And to be fair with Business Insider, let’s underline that its must-read 139 slides about The State of the Internet, attracted nearly 5 million viewers in three weeks.

Coming back to the chart above: on the bottom left, web sites like Slate or Salon (there are many others) enjoy strong reputation, loyal readership… but — as unfair as it sounds — tiny ones. On the upper right corner, we have the exception(s), lead by the New York Times: high audience, high ARPU (about $160m-200m in advertising revenue, recently supplemented by a $60-100m in subscription revenue that didn’t exist 15 months earlier.)

Let’s wrap up with advertising formats. Bottom line: ad agencies and their clients will always seek to blur the distinction between editorial and commercial contents. In that respect, the future lies, again, in the Business Insider model, which pushes the envelope pretty far (in my own, probably conservative opinion.) On this weekend’s home page, you can see how BI morphs its editorial team into sales reps with this story : 15 Tips For Getting The Perfect Tailored Suit, an advertorial for a wannabe hip Manhattan tailor. The package looks entirely like news coverage and it comes into two stages. Linked to the We-Give-You-Great-Tips treatment, you get the full monty: The secret suit shop underneath Mazza’s swank Chelsea sports bar, complete with a 20 pics slide-show and a glowing profile of the owners. The two stories gathered more than… 100,000 views (including mine — note that I linked to the stories because I’m pretty sure you’ll click on it…) But it’s pocket change compared to the rather straightforward Here’s Why Peter Luger Is The Best Steakhouse In New York City which collected an amazing 244,000 views. (Business Insider wins on both ends: for the advertorial — Henry, please, don’t tell me you do that for free — and the ads surrounding it.)

With very few exceptions, the editorial independence of lifestyle and consumer sections is now long gone (this includes “respectable” legacy media.) But this obvious violation of the separation between Church and State is bound to percolate into more pernicious “brand content” (see this earlier Monday Note) for more serious subjects than food or clothing. That’s where the credibility issue will set in.

frederic.filloux@mondaynote.com

 

Brand x Device = Reach

 

Combine the enduring strength of media brands with emerging mobility reading habits: the result could boost digital news.  

The equation in the headline is based on a simple, important fact: By and large, digital users still trust old news outlets. In the new world, media brands are far from dead, predictions of their extinction have been vastly exaggerated. In fact, we can see an opportunity for the new reading patterns seen in smartphone and tablet to provide welcome help to legacy media in their painful transition.

Last week, the Poynter Institute released interesting data Surveying Americans who define themselves as news consumers:
=> 53% get their primary digital news from web native outlets (Huffington Post, portals like Yahoo, AOL, or shallow verticals like Drudge or TMZ — the celebrity news-breaker).
=> 83% seek a secondary source for confirmation or amplification right after getting breaking news.
=> 60% do so by relying on established media brands such as the digital version of newspapers, TV networks, etc.

Let’s pause for a moment and reflect on the latest figure, the six-out-of-ten who go for the trusted brands.

Traditional media missed the train for digital breaking breaking news; this is barely a surprise. We know the factors only too well: newsrooms were too slow to catch the wave; publishers didn’t foresee the audience battle; they didn’t invest in relevant technologies, they got swamped in the battle of free vs. paid; they stayed fixated on avoiding cannibalization of the (dying) flagship product, newspapers, broadcast news, etc. In doing so, legacy outlets left an open field for more agile, less scrupulous, traffic-obsessed young ventures. The new entrants started with a blank slate which, indeed, cannibalized the old league thanks to their speed and ubiquity.

As a result, a new vulgate emerged: newcomers would eat “old” brands alive. They would do this by capturing every segment of news:  the “commodity” format (near-live news, same everywhere for everyone, and free); the sophisticated treatments (long forms, in-depth reporting, profile…). Pundits speculated the Yahoos and the Googles of the new Digital World Order would soon hire talent and build newsrooms giants from scratch.

Fact is: it didn’t happen. Some internet brands did a great job addressing niches in politics, society or business. But, broadly speaking, once the predictions dust settled, ancestral brands seems to have been able to salvage the quality part of their franchise. Unfortunately, this one is the costliest and the less audience-driving segment. The HuffPo might have a huge audience, its readers are essentially looking for snapshots of news. For serious complement, they go for the New York Times or the trusted brand of their preference.

