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The Google Fund for the French Press

 

At the last minute, ending three months of  tense negotiations, Google and the French Press hammered a deal. More than yet another form of subsidy, this could mark the beginning of a genuine cooperation.

Thursday night, at 11:00pm Paris time, Marc Schwartz, the mediator appointed by the French government got a call from the Elysée Palace: Google’s chairman Eric Schmidt was en route to meet President François Hollande the next day in Paris. They both intended to sign the agreement between Google and the French press the Friday at 6:15pm. Schwartz, along with Nathalie Collin, the chief representative for the French Press, were just out of a series of conference calls between Paris and Mountain view: Eric Schmidt and Google’s CEO Larry Page had green-lighted the deal. At 3 am on Friday, the final draft of the memorandum was sent to Mountain View. But at 11:00am everything had to be redone: Google had made unacceptable changes, causing Schwartz and Collin to  consider calling off the signing ceremony at the Elysée. Another set of conference calls ensued. The final-final draft, unanimously approved by the members of the IPG association (General and Political Information), was printed at 5:30pm, just in time for the gathering at the Elysée half an hour later.

The French President François Hollande was in a hurry, too: That very evening, he was bound to fly to Mali where the French troops are waging as small but uncertain war to contain Al-Qaeda’s expansion in Africa. Never shy of political calculations, François Hollande seized the occasion to be seen as the one who forced Google to back down. As for Google’s chairman, co-signing the agreement along with the French President was great PR. As a result, negotiators from the Press were kept in the dark until Eric Schmidt’s plane landed in Paris Friday afternoon and before heading to the Elysée. Both men underlined what  they called “a world premiere”, a “historical deal”…

This agreement ends — temporarily — three months of difficult negotiations. Now comes the hard part.

According to Google’s Eric Schmidt, the deal is built on two stages:

“First, Google has agreed to create a €60 million Digital Publishing Innovation Fund to help support transformative digital publishing initiatives for French readers. Second, Google will deepen our partnership with French publishers to help increase their online revenues using our advertising technology.”

As always, the devil lurks in the details, most of which will have to be ironed over the next two months.

The €60m ($82m) fund will be provided by Google over a three-year period; it will be dedicated to new-media projects. About 150 websites members of the IPG association will be eligible for submission. The fund will be managed by a board of directors that will include representatives from the Press, from Google as well as independent experts. Specific rules are designed to prevent conflicts of interest. The fund will most likely be chaired by the Marc Schwartz, the mediator, also partner at the global audit firm Mazars (all parties praised him for his mediation and wish him to take the job).

Turning to the commercial part of the pact, it is less publicized but at least as equally important as the fund itself. In a nutshell, using a wide array of tools ranging from advertising platforms to content distribution systems, Google wants to increase its business with the Press in France and elsewhere in Europe. Until now, publishers have been reluctant to use such tools because they don’t want to increase their reliance on a company they see as cold-blooded and ruthless.

Moving forward, the biggest challenge will be overcoming an extraordinarily high level distrust on both sides. Google views the Press (especially the French one) as only too eager to “milk” it, and unwilling to genuinely cooperate in order to build and share value from the internet. The engineering-dominated, data-driven culture of the search engine is light-years away from the convoluted “political” approach of legacy media that don’t understand or look down on the peculiar culture of tech companies.

Dealing with Google requires a mastery of two critical elements: technology (with the associated economics), and the legal aspect. Contractually speaking, it means transparency and enforceability. Let me explain.

Google is a black box. For good and bad reasons, it fiercely protects the algorithms that are key to squeezing money from the internet, sometimes one cent at a time — literally. If Google consents to a cut of, say, advertising revenue derived from a set of contents, the partner can’t really ascertain whether the cut truly reflects the underlying value of the asset jointly created – or not. Understandably, it bothers most of Google’s business partners: they are simply asked to be happy with the monthly payment they get from Google, no questions asked. Specialized lawyers I spoke with told me there are ways to prevent such opacity. While it’s futile to hope Google will lift the veil on its algorithms, inserting an audit clause in every contract can be effective; in practical terms, it means an independent auditor can be appointed to verify specific financial records pertaining to a business deal.

Another key element: From a European perspective, a contract with Google is virtually impossible to enforce. The main reason: Google won’t give up on the Governing Law of a contract that is to be “Litigated exclusively in the Federal or States Courts of Santa Clara County, California”. In other words: Forget about suing Google if things go sour. Your expensive law firm based in Paris, Madrid, or Milan will try to find a correspondent in Silicon Valley, only to be confronted with polite rebuttals: For years now, Google has been parceling out multiples pieces of litigation among local law firms simply to make them unable to litigate against it. Your brave European lawyer will end up finding someone that will ask several hundreds thousands dollars only to prepare but not litigate the case. The only way to prevent this is to put an arbitration clause in every contract. Instead of going before a court of law, the parties agrees to mediate the matter through a private tribunal. Attorneys say it offers multiples advantages: It’s faster, much cheaper, the terms of the settlement are confidential, and it carries the same enforceability as a Court order.

