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Culture War: Jeff Bezos and The Washington Post

 

by Jean-Louis Gassée

After predicting the death of newspapers, that was last year, Jeff Bezos, the Amazon founder, now buys himself the The Washington Post. Necrophilia or the beginning of another spectacular transformation of an old genre?

A successful business man reaches the dangerous age of 50, looks at his fortune and makes a decision: He’s going to plough a few of his millions into a restaurant. In the past 25 years, he’s been to many of the best dining places around the world. Power lunches, closing dinners, gastronomy road trips with the family, he’s done it all.

He knows restaurants.

But he keeps failing. He fires the chef, changes suppliers, hires a new dining room manager, looks for a classier sommelier, fights city inspectors, calls on his acquaintances and asks them to bring their celebrity friends… nothing works.

He was blinded by his command of his true calling: being a customer. He saw the show from a comfortable box seat and only went backstage when invited by a knowing proprietor eager to glad-hand a moneyed patron. Our gastronome failed to see he knew very little about being a restaurateur, the intricacies, the people challenges (theft, drugs and sex), the politics that are involved in running a real restaurant.

(During my psychosocial moratorium, before I joined the high-tech industry in 1968, I worked in a bar, a food-serving strip-joint, and a restaurant. I thought these places were deranged. Decades later, I read Anthony Bourdain’s Kitchen Confidential and realized the “people challenges” I witnessed aren’t so unusual after all. Enjoy the book and think about the goings-on back there next time a maitre d’ looks down his aquiline nose at you.)

Failed restaurants are common in Silicon Valley, with its crowd of affluent and well-traveled business people who think they can master the trade. A few of them subsidize the great dinners we get to enjoy — for a while. They have our fleeting gratitude and end up with a painfully depleted bank account.

Is this a valid parable for Jeff Bezos plowing $250M (so far) into The Washington Post? To start, the price paid for the DC “paper of record” amounts to less than 1% of the Amazon founder’s fortune. Even if he has to double or triple his initial investment while he turns the paper around, it won’t trouble Bezos’ pocketbook much — he can eminently afford the bet.

And, unlike our failed restaurateur, I don’t think Bezos’ purchase was made in a mid-life fit of vanity. (Although see this delicious piece of Internet satire that contends he bought the paper as a result of a mistaken click.) Read Bezos’ Wikipedia bio, or his letters to shareholders… you’ll see he’s a deep-thinking geek (now a term of respect. The Urban Dictionary updates the meaning: people you pick on in high school and wind up working for as an adult). He’s justifiably famous for taking the very long view, and he’s quotably willing to be “misunderstood” for a long time.

But can he win?

Personally, I hope so. I used to love newspapers, I remember how much I enjoyed breakfast with two local and two national papers, all delivered to my doorstep, an unimaginable luxury in France.

Once upon a time, for their advertising revenue, newpapers enjoyed an oligopoly. With three or four dailies in each market, prices were contained. And we, the readers, certainly didn’t mind that advertisers paid 75% of the cost of our daily fix.

Then, the Internet that Bezos has ridden so well intervened and newspapers lost the news race. The Internet won on velocity and, too often, on relevance. In a Fortune Tech piece offering “5 hacks for Jeff Bezos“, Ryan Holmes, CEO of Social Media Management company HootSuite, points to the speed and tone of social media as sources of fixes for the Post:

Perhaps the greatest criticism of newspapers today is that they have lost relevance to their own readers. Writing on the decline of the Post, New York Times media columnist David Carr points out that “[the] days when people snapped open the daily paper to find out the things they should care about were long past …” Big newspapers, in particular, have proven startlingly inept at delivering timely, relevant news to the people they serve. So, naturally, readers have gone elsewhere, to myriad online sources that better cater to their interests.

Since the Net offered a seemingly unconstrained amount of billboard space, the price that newspapers could charge for ads was quickly cut by a factor of ten and, more recently, sixteen.

But it wasn’t just the emergence of the Internet as a news medium that dealt newspapers a near fatal blow. They also lost the race because of internal, cultural circumstances.

In another case of the Incumbent’s Curse, newspapers looked down on the Internet and those annoying high-tech people and things.  Kara Swisher, co-head of AllThingsD (a Wall Street Journal enterprise), recounts her trouble with the old, arrogant culture at the Post in her Dear Jeff Bezos, Here’s What I Saw as an Analog Nobody in the Mailroom of the Washington Post letter:

“It happened every day — other reporters playfully mocking me for using email so much or for borrowing the Post’s few suitcase cellphones, or major editors telling me that the Internet was like the CB-radio fad, or sales people insisting that the good times would never end for newspapers as long as there were local businesses that needed to reach consumers. (In truth, they still do, but that’s another letter.)”

Sadly, the Post’s cultural reluctance isn’t unique. In another country, two prominent dailies I know exhibit very similar symptoms, print journalists who actively despise or even obstruct the Internet side of their house.