As for social media, the Poynter survey reframes the debate in a rather blunt way:

Despite all the social sharing buttons littering news sites, the study finds the top methods of sharing news are still word of mouth and email. (See earlier:Limited use of sharing buttons Sharing buttons look “a little desperate“.)

Having said that, for the younger generation, social networks are a key source of primary news: 35% of the Generation Y, 23% of the Gen X and 11% of the Boomers find their news there. As they get older and better educated, they could, supposedly, rely more on traditional media.

Let’s now talk about the Grand Disruption, namely how the rise of the smartphone and tablet impacts the news. According to the Poynter survey, established media benefit more from mobile devices than web native sources do. It goes like this:

The prime reason is reader engagement. The Pew Research Center for the People and the Press, exposes this in two 90-page surveys : The Future of Mobile News, produced in collaboration withe the Economist Group (PDF here), and the Trends in News Consumption 1991-2012 (PDF here).
First, the 11-years evolution of how people “got their news yesterday”:

The rise of the mobile is obvious (So is the free fall of the newspaper.) According to the Pew survey:
=> Among smartphone users (44% of the US adults) : 62% get their news weekly and 36% daily.
=> Among tablet users (22% of the US adults): 64% get their news weekly and 37% daily.

In addition, numbers reveal a high level of engagement among tablet users:
=> 78% read more than one in-depth article during a sitting (nine times out of ten for personal interest).

… and the tablet appears to be a remarkable vector for serendipitous use:
=>  72% of users end up reading in-depth articles they were not initially looking for.

More broadly, the tablet format induces further reading:
=> 69% end up reading a full article after checking headlines.

And more than one device equals more time with news:


To close the loop, the Pew survey confirms the Poynter’s findings on the preeminence of trusted brands on mobile — and more specifically on tablets as 60% of tablet users read long form journalism from publications they regularly keep up with.

The tablet is indeed the next bing thing for media. Apple is no longer the only one (I put my hand on the €200 Google Nexus 7 and it’s an excellent product). The market is now poised for a real takeoff. The tablet is the most favored vector for more in-depth news — which is legacy media’s core value proposition. And since device and media both address the most solvent segment of the population, a sustainable model is bound to emerge.

frederic.filloux@mondaynote.com

 

Quartz: Interesting… and uncertain

 

Atlantic’s new digital venture named Quartz is aimed at global business people. It innovates in many radical ways, but its business model remains dicey.

Two years ago, Atlantic Media’s president Justin Smith was interviewed by the New York Times. The piece focused on the digital strategy he successfully executed:

“We imagined ourselves as a Silicon Valley venture-backed startup whose mission was to attack and disrupt The Atlantic. In essence, we brainstormed the question: What would we do if the goal was to aggressively cannibalize ourselves?”

In most media companies, that kind of statement would have launched a volley of rotten tomatoes. Atlantic’s disruptive strategy gave birth to a new offspring: Quartz (URL: qz.com), launched a couple of weeks ago.

Quartz is a fairly light operation based in New York and headed by Kevin Delaney, a former managing editor at the WSJ.com. Its staff of 25 was pulled together from great brands in business journalism: Bloomberg, The Wall Street Journal, The Economist and the New York Times. According to the site’s official introduction, this is a team with a record of reporting in 119 countries and speaking 19 languages. Not exactly your regular gang of digital serfs or unpaid contributors that most digital pure players are built on.

This professional maturity, along with the backing of the Atlantic Media Company, a 155 years-old organization, might explain the set of rather radical options that makes Quartz so interesting.

Here are a few:

Priority on mobile use. Quartz is the first of its kind to deliberately reverse the old hierarchy: first, traditional web (for PC), and mobile interfaces, second. This is becoming a big digital publishing debate as many of us strongly believe we should go for mobile first and design our services accordingly (I fall in that category).

Quartz founders mentioned market research showing their main target — people on the road interested in global economy — uses 4.21 mobiles devices on average (I love those decimals…): one laptop, one iPad, and two (!) Blackberrys. (Based on multiple observations, I’d rather say, one BB and one iPhone.)