Google (and all the internet giants for that matter) usually refuses an arbitration clause as well as the audit provision mentioned earlier. Which brings us to a critical element: In order to develop commercial relations with the Press, Google will have to find ways to accept collective bargaining instead of segmenting negotiations one company at a time. Ideally, the next round of discussions should come up with a general framework for all commercial dealings. That would be key to restoring some trust between the parties. For Google, it means giving up some amount of tactical as well as strategic advantage… that is part of its long-term vision. As stated by Eric Schmidt in its upcoming book “The New Digital Age” (the Wall Street Journal had access to the galleys) :

“[Tech companies] will also have to hire more lawyers. Litigation will always outpace genuine legal reform, as any of the technology giants fighting perpetual legal battles over intellectual property, patents, privacy and other issues would attest.”

European media are warned: they must seriously raise their legal game if they want to partner with Google — and the agreement signed last Friday in Paris could help.

Having said that, I personally believe it could be immensely beneficial for digital media to partner with Google as much as possible. This company spends roughly two billion dollars a year refining its algorithms and improving its infrastructure. Thousands of engineers work on it. Contrast this with digital media: Small audiences, insufficient stickiness, low monetization plague both web sites and mobile apps; the advertising model for digital information is mostly a failure — and that’s not Google’s fault. The Press should find a way to capture some of Google’s technical firepower and concentrate on what it does best: producing original, high quality contents, a business that Google is unwilling (and probably culturally unable) to engage in. Unlike Apple or Amazon, Google is relatively easy to work with (once the legal hurdles are cleared).

Overall, this deal is a good one. First of all, both sides are relieved to avoid a law (see last Monday Note Google vs. the press: avoiding the lose-lose scenario). A law declaring that snippets and links are to be paid-for would have been a serious step backward.

Second, it’s a departure from the notion of “blind subsidies” that have been plaguing the French Press for decades. Three months ago, the discussion started with irreconcilable positions: publishers were seeking absurd amounts of money (€70m per year, the equivalent of IPG’s members total ads revenue) and Google was focused on a conversion into business solutions. Now, all the people I talked to this weekend seem genuinely supportive of building projects, boosting innovation and also taking advantage of Google’s extraordinary engineering capabilities. The level of cynicism often displayed by the Press is receding.

Third, Google is changing. The fact that Eric Schmidt and Larry Page jumped in at the last minute to untangle the deal shows a shift of perception towards media. This agreement could be seen as a template for future negotiations between two worlds that still barely understand each other.

frederic.filloux@mondaynote.com

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

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

NYT Digital Lessons

The New York Times Company’s latest quarterly numbers contain a rich trove of data regarding the health of the digital news industry. Today, we’ll focus on the transition from traditional advertising to paywall strategies being implemented across the world. Paywall appear as a credible way to offset — alas too partially — the declining revenue from print operations.

First, the highlights.

(See NYTCO’s press release here and stock here. Unless otherwise stated, all figures are for Q1 2012 and comparisons are Q1 2012 vs. Q1 2011.)

  • Total Revenue is stable at $499.4 million.
  • Operating profit is down by 23% at $19.6 million. When excluding depreciation, amortization and (generous) severance packages, OP is up 9.4% at $57 million.
  • Print advertising for all properties and from all sources is down 8.1% at $238 million
  • Circulation revenue is up 9.7% at $227 million.
  • Digital subscriptions, launched just a year ago, reach 454,000. That’s a 16% growth vs. Q4 2011.
  • Digital advertising for the entire NYTCO (this includes NYTimes.com, BostonGlobe.com, Boston.com, About.com, etc) is down 10.3% to $71 million.
  • Such decrease is primarily due to About.com losing 24% of its ad revenue to $22.6 million, and 50% of its operating profit to $7 million. This online guide is entirely dependent on advertising.
  • But the real bad news is the decline in digital advertising for the NYT News Media Group  consisting mostly of the NYT and the Boston Globe. Revenue dropped by 2.3% to $48.5 million for the quarter.
  • Digital advertising accounts for 22.5% of the entire NYTCO ad revenue, and for 30% of the NYT News Media Group’s digital advertising revenue.