No native mobile app. Similarly, Quartz went for an open HTML5 design instead of apps. We went through this before in the Monday Note. Apps are mandatory for CPU intensive features such as heavy graphics, 3D rendering and games. For news, HTML5 — as messy as it is — does the job just fine. In addition, Quartz relies on “responsive design”, one that allows a web site to dynamically morph in response to the specific connected device (captures are not to scale):

Here is how it looks on a desktop screen:

… on an iPad in landscape mode:

 

…on an iPad in portrait mode:

on a small tablet:

..on an iPhone:

and on a small phone:

(I used Matt Kerlsey Responsive Design Test Site to capture Quartz renderings, it’s an excellent tool to see how your site will look like on various devices).

A river-like visual structure. Quartz is an endless flow of stories that automatically load one below the other as you scroll down. The layout is therefore pretty straightforward: no page-jumps, no complicated navigational tools, just a lateral column with the latest headlines and the main windows where articles concatenate. Again, the priority given to mobile use dictates design purity.

A lightweight technical setup. Quartz does not rely on a complex Content Management System for its production but on WordPress. In doing so, it shows the level of sophistication reached by what started as a simple blog platform. Undoubtedly, the Quartz design team invested significant resources in finding the best WP developers, and the result speaks for itself (despite a few bugs, sure to be short-lived…).

Editorial choices. Instead of the traditional news “beats” (national, foreign, economy, science…), Quartz went boldly for what it calls “obsessions”. This triggered a heated debate among media pundits: among others, read C.W. Anderson piece What happens when news organizations move from “beats” to “obsessions”? on the Nieman Journalism Lab.  Admittedly, the notion of “beats” sounds a bit old-fashioned. Those who have managed newsrooms know beats encourages fiefdoms, fence-building and bureaucracy… Editors love them because they’re much simpler to manage on a day-to-day basis; editorial meetings can therefore be conducted on the basis of a rigid organizational chart; it’s much easier to deal with a beat reporter or his/her desk chief than with some fuzzy “obsession” leader. At Quartz, current “Obsessions” appear in a discreet toolbar. They includes China Slowdown, The Next Crisis, Modern States, Digital, Money, Consumer Class, Startups, etc.

To me, this “obsessive” way of approaching news is way more modern than the traditional “beat” mode. First, it conveys the notion of adjustability to news cycles as “obsessions” can — should — vary. Second, it breeds creativity and transversal treatments among writers (most business publications are quite boring precisely due to their “silo culture”.) Third, digital journalism is intrinsically prone to “obsession”, i.e. strong choices, angles, decisions. For sure, facts are sacred, but they are everywhere: when reporting about the last alarming report from the World Bank, there is no need to repeat what lies just one click away — just sum up the main facts, and link back to the original source! Still, this shouldn’t preclude balanced treatment, fairness and everything in the basic ethics formulary. (Having said that, let’s be realistic: managing a news flow through “obsessions” is fine for  an editorial staff of 20, certainly not so for hundreds of writers.)

Quartz business side. Quartz is a free publication. No paywall, no subscription, nothing. Very few ads either. Again, it opted for a decisive model by getting rid of the dumb banner. And it’s a good thing: traditional display advertising kills designs, crappy targeting practices irritate readers and bring less and less money. (Most news sites are now down to single digital digits in CPM [Cost Per Thousand page views], and it will get worse as ad exchanges keep gaining power, buying remnant inventories by the bulk and reselling those for nothing.) Instead, Quartz started with four sponsors:  Chevron, Boeing, Credit Suisse and Cadillac, all showing quality brand contents. It’s obviously too early to assess this strategy. But Quartz business people opted for being extremely selective in their choice of sponsors (one car-maker, one bank, etc.), with rates negotiated accordingly.

Two, brands are displayed prominently with embedded contents instead of usual formats. Quartz is obviously shooting for very high CPMs. At the very least, they are right to try. I recently meet a European newspaper that extracts €60 to €100 CPMs by tailoring ads and making special ads placements for a small list of advertisers.

Again: such strategy is fine for a relatively small operation: as it is now, Quartz should not burn more than $3-4M a year. Betting on high CPMs is way more difficult for large websites — but niches can be extremely profitable. (For more on Quartz economics, read Ken Doctor’s piece also on Nieman.)

To sum up, three elements will be key to Quartz’ success. 

1 . Quickly build a large audience. Selected advertisers are not philanthropists; they want eyeballs, too. Because of its editorial choices, Quartz will never attract HuffPo-like audiences. To put things in perspective, the Economist gets about 7M uniques browsers a month (much less unique visitors) and has 632,000 readers on its app.

2 . Quartz bets on foreign audiences (already 60% of the total). Fine. But doing so is extremely challenging. Take The Guardian: 60 million uniques visitors per month — one third in the UK, another in the US, and the rest abroad — a formidable journalistic firepower, and a mere £40m in revenue (versus $160m in advertising alone for the NYTimes.com with half of the Guardian’s audience, that’s a 5 to 1 ratio per reader.)

3 . Practically, it means Quartz will have to deploy the most advanced techniques to qualify its audience: it will be doomed if it is unable to tell its advertisers (more than four we hope) it can identify a cluster of readers traveling to Dubai more than twice a year, or another high income group living in London and primarily interested in luxury goods and services (see a previous Monday Note on extracting reader’s value through Big Data)

4 . In the end, Quartz is likely to face a growth question: staying in a niche or broadening its reach (and its content, and increasing its staff) to satisfy the ad market. Once its audience levels off, it might have no other choice than finding a way to make its readers pay. It should not be a problem as it focuses on a rather solvent segment.

frederic.filloux@mondaynote.com

Facebook’s Gen Y Nightmare

 

GenerationY will — paradoxically — pay a high price for giving up its privacy to Facebook.                  

Taos, New Mexico, Fall 2012. At 18, Tina Porter has been on Facebook for four years. Duly briefed by her parents, a teacher and a therapist, she takes great care not to put contents — remarks on her wall, photos, videos — that could expose her in a unwanted manner.

Still. Spending about 30 hours a month on the social network, she has become as transparent as a looking glass. It will impact the cost of her health insurance, her ability to get a loan and to find a job.

Denver, Colorado, spring 2018. Tina is now 24. She’s finishing her law degree at Colorado State University. She’s gone through a lot: experimenting with substances, been pulled over for speeding a couple of times, relying on pills to regain some sleep after being dumped by her boyfriend.  While Tina had her share of downs, she also has her ups. Living in Denver she never missed an opportunity to go hiking, mountain biking, or skiing — except when she had to spend 48 gruesome hours in the dark, alone with a severe migraine. But she remains fit, and she likes to record her sports performances on health sites — all connected to Facebook — and compare with friends.

Seattle, winter 2020. In a meeting room overlooking the foggy Puget Sound, Alan Parsons, head of human resources at the Wilson, McKenzie & Whitman law firm holds his monthly review of the next important hires. Parsons is with Marcus Chen, a senior associate at Narrative Data Inc., both are poring over a selection of resumés. Narrative Data was created in 2015 by a group of MIT graduates. Still headquartered in Cambridge, Massachusetts, the startup now helps hundreds of corporations pick the right talent.

Narrative Data doesn’t track core competencies. The firm is more into character and personality analysis; it assesses ability to sustain stress, to make the right decision under pressure. To achieve this, Narrative Data is staffed with linguists, mathematicians, statisticians, psychologists, sociologists, neuroscientists. What they basically do is data-mining the social internet: blogs, forums, Twitter, and of course Facebook. Over the years, they’ve drawn a map of behaviors, based on language people use. Thanks to Narrative Data’s algorithm, everyone aged above 20, can have his or her life unfolded like a gigantic electronic papyrus scroll. HR people and recruiters love it. So do insurance companies and banks.

Of course, in 2015 no one will be dumb enough to write on his Facebook wall something like “Gee, bad week ahead, I’m heading to my third chemotherapy session”. But Narrative Data is able to pinpoint anyone’s health problems by weaving together language patterns. For instance, it pores over health forums where people talk, openly but anonymously, about their conditions. By analyzing millions of words, Narrative Data has mapped what it calls Health Clusters, data aggregates that provide remarkable accuracy in revealing health conditions. The Cambridge company is even working on a black program able to “de-anonymize” health forum members thanks to language patterns cross-matching with Facebook pages. But the project raises too many privacy issues do be rolled out — yet.

Tina Porter’s resumé popped up thanks to LinkedIn Expert, the social network’s high-end professional service. LinkedIn, too, developed its own technology to data-mine resumés for specific competences. Tina’s research on trade disputes between Korea and the United States caught everyone’s interest at Wilson, McKenzie. That’s why her “3D Resumé” — a Narrative Data trademark — is on the top of the pile, that is displayed on a large screen in the meeting room.