We can discern four trends:

#1:  Digital advertising is struggling, even for a major brand such as the New York Times.
Again the evolution :
FY 2010: +18%
FY 2011: +10%
Q1 2012 (Y/Y):  -2%

This confirms a much feared trend. By and large, in a news context, the performance of digital advertising is on the decline. All indicators are now flashing red: CPM (cost per thousand impressions), cost per click, volumes, yields, etc. The cause is well-known, and way more acute for digital than for print: ads and news contents do compete for the same eyeballs. The more attractive and eye-catching the content is, the lesser the ad yields. Behavioral advertising won’t change that much — at least for hard core, high value-added news environment.

This decline also announces a major shift in the way ads are sold. The advertising flow is likely to split: premium ads such as well-placed special packages will still be sold for high prices by in-house teams. But the bulk of the inventory will shift downward to bazaars in which gazillions of pageviews will be dumped into real-time exchanges supposed to optimize prices. The bad news: such schemes are likely to fuel deflationary trends for remnant (i.e. sub-premium) inventories. The good news: media organizations such as online news outlets or pure players are likely to join such marketplaces and perhaps gain an operating role of sorts — assuming they are smart enough to cooperate (I’ll address this in an upcoming column).

#2 Paywalls work. With roughly half a million paying subscribers, the NYTimes.com has captured the equivalent of 39% of its weekday print circulation of 1.3 million. In its financial statements, the Times doesn’t break down its revenue structure, but a significant part of the 13% increase in circulation revenue (print + digital) is attributable to digital subscriptions (the rest comes from the recent print price hike).
Estimates are difficult but here are some clues: on these 500,000 digital subs, it is estimated that 60% pay the basic $15/mo rate while 40% opt for the full $35 digital package. This would translate to digital subscribers contributing $34.5 million (18%) to the $190 million in NYT Media Group circulation revenue that appear in its quarterly statement. 18% is not that bad for a paywall that is barely one year old (even though this estimated revenue doesn’t reflect the cost of the NYTimes’ massive promotions for its paywall program). But again, compared to the $48 million of digital advertising, it is significant.

#3 A warning to paywall dreamers: some restrictions apply. In order to be successful, a digital subscription must check the following boxes:
Own a sizable share of a given (and preferably solvent) segment of the population. In other words: start from a large built-in audience. Globally, the New York Times has about 34 million unique visitors per month – a large pool for conversions to the paywall.
Don’t expect a paywall to work for a small site or a niche product — unless it is a reference for its community. Even then, in spite of its reference status in New England, the Boston Globe shows a mere 18,000 paid-for digital subscribers.
– Allow time to grow the subscriber base. A paywall strategy must spread over several years. The free audience first has to be converted into registered users able to be thoroughly data-mined; then the paywall will be tightened with less and less articles available for free (the NYT recently lowered its threshold from 20 to 10 free articles); the entire process will take at least two to four years, depending on where you start from.
– Carefully manage porosity. That’s why some people refer to a “semi-permeable membrane” (see the interesting conversation between Clay Shirky and NYT’s Digital manager Denise Warren on NPR last January). While it is tightening its paywall, the NYT leaves willingly plenty of free access to its content: if you land its site from a search engine, from Facebook, Twitter, or from a blog, no limit applies (same for the FT.com, actually). Such tactic has two virtues: it doesn’t affect natural referencing and incoming traffic from search engines (which could weigh as much as 30-40% of the audience), and the brand remains exposed to many — such as social networks users.
– Quality is non-negotiable. A successful paywall requires exclusive, unique, authoritative, high-quality content. A paywall isn’t the right solution for streams of “commodity news” or user-generated contents. It won’t work for the Huffington Post. Despite its enormous audience, the HuffPo’s embryonic original content won’t do much to alter its “Left wing Fox News” positioning (Even though the HuffPo managed to score a Pulitzer Prize for National reporting for its remarkable Beyond The Battlefield series.)

#4 Print is still alive. While print advertising is drying up, the share of circulation revenue keeps rising (in relative terms.) The good news: price hikes don’t seem to matter: the recent increase to $2.50 had no effect on sales. Actually, the Times uses its weekend edition (priced at $5.00) to channel digital subscriptions by providing the best deal of its complex rate card. Which leads to two conclusions: a sizable reservoir of readers is ready to pay for quality-on-paper at almost any price (see a previous Monday Note Cracking the Paywall); and commercially strong weekend editions can be a potent vector for digital subscriptions.

Print and digital strategies are more intertwined than ever.

frederic.filloux@mondaynote.com

Trying a Simple Model

Advertising still dominates the newspaper revenue model. Depending upon the particular country, it is not uncommon to see print dailies getting 70% to 80% of their revenue from advertising. In the early days of the digital era, when business plans were driven by “eyeballs”, everybody hoped to replicate the tried and true print advertising revenue model. Now, the collective hallucination has dissipated; a more down-to-earth vision prevails: publishers willing to preserve high quality (read: costly) journalism recognize they have no choice but getting their users to pay for it, one way another. The pendulum has swung back.