Narrative’s Marcus Chen does the pitch:
“Tina Porter, 26. She’s what you need for the transpacific trade issues you just mentioned, Alan. Her dissertation speaks for itself, she even learned Korean…”
He pauses.
“But?…” Asks the HR guy.
“She’s afflicted with acute migraine. It occurs at least a couple of times a month. She’s good at concealing it, but our data shows it could be a problem”, Chen said.
“How the hell do you know that?”
“Well, she falls into this particular Health Cluster. In her Facebook babbling, she sometimes refers to a spike in her olfactory sensitivity — a known precursor to a migraine crisis. In addition, each time, for a period of several days, we see a slight drop in the number of words she uses in her posts, her vocabulary shrinks a bit, and her tweets, usually sharp, become less frequent and more nebulous. That’s an obvious pattern for people suffering from serious migraine. In addition, the Zeo Sleeping Manager website and the stress management site HeartMath — both now connected with Facebook –  suggest she suffers from insomnia. In other words, Alan, we think you can’t take Ms Porter in the firm. Our Predictive Workforce Expenditure Model shows that she will cost you at least 15% more in lost productivity. Not to mention the patterns in her Facebook entries suggesting a 75% chance for her to become pregnant in the next 18 months, again according to our models.”
“Not exactly a disease from what I know. But OK, let’s move on”.

I stop here. You might think I’m over the top with this little tale. But the (hopefully) fictitious Narrative Data Inc. could be the offspring of existing large consumer research firms, combined to semantic and data-mining experts such as Recorded Future. This Gothenburg (Sweden)-based company — with a branch in… Cambridge, Mass. –  provides real time analysis of about 150,000 sources (news services, social networks, blogs, government web sites). The firm takes pride in its ability to predict a vast array of events (see this Wired story).

Regarding the “de-anonymizing” the web, two years ago in Paris, I met a mathematician working on pattern detection models. He focused on locating individuals simply through their cell phones habits. Even if the person buys a cell phone with a fake ID and uses it with great care, based on past behavior, his/her real ID will be recovered in a matter of weeks. (As for Facebook, it recently launched a snitching program aimed at getting rid of pseudonyms — cool.)

Expanding such capabilities is only a matter of refining algorithms, setting up the right data hoses and lining up the processing power required to deal with petabytes of unstructured data. Not an issue anymore. Moore’s Law is definitely on the Inquisitors’ side.

frederic.filloux@mondaynote.com

The value is in the reader’s Big Data

 

Why the right use of Big Data can change the economics of digital publishing. 

Digital publishing is vastly undervalued. Advertising has yet to fulfill its promises — it is nosediving on the web and it failed on mobile (read JLG’s previous column Mobile Advertising: The $20 billion Opportunity Mirage). Readers come, and often go, as many digital publications are unable to retain them beyond a few dozen articles and about thirty minutes per month. Most big names in the digital news business are stuck with single digit ARPUs. People do flock to digital, but cash doesn’t follow — at least, not in amounts required to sustain the production of quality information. Hence the crux of the situation: if publishers are unable to extract significantly more money per user than they do now, most of them will simply die. As a result, the bulk of the population — with the notable exception of the educated wealthy — will rely on high audience web sites merely acting as echo chambers for shallow commodity news snippets.

The solution, the largest untaped value resides right before publisher’s eyes: readers profiles and contents, all matched against the “noise” of the internet.

Extracting such value is a Big Data problem. But, before we go any further, what is Big Data? The simplest answer: data sets too large to be ingested and analyzed by conventional data base management tools. At first, I was a suspicious, this sounded like a marketing concept devised by large IT players struggling to rejuvenate their aging brands. I changed my mind when I met people with hands-on experience, from large corporations down to a 20-staff startup. They work on tangible things, collecting data streams from fleets of cars or airplanes, processing them in real time and, in some cases, matching them against other contexts. Patterns emerge and, soon, manufacturers predict what is likely to break in a car, find out ways to refine the maintenance cycle of a jet engine, or realize which software modification is needed to increase the braking performance of a luxury sedan.

Phone carriers, large retail chains have been using such techniques for quite a while and have adjusted their marketing as a result. Just for fun, read this New York Times Magazine piece depicting, among other things, the predictive pregnancy model developed by Target (a large US supermarket chain). Through powerful data mining, the rightfully named Target corporation is able to pinpoint customers reaching their third pregnancy month, a pivotal moment in their consuming habits. Or look at Google Flu Trends providing better tracking of flu outbreaks than any government agency.

Now, let’s narrow the scope back to the subject of today’s column and see how these technologies could be used to extract more value from digital news.

The internet already provides the necessary tools to see who is visiting a web site, what he (she) likes, etc. The idea is to know the user with greater precision and to anticipate its needs.

Let’s project an analogy with Facebook. By analyzing carefully the “content” produced by its users — statements, photos, links, interactions among friends, “likes”, “pokes”, etc. — the social network has been able to develop spectacular predictive models. It is able to detect the change in someone’s status (single, married, engaged, etc.) even if the person never mentioned it explicitly. Similarly, Facebook is able to predict with great accuracy the probability for two people exchanging casually on the network to become romantically involved. The same applies to a change in someone’s financial situation or to health incidents. Without telling anyone, semantic analysis correlated by millions of similar behaviors will detect who is newly out of job, depressed, bipolar, broke, high, elated, pregnant, or engaged. Unbeknownst to them, online behavior makes people completely transparent. For Facebook, it could translate into an unbearable level of intrusiveness such as showing embarrassing ads or making silly recommendations — that are seen by everyone.

Applied to news news contents, the same techniques could help refine what is known about readers. For instance, a website could detect someone’s job changes by matching his reading patterns against millions of other monthly site visits. Based on this, if Mrs. Laura Smith is spotted with a 70% probability to have been: promoted as a marketing manager in a San Diego-based biotech startup (five items), she can be served with targeted advertising especially if she has also appears to be a active hiker (sixth item). More importantly, over time, the website could slightly tailor itself: of course, Mrs Smith will see more biotech stories in the business section than the average reader, but the Art & Leisure section will select more contents likely to fit her taste, the Travel section will look more like an outdoor magazine than a guide for compulsive urbanites. Progressively, the content Mrs. Smith gets will become both more useful and engaging.

The economic consequences are obvious. Advertising — or, better, advertorial contents branded as such (users are sick with banners)– will be sold at a much higher price by the web site and more relevant content will induce Mrs. Smith to read more pages per month. (Ad targeting companies are doing this, but in such a crude and saturating way that it is now backfiring). And since Mrs Smith makes more money, her growing interest for the web site could make her a good candidate to become a premium subscriber, then she’ll be served with a tailor-made offer at the right time.

Unlike Facebook who will openly soak the intimacy of its users under the pretext of they are willing to give up their privacy in exchange for a great service (good deal for now, terrible in the future), news publishers will be more careful. First, readers will be served with ads and contents they will be the only ones to see — not their 435 Facebook “friends”. This is a big difference, one that requires a sophisticated level of customization. Also, when it comes to reading, preserving serendipity is essential. By this I mean no one will enjoy a 100% tailor-made site; inevitably, it will feel a bit creepy and cause the reader to go elsewhere to find refreshing stuff.

Even with this sketchy description, you get my point: by compiling and analyzing millions of behavioral data, it is possible to make a news service way more attractive for the reader — and much more profitable for the publisher.

How far-reaching is this? In the news sector, Big Data is still in infancy. But as Moore’s Law keeps working, making the required large amounts of computing power more affordable, it will become more accessible to publishers. Twenty years ago, only the NSA was able to handle large sets of data with its stadium-size private data centers. Now publishers can work with small companies that outsource CPU time and storage capabilities to Amazon Web Services and use Hadoop, the open source version of Google master distributed applications software to pore over millions of records. That’s why Big Data is booming and provides news companies with new opportunities to improve their business model.

frederic.filloux@mondaynote.com

Google’s Amazing “Surveywall”

 

How Google could reshape online market research and also reinvent micro-payments. 

Eighteen months ago — under non disclosure — Google showed publishers a new transaction system for inexpensive products such as newspaper articles. It worked like this: to gain access to a web site, the user is asked to participate to a short consumer research session. A single question, a set of images leading to a quick choice. Here are examples Google recently made public when launching its Google Consumer Surveys:

Fast, simple and efficient. As long as the question is concise and sharp, it can be anything: pure market research for a packaging or product feature, surveying a specific behavior,  evaluating a service, intention, expectation, you name it.