It’s a chicken-and-egg problem. You’ll be able to charge readers if you put yourself in a position to propose exclusive, unique contents. To do so, you’ll have to put together an strong line-up of professionals, as opposed to a blogger army whose output no one will ever pay a dime for.Next questions include: how much to charge ? Is it 10 (dollars euros, pounds), 20 or more?  What free-to-pay conversion rate to aim at? Can we shoot for 5%, 10% or more of the overall audience? How does a full digital operation look like?

Let’s dive into numbers for a back-of-the-envelope exercise.

First, assumptions: The following is based on my observations of markets in Europe (France, UK, Scandinavia) and the United states; numbers may vary but I trust none are widely off the mark.

In the print world, costs break down as follows:

Newsroom........................25%
Production, printing............25%
Distribution....................20%
Marketing promotion.............20%
Administration..................10%
...............................100%

Now let’s move to a fully digital operation derived from a traditional one in terms of journalistic firepower and standards.

To produce it, we’ll settle for a 200 staff newsroom, with writers, editors, data journalists, information-graphic designers, videographers, etc. We removed the staff working on the dead-tree model. With 200 dedicated people working for an online operation, you can really shoot the for stars. Such a setup costs between $25 and $30 million a year, all expenses included. Let’s settle for a middle $27 million.

Production costs fall sharply as the carbon-based version is gone. The old 45% production and printing line morphs into a conservative 15% for serving web pages and applications. We’ll assume all other costs (marketing, promotion, administrative) remain at the same level.

The cost table now looks like this:

Newsroom...............27M$......40% of the total
Production, technical..10M$......15%
Marketing promotion....20M$......30%
Administration.........10M$......15%
Total Costs............67M$ 

Now, let’s turn to the revenue side.

First: advertising revenue. We assume a real audience of 5 million Unique Visitors per month. By real audience, I mean no cheating, no bogus viewers, reasonable SEM and excellent SEO. People come to the site, stick to it and come back. Each user sees at least 20 pages a month. That’s on the high side. By comparison, Google Ad Planner gives the following page views per UVs:

NYT.........15 pageviews per user and per month (distant paywall)
WSJ.........14 (some paid-for section)
FT.com......11 (strict paywall)
Guardian....14 (free)

20 pages is therefore an ambitious goal. I’m convinced it can be achieved through high-performance recommendation engines (look at what Amazon does in terms of its ability to get people to click on related items).

5 million UVs multiplied by 20 pages views gives (thank you) 100 million PV. Now, let’s assume each page generate a CPM (for several modules) of $20. That’s an average as not all pages yield the same amount: parts of the inventory will go unsold, but pages served to high value, paid-for subscribers will generate twice that amount. This translates into a yearly revenue of $24 million, that is around 5 advertising dollars per visitor per year.

Again: it will vary, but it is consistent with what we see on the market for high quality, branded, publications. (By contrast, even the greatest blogs only yield one or two dollars per user).

Two, subscription revenue. Since our audience is solid and loyal to the brand, we will assume 10% of all readers will be willing to pay. Make no mistake: that is the transformation rate a newspapers such as the New York Times is aiming at (it is currently at 1%, still a long way to go). My take is a general news operation will be price-sensitive, meaning the transformation rate with a $9.99 a month price will be significantly higher than with $15 or $20 per month; by contrast, a specialized publication is less rate-sensitive and can be pricier.

In my model of a general news product, I set the price to $10 a month, which makes the one-tenth conversion rate more realistic. Then, I factor in two items:
- 15% taxes (it ranges from 8% in the US to 20% in France)
- a 13% cost of platform including transaction, database, etc (that’s should be a goal as Google OnePass charges 10%); this line is distinct from the technical costs applied to the entire digital operation.

All of the above taken into account, a digital subscriber paying $10 month will generate a net ARPU of $89 a year for the company. Multiplied by 0.5 million paid-for users (i.e.10% of the global audience), this translates into a revenue of $44 million for digital subscribers.

The revenue table now looks like this:

Advertising......24M$...35% of the total
Subscription.....44M$...65%
Total............68M$...100%

$68 million in revenue for a cost of $67 million (all numbers rounded), leaves a mere 2% operating margin. Nothing to brag about. It could easily translate into an accounting loss, especially since it will take a while to reach several of these goals: a 10% free-to-paid transformation rate, a high number of pages per viewers, both are several years (of losses) away for many publications.
But these are the only dials I set on the ambitious side; the rest (subscription price, audience), is rather conservative; for instance if you simply set the subscription rate at $12 a month instead of $10 — that is fifty cents per weekday — the operating margin jumps to 13%.
And I also set aside many things I firmly believe in, like keeping some print operation in the form of a compact, high-end weekly for instance (with a staff of 200, it sounds feasible), developing ancillary products such as digital book publishing, etc.