This caused me to wonder how such a research system could impact digital publishing and how it could benefit web sites.

We’ll start with the big winner: Google, obviously. The giant wins on every side. First, Google’s size and capillarity puts it in a unique position to probe millions of people in a short period of time. Indeed, the more marketeers rely on its system, the more Google gains in reliability, accuracy, granularity (i.e. ability to probe a segment of blue collar-pet owners in Michigan or urbanite coffee-drinkers in London).The bigger it gets, the better it performs. In the process, Google disrupts the market research sector with its customary deflationary hammer. By playing on volumes, automation (no more phone banks), algorithms (as opposed to panels), the search engine is able to drastically cut prices. By 90% compared to  traditional surveys, says Google. Expect $150 for 1500 responses drawn from the general US internet population. Targeting a specific group can cost five times as much.

Second upside for Google: it gets a bird’s eye on all possible subjects of consumer researches. Aggregated, anonymized, recompiled, sliced in every possible way, these multiple datasets further deepen Google’s knowledge of consumers — which is nice for a company that sells advertising. By the way, Google gets paid for research it then aggregates into its own data vault. Each answer collected contributes a smallish amount of revenue; it will be a long while, if ever, before such activity shows in Google’s quarterly results — but the value is not there, it resides in the data the company gets to accumulate.

The marketeers’ food chain should be happy. With the notable exception of those who make a living selling surveys, every company, business unit or department in charge of a product line or a set of services will be able to throw a poll quickly, efficiently and cheaply. Of course, legacy pollsters will argue Google Consumer Surveys are crude, inaccurate. They will be right. For now. Over time the system will refine itself, and Google will have put  a big lock on another market.

What’s in Google’s Consumer Surveys for publishers whose sites will host a surveywall? In theory, the mechanism finally solves the old quest for tiny, friction-free transactions: replace the paid-for zone with a survey-zone through which access is granted after answering a quick question. Needless to say, it can’t be recommended for all sites. We can’t reasonably expect a general news site, not to mention a business news one, to adopt such a scheme. It would immediately irritate the users and somehow taint the content.

But a young audience should be more inclined to accept such a surveywall. Younger surfers will always resist any form of payment for digital information, regardless of quality, usefulness, relevance. Free is the norm. Or its illusion. Young people have already demonstrated their willingness to give up their privacy in exchange for free services such as Facebook — they have yet to realize they paid the hard price, but that’s another subject.
On the contrary, a surveywall would be at least more straightforward, more honest: users gives a split second of their time by clicking on an image or checking a box to access the service (whether it is an article, a video or a specific zone.) The system could even be experienced as fun as long as the question is cleverly put.
Economically, having one survey popping up from time to time — for instance when the user reconnects to a site — makes sense. Viewed from a spreadsheet (I ran simulations with specific sites and varying parameters), it could yield more money than the cheap ads currently in use. This, of course, assumes broad deployment by Google with thousands of market research sessions running at the same time.

A question crosses my mind : how come Facebook didn’t invented the surveywall?

–frederic.filloux@mondaynote.com

 

 

Why newspapers must raise their price

For quite a while, I’ve been advocating a newspapers price hike. My take: the news market is undergoing an irreversible split. On one side, digital distribution (on web, mobile and tablets) will thrive through higher volumes and deeper penetration; revenue is not easy to squeeze out of digital subscribers and advertisers but, as some consolation, serving one or ten million customers costs about the same.

On the other side, print is built on a different equation: gaining audience is costly; every additional reader comes with tangible industrial costs (printing, shipping, home delivery). Having said that, each print reader carries a much better ARPU than its online counterpart (bet on a 5 to 15 times higher yield, depending on the product). And, for a long time, there will be a significant share of the audience that will favor the print version, regardless of  price (almost). Those are super loyal and super solvent readers.

Last week, my little solo tune about price hikes received independent support of people much better equipped to define prices and value. Global marketing consultants Simon-Kucher & Partners released conclusions from an in-depth study of newspaper price evolution and its impact on circulation (PDF summary here). The headline: “Calling all newspapers: A premium model is your best hope”, which the authors, Andre Weber and Kyle Poyar, sum up thusly:

Newspapers are in an unenviable, but not uncommon position: raising print prices may shrink their already anemic readership base, but may also be their best hope for staying afloat.

Headquartered in Germany, with 23 branches across the world, Simon-Kucher specializes in marketing, sales and pricing strategies. They rely on thorough analysis and models to help their clients value a wide range of products and services. For this study, they surveyed the 25 largest US newspapers (ABC’s listing here). Before that, they’d worked on quality newspapers in the UK. Their findings:

– When technological disruption causes an irrevocable market decline, “it’s almost prudent to raise prices”. To support their claim, SKP mentions AOL which, at a critical point of its existence, raised its rates and generated large amounts of cash. This helped the online service finance major shifts in its business. To the contrary, Kodak continuously lowered the price of its film products, found itself unable to invest in a digital turnaround and finally went bankrupt.

– There is no elasticity in newspaper prices. In other words, a significant price hike won’t necessarily translate into a material drop in circulation. But the extra money raised in the process will provide welcomed help for investments in digital technologies.

– Raising prices discourages price wars. Many sectors are engaged in a downward spiral that doesn’t always translate into higher volume, but guarantees weaker revenues.

They conclude:

The print business is not your legacy, it’s your bank.

For publishing companies with struggling print divisions, SKP’s shibboleth might appear a bit overstated but it still contains valuable truths.

Let’s come back to the price elasticity issue. It’s an endless debate within publishing houses. Fact is there is none. For the US market, here are the effects of specific price hikes on circulation revenues:

 

…In an earlier UK market study, SKP looked at the consequences of price increases between 2007 and 2010 for these quality papers:

                Price        Variation in     Variation in 
                Increase     Circ. volume     Circ. revenue
 The Times        +54%         -24%             +16.7%
 The Guardian     +43%         -19%             +15.8%
 The Independent  +43%         -21%             +13%
 The Telegraph    +43%         -25%             +7%

When I spoke with Andre Weber and Kyle Poyar, the authors of the study, they were reluctant to evaluate which part of the circulation drop was attributable to the natural erosion of print, and which part was linked to the price hike. Also, they were careful not to venture into the consequences of the drop in circulation on advertising (as ad rates are tied to the circulation.)

However, they didn’t dispute that the bulk of the drop in circulation was linked to the erosion of print caused by the shift to digital. If there is any remaining doubt, watch this chart compiled the Pew Research Center:

With the left scale showing the percentage drop (!), the plunge is obvious, even though a change in the counting system by the Audit Bureau of Circulation embellishes the situation a bit.

The price equation for print newspapers can be summed-up as follows:

#1 Price hikes –both for street price and subscriptions– only marginally impact circulation already devastated by the conversion to digital.

#2 Additional revenue coming from price hikes far outpaces the loss in circulation (which will occur anyway). Ten or twenty years ago, US newspapers drew most of their revenue (70%-sometimes 80%) from advertising. Now the revenue structure is more balanced. The NY Times, for instance, evolves into an evenly split revenue structure, as shown in its Q2 2012 financial statement:

#3 There is room for further price increases. When asked about the threshold that could trigger a serious loss in readership, Andre Weber and Kyle Poyar opine that the least loyal customers are already gone, and that we have not yet reached the critical threshold that will discourage the remaining base of loyal readers.

#4 Advertising is indeed an issue, but again, its decline will occur regardless of circulation strategies. The main reason (other than difficult economic conditions): the adjustment between time spent and advertising expenditures on print that will inevitably affect print ads.

(source: Mary Meeker’s State of the Internet, KPCB)

#5 High prices on print versions will help maintain decent prices for digital paid-for contents, through subscriptions, paywalls, etc. As Weber and Poyar point out, for a publisher, the quality of print and digital products must remain connected, the two must work together (even though digital subscriptions will always be substantially lower than print.)

#6  When it comes to pricing strategies, quality rules the game. Simon-Kucher’s conclusions applies for high-end products. The New York Times, The Guardian, or The Sydney Morning Herald won’t have problems raising their prices by substantial amounts. But for tabloids or low end regional papers filled with cheap contents and newswire fodder, it’ll be another story.

#7 Pricing issues can’t be insulated from distribution.  In many countries, publishers of national dailies should consider refocusing their distribution map down to major cities only. The move would save shipping costs without too much of an impact on the advertising side as the solvent readership — the one dearly loved by advertisers — is mostly urban.

–frederic.filloux@mondaynote.com