Once again, while I feel my numbers are well-grounded, others will find this little model simplistic and questionable. The simulation is aimed at showing there is a life after the death of the daily print edition. Success is a “mere matter” of persistence.

frederic.filloux@mondaynote.com

Cracking the Paywall

(This version corrects an error in the percentage for the price increase of the FT)

Every newspaper, magazine or website is working on a paywall of sorts and closely monitoring what everyone else is doing. In almost every news company, execs are morosely watching advertising projections and finding numbers that are not exactly encouraging. For digital media, there is no way around this year’s weak outlook: the bad economic climate only adds to the downward price pressure exerted by the ever growing inventory of web and mobile pages. In a best-case scenario, volumes and prices will remain flat. On the print circulation side, Western newspapers are likely to witness a continuing readership erosion at a rate of several percentage points.

But here is the interesting point: The strongest players don’t just bow to the inevitable, they accelerate their transition to digital. This week, I was struck by the fact two such leaders made the same move: The New York Times and the Financial Times both announced serious price hike for their newsstand price (respectively 25% and 13.6%) :
- The NYT moves from $2.00 (€1.57) to $2.50 (€1.96) from Monday to Saturday, with no change for the Sunday edition still priced at $5 (€3.92) in New York, and $6 (€4.72) elsewhere.
- The FT goes from £2.20 ($3.39 or €2.66) to £2.50 ($3.85 or €3.03) on weekdays, as the weekend edition moves from £2.80 ($4.32 or €3.39 ) to £3 ($4.62 or €3.63).

Those numbers are really meaningful: a 10% increase every two years or so can be seen as an inflation adjustment — a generous one considering the inflation rate in those countries to be about 2.5%-3.5%. At 25% increase is a strategic decision aimed at accelerating the switch to digital. (The paper version of the FT now costs 25% more than it did last October).

Interestingly enough, for a New York Times addict, reading the paper online with the cheapest package ($15 a month), is now 40% to 50% cheaper that the home-delivered version and 70% cheaper than buying the paper each day at a newsstand. As for the FT, the standard digital version is now 21% cheaper than the print subscription and 68% less than the newsstand price.

Both are working hard at converting readers to the digital paid-for model. The FT is heading full steam into digital, furiously data-mining its 4 million subscribers base to convert them into paid-for subscribers (250,000 according to the most recent count). The FT’s tactics is simple: readers are relentlessly pushed toward the paywall thanks to a diminishing number of stories available for free: from 30 free articles per month in 2007 it is now down to 8 articles; the other bold move is making registration mandatory in order to access even a single story.

Last year, the New York Times came up with a less readable strategy: the adjustable paywall. And it seems to work. The NYT has been able to collect 324,000 paid-for digital subscribers in nine months. Considering the NYT has about four times less non-paying digital registered users than the FT (therefore a lesser conversion potential), this is not bad.

The Times builds its paid-for strategy on three key factors:

1 / The uniqueness of its content. Let’s put it this way: The New York Times has no equivalent in the world when it comes to great journalism, period. This valued content helped collect 34 million uniques visitors a month in its domestic market, and 47 million worldwide. More than any other newspapers in the world, the NYT has a huge base of loyal users. If it manages to convert only 5% of its global audience, say 2.4 million people, and extracts an ARPU (combined subscription and advertising) of $150 per year, it will gross €360 million, which largely covers the cost of its newsroom ($200 million a year, by far the largest in the world).

2 / The managed porosity of its paywall. One key requirement in building the digital subscription system for the Times was keeping as many of its readers as possible. There are two main reasons for this: high audience numbers are critical for advertising revenue; and the visibility factor is crucial for a news brand. This led to a system that targets the heaviest users. But even those can easily game the system (by using several browsers on several devices, I never bump into the paywall, with no particular desire to avoid it). Similarly, prices vary from $15 to $35… for exactly the same content — this is typical of a price structure aimed at audiences with flexible purchasing powers (it is widely established that richer people tend to opt for the most expensive package, regardless of its true value).

3 / Getting in bed with Apple. Since the early iPad days, The New York Times has been working closely with Apple for applications, subscriptions, and the nascent Newsstand. Again: thanks to its unique brand and the trust it carries, the NYT experiences no trouble collecting the precious customer data the app’s default settings fail to provide. In doing so, the Times benefited from Apple’s huge promotional vortex. The Apple system is highly beneficial when it comes to building an audience. But it does so at the expense of the essential customer relationship, and at a huge cost of 30% when the goal should rather be in the 10% range.
That was the Financial Times’ rationale for breaking the Apple leash. Last week, the FT went even further: it acquired the software firm Assanka, well-known for the development of the FT.com’s remarkable web-app that insured its crucial independence from Apple (story in PaidContent). In itself, the move demonstrates the FT’s commitment to mobile products: HTML5 development remain difficult and the FT decided it was critical to integrate Assanka’s development tools.

Of these three factors, the uniqueness of content remains the most potent one. With the inflation of aggregators and of social reading habits, the natural replication of information has turned into an overwhelming flood. Then, the production of specific content — and its protection — becomes a key element in building value. As for price structures, there is no magic formula. Usually, the simpler the better (as Apple demonstrated) — especially for businesses that start from scratch. But, with pre-existing and different audience segments such as an individual and corporate users, pricing decisions become more complicated and a diversified price list can prevent cannibalization. As for the Apple vs. independent app issue, my personal take is that sleeping with Apple is a quick short-term win, an easier strategy. But, in the long run, the independent way (which, after all, is an article of faith for Apple itself) will yield better results.

frederic.filloux@mondaynote.com

Innovation in turbulent times

News organizations have an innovation problem. Especially print media. As they gingerly wade into digital, their ability to foster innovation becomes more critical than ever. In today’s fast-changing landscape, they should view innovation as their main weapon against direct competitors and emerging players such as tech startups,.

Unfortunately, print media appears ill-equipped to innovate. The reasons are many.

– The weight of the past. Looking back ten years, making changes to a newspaper or magazine used to be a lengthy and complicated process, with technical, industrial as well as political implications. On the internet, by contrast, major changes are a only few lines of code away. Modern CMS (Content management systems) are designed to allow and sometimes encourage modifications and adaptation to rapidly changing needs. As for applications, a minuscule team needs only a couple of months to engineer an impactful product.

– The takeover of the bean-counters. In the newspaper industry, years of revenue depletion have shifted tremendous power to the financial guys. They performed as requested by shareholders (especially because journalist-bred managers lost their credibility).They cut, downsized, optimized. Not exactly the best petri dish for creativity.

– A risk averse culture. This is mostly a consequence of the previous point. Cost-centered management, added to gloomy business conditions, won’t foster initiative and risk-taking. The result is you will not see a group of journalists putting their job in play in order to launch a new product they believe in.

– No management reform. Each time I look at a newspaper’s org chart, I’m struck by the complexity of the management structure, by the level of red tape still remaining. Curiously enough, very little has been done about it. (In most cases, it has to do with a spreadsheet-driven management unwilling to fight organizational conservatism).

As a result, very few news organizations prepared themselves to switch to a genuine competitive innovation model, more comparable to the one used by technology companies. Having said that, questions arise: How to create an environment that will stimulate new ideas; how to restore a risk-taking culture; should innovation be mostly internalized or outsourced; how to select the best decision-making processes for the new digital-driven world?

Last week, the New York Times unveiled its Beta 620 initiative. As Matthew Ingram  puts it in Gigaom, the project is the NYT’s version of Google Labs, with selected projects presented to the public. Innovations involve social media, search, recommendation engines, etc. Let’s be clear: I can’t think of many news organizations with the courage and ability to devote anything close to what the Times is investing in its R&D effort. (To get an idea of the New York Times R&D Labs’s scope and ambition, see these videos shot by the Neiman Journalism Lab.) Still, some of their processes and ideas are worth considering. From what I’m told, Beta 620 is the visible part of a program started several years ago, one in which, once a year, everyone is encouraged to present a digital project. Even the least nerdy will be helped in his/her pitch. An ad hoc committee selects a couple of projects and the authors receive a small prize (a thousand dollars or so). More importantly, s/he will get appropriate resources and time to further develop it.

More broadly, the Times has a low-key but efficient way to stimulate innovation or improvements. Take its new CMS. Developed in cooperation with Infosys, it is carefully designed to be safe and robust. But, at the same time, it lets the nerdiest web producers tinker with the code to alter the layout of a page, or to adapt the rendering of the website to a specific need. When someone described how the improvement process was made available to so many, I was surprised by the level of trust the NYTimes is putting in its staff. (Needless to say: this accessibility comes with suitable precautions, tests procedures and so on).

Obviously,  very few news organizations facing a constant revenue depletion can afford a fully-staffed R&D Lab. Having said that, between its internal contest encouraging out-of-the-box thinking and the trusted approach for continuous improvement, The New York Times teaches us a lesson: Fostering innovation is a matter of creating the right environment as much as pouring tons of money in it.

The dominance of finance-driven management impacts innovation. It encourages a short-term approach. Today, an executive team will be much more inclined to spend money with the promise of a quick — even if small — return, as opposed to investing the same amount of cash in an actual new product. To them, the potential for the greater benefit of a truly new creation is outweighed by the risk of a more distant, more uncertain outcome. Investing $100,000 or $500,000 in a marketing campaign, aimed at boosting an existing digital audience, will get a greater consideration than making the same investment in a new app — especially since the performances of the former will be easier and quicker to measure.

Another side-effect is the alteration of the decision-making process. Ten or twenty years ago, sound businesses with decent margins and growth, along with predictable economic conditions, allowed gut-based decisions. Today is the opposite: with all key economic indicators blinking red, management will run for cover by asking for as much data as possible to justify their decision. And a landscape that changes faster than ever before makes getting reliable data a complicated task. Think about the changes we witnessed over the last two years. In a recent interview to McKinsey Quarterly,  Google’s CFO Patrick Pichette acknowledged that, every single day, 15% of the queries it handles are completely new and never seen before. This says a lot about the level of uncertainty the digital business now faces.

What is left to manage innovation? Based on my observations and discussions with project managers and executives, key recommendations emerge:

– Separate short-term tactics from medium-to-longer term strategy initiatives. Marketing is fine, but it doesn’t guarantee lasting results. A great product does.

– Dissociate production from innovation functions. Those who drive the train can’t be asked to design a new locomotive. Nor to oversee it construction.

– Stimulate creativity. Encouraging staff to come forward with new ideas, helping people formulate projects can be done inexpensively.

– Once a project is selected, assign clear objectives, scope, schedule and ways of measuring success or failure.

– Assign a small, dedicated team that will report to the top of the organization, not to middle management.

This sounds like basic and somewhat obvious rules. With one exception: very few news organizations have adopted them.

frederic.filloux@mondaynote.com

The ePresse Digital Kiosk: First Lessons

[correction added about Relay.com's rate]

On June 30th, the French consortium ePresse opened its digital kiosk. Six months of hard work for a very small team (the ePresse consortium is a three persons operation: a CTO, a marketing person, and a manager), and still a long way to go. ePresse brought up eight titles: five dailies (Le Figaro, Le Parisien and its national edition, Libération, the sports daily l’Equipe and the business paper Les Echos), and three newsweeklies (L’Express, Le Point, Le Nouvel Observateur). This is only the rocket’s first stage: an iPad/iPhone app allowing per-copy purchases within the App Store; more to come this Fall.

Knowing I’m charge of this development, editors and news executives abroad inquired about the experience. Here are a few early observations.

[English version of ePresse demo here]

First, the big question: Why build a digital newsstand? After all, there is no shortage of places for buying online editions: Zinio, deployed globally; Relay.com and LeKiosque.fr in France. And, of course, Apple, which will roll-out its own Newsstand before year-end.

The answer is of a strategic nature: we’re dealing with concerns over control and technology.

For publishers, retaining full control of all commercial aspects of their digital sales channels is a critical matter. They must safeguard their freedom to decide prices, marketing strategies, discounts, bundles, special deals. They must also protect their ability to collect valuable customer data, without having to beg permission from a third party to do so. Marketing being the tactical engine of the trade, it is also one of the most underdeveloped assets of the press — and not just in France. A kiosk owned and controlled by publishers will be immensely beneficial for all involved.

Now, let’s take a walk through a usage scenario. You start by downloading the (free) kiosk application on your mobile phone. Next, you launch the application. A welcome screen greets you: for one euro (or dollar, or pound), you get unlimited access to the entire kiosk for one (or two) weeks, all you can eat.
Publishers might not like this: it amounts to a “leak” of digital copy sales that won’t be counted by the Audit Bureau of Circulation. But savvy publishers will also consider the upside: (a) the customer leaves his name and credit card info (that’s what the one-euro thing is about); (b) he will leave a trail of data. Then, when the almost-free trial period ends, a tailored offer is pushed to each individual customer, based on his recorded readings. An individual’s preferred title would be well inspired to offer him/her a steep subscription discount.
Over time, as reading patterns build up in the customer database, it becomes easier and easier to push offers not only based on title preferences, but also on a predictable news cycle. A political newspaper might cook up special deals six months before an election; a sports paper might do the same with Olympics and similarly attractive events. Here, tactical flexibility provides inordinate payoffs. As for occasional customers sticking to per-digital-copy purchases, they should be offered an incentive to give an email address, the ultimate goal being to convert them into digital subscribers.

Now the reality check: this scenario doesn’t work for current kiosks; pricing policies are constrained, promotional offers are not possible (they will eat up the kiosk’s margin) and the newsstand keeps customer data for its own marketing purposes. Plus, most kiosks charge around 30%, roughly three times the cost of an efficient digital delivery system.

The same goes for bundles. Currently, platforms handle those rather crudely. For publishers, beside per-copy sales, subscription systems end up as value-killers. In France, the Hachette-operated Relay.com kiosk offers a 9.90€ a month digital bundle for up to 30 10 magazines. A great bargain indeed, but one that yields a mere 0.30€ for each publication — before the kiosk’s cut. In other words, nothing. One of Relay.com’s bestsellers is said to be the 19.90€ a month all-magazines-you-can-read, with a similarly puny outcome for magazines.

In contrast, a publisher-run kiosk can introduce more bundling refinements such as a combined daily + weekly subscriptions system or any other such combination that makes sense marketing-wise. Deploying such arrangements will require a great deal of cooperation among titles – something close to performing unnatural acts, a delicate aspect of the job.

Building the system also involves deploying multi-title CRM (Customer Relationship Management) systems. This, in turn, requires weaving together customer databases belonging to different and sometimes competing titles – again, plenty of diplomatic issues in sight. I might be a little naïve, but I think media groups have done a great deal of progress recently when it comes to understanding the benefits of building integrated systems. With this in mind, for a consortium such as ePresse, the goal is to yield more value that the sum of its parts.

Now let’s jump to the technology aspect. ePresse.fr, launched ten days ago, is but the first stage of a much larger setup. Today, we limit ourselves to proposing an iOS app with per-issue sales only, through the Apple app store (lower case ‘‘app store’’ with intent as it seems Apple won’t be able to own those words). Obvious next steps include other mobile platforms and, more importantly, a subscription system directly available to smartphones, tablets and, of course, the web. In the process, we’ll add a couple more titles, but we intend to remain selective.

Mobility is a critical component. Currently, digital kiosks offer mostly PDF-based editions. As  discussed in a previous Monday Note, PDF is by no means the future of digital media. PDF once was a fantastic invention, but it wasn’t designed for today’s task: encapsulating news.
With this in mind, during the first months of ePress development, we spent a great deal of time aligning the output of the different publications to what we knew was the right target for mobility: XML feeds for stories on top of a “zoned” PDF that defines the placement of a story in a page.  Such feeds were supposed to come directly from each publication’s CMS (Content Management System). Some were able to supply the correctly formatted feeds right from day one, other needed upgrades to their CMS output. At publications, tech teams were very cooperative. We also got serious help from EDD, a French company specialized in digitizing media contents (EDD indexes and distributes 50,000 articles per day). EDD collects publishers’ PDF files, send those to India where the files are taken apart in order to produce the required output, all of it done every night within two hours.

Once clean XML feeds (standardized for the eight titles) became finally available, we had to put those on our content-delivery platform. We did this by re-aggregating all the components (PDF, zoning/mapping files, XML files, summaries, graphic elements) within a transaction-tracking mechanism. For this, we picked miLibris, a French startup that provides reading tools and cataloging systems for publishers, and for the French ISP and mobile carrier Orange.

Again: the idea was to use native XML to publish each title we serve, fully formatted for each article.

Three reasons for this:

Readability. You don’t comfortably read by constantly zooming and pinching. The screen of smartphone covers only a 1/60th of a broadsheet newspaper. For a reading a “facsimile” rendering of a 30 pages publication you’d need 1800 pans and zooms. Insanely unrealistic. XML gives us the ability to automatically reformat the text to fit the device, smartphone, tablet or, eventually, PC browser. No more pinching and zooming, just scrolling.

Functionalities. Relying on XML and text opens the way to a broad set of additional features: font-size adjustment, social sharing of articles, ability to create users’ folders, search, recommendation engines, etc.

Future-proof. At some point, we’ll get rid of PDF. As mobility usage rises, readers will demand quicker downloads over 3G or Edge cellular network. Two obstacles remain: one is each title’s graphic identity; legitimately, publishers demand the preservation of the visual aspects of the publications. As shown below, we’re making progress; the PDF version of a page:

and its XML/HTML5 translation (click to enlarge both):

… But we aren’t yet able to translate the minute details of a refined newspaper layout in XML and HTML5.

The second aspect is more economical. In some countries (such as France), the entity in charge circulation audits (equivalent to ABC) refuses to take in account digital copies as long as they are not exactly identical to the print version. This outdated posture explains the remanence of PDF formatting: it is accepted as a ‘’carbon copy’’ of the print original. My take is this will evolve over time. Already, titles such as the Economist offer an encapsulated version of their print edition that carries the same editorial content, but with a different advertising setup in some parts.

The evolution of the “edition” concept of is indeed a key question. On the one hand, the notion is deeply associated with the idea of branded news encapsulated in a “cognitive container” – yesterday the paper, today the digital edition tied to an app. On the other hand, digital news also begs for real-time. This can be implemented through a variety of techniques: overlay real-time news display, or permanently updated editions, which, in turn, push hard in favor of a subscription model vs. per-copy sales, the latter a mere (but necessary) transition.

frederic.filloux@mondaynote.com