Much has been written about Jeff Bezos’ personal (not Amazon’s) purchase of the Post. For example: Good Luck With That – Pew Research Graphs Bezos’ Stunning Challenge, where Tom Foremski steps us through the Post’s business challenges, starting with the inexorable decline in Print revenues:

Post Revenue Decline

Another comment well worth reading, Stop the Presses: A New Media Baron Appears, comes to us courtesy of Michael Moritz, a.k.a. Sir Michael, a journalist who went over to the Dark Side and is now Chairman of Sequoia Capital, a leading venture firm. The article reminds us of Bezos’ foremost preoccupation with customers [emphasis mine]:

“It won’t come as a surprise that Bezos explains that pleasing, if not thrilling, customers is Amazon’s most important task. In his 2009 letter he provided a peek into the internals of Amazon explaining that of the company’s 452 detailed goals for the ensuing year 360 had an impact on the customer, the word ‘revenue’ was used just eight times, ‘free cash flow’ only four times and ‘net income’, ‘gross profit’, ‘margin’ and operating profit were not mentioned. Even though there is no line item on any financial statement for the intangible value associated with the trust of customers this is, by far and away, Amazon’s most important asset.

Elsewhere, Moritz reminds us of another source of Amazon’s prosperity, Free Cash-Flow, a frequent topic in Bezos’ letters to shareholders:

“Since inception Amazon has generated $20.2 billion from operations almost half of which ($8.6 B), has been used for capital expenditures such as new distribution centers, which improve life for the customer.”

With this and more in mind, we now turn to the letter Bezos wrote to employees at the newspaper. While he professes no desire to “be leading The Washington Post day-to-day”, he nonetheless makes no mystery of his goal to be an agent of change, of modernization, of adapting to the Internet Age:

“There will, of course, be change at The Post over the coming years. That’s essential and would have happened with or without new ownership. The Internet is transforming almost every element of the news business: shortening news cycles, eroding long-reliable revenue sources, and enabling new kinds of competition, some of which bear little or no news-gathering costs. There is no map, and charting a path ahead will not be easy. We will need to invent, which means we will need to experiment. Our touchstone will be readers, understanding what they care about – government, local leaders, restaurant openings, scout troops, businesses, charities, governors, sports – and working backwards from there. I’m excited and optimistic about the opportunity for invention.”

This comes from a man who, last year, said ‘People Won’t Pay For News On The Web, Print Will Be Dead In 20 Years‘.

Changing business models as a publicly traded company is impossible in practice. The old model dies faster than the new one kicks in and Wall Street runs away from the transition’s “earnings trough”. By buying the Washington Post, Bezos is afforded a privacy that the old public ownership structure doesn’t permit. (That’s exactly why Michael Dell wants to take his own company private, so he can perform surgery behind the curtains.)

Which leaves the new owner with his biggest challenge: Understanding and changing the culture at the old “paper” — which sounds harder and more expensive than a gastronome trying to become a restaurateur.

There will be blood.

This is no reflection on Bezos’ truly amazing diversity and depth of skills, but a sincere concern borne of Culture’s ability to devour anything that stands in its way, sometimes silently until it’s too late. As the saying goes, Culture Eats Strategy for Breakfast.

Of course, we have examples of people performing seemingly impossible feats. Steve Jobs’ Apple 2.0 comes to mind, a turnaround of monumental proportions to which Bezos’ Amazon achievements could be fairly compared. So, why couldn’t Bezos build a WaPo 2.0?

As Aaron Levie, the founding CEO of Box, tweeted last week:

“Industries are transformed by outsiders who think anything is possible, not insiders who think they already know what is impossible.”

One more thing, a thought I can’t suppress: Unlike Steve Jobs, who gained insight from his tribulations and then spread the benefits on the largest of scales, Bezos hasn’t been burned and tempered by failure.

JLG@mondaynote.com

 

In Bangkok, with the Fast Movers

 

The WAN-IFRA congress in Bangkok showed good examples of the newspaper industry’s transformation. Here are some highlights. 

Last week, I travelled to Bangkok for the 65th congress of the World Association of Newspapers (The WAN-IFRA also includes the World Editors Forum and the World Advertising Forum.) For a supposedly dying industry, the event gathered a record crowd: 1400 delegates from all over the world (except for France, represented by at most a dozen people…) Most presentations and discussions revealed an acceleration in the transformation of the sector.

The transition is now mostly led by emerging countries seemingly eager to get rid themselves as quickly as possible of the weight of the past. At a much faster pace than in the West, Latin America and Asia publishers take advantage of their relatively healthy print business to accelerate the online transition. These many simultaneous changes involve spectacular newsroom transformations where the notion of publication gives way to massive information factories equally producing print, web and mobile content. In these new structures, journalists, multimedia producers, developers (a Costa-Rican daily has one computer wizard for five journalists…) are blended together. They all serve a vigorous form of journalism focused on the trade’s primary mission: exposing abuses of power and public or private failures (the polar opposite of the aggregation disease.) To secure and to boost the conversion, publishers rethink the newsroom architecture, eliminate walls (physical as well as mental ones), overhaul long established hierarchies and desk arrangements (often an inheritance of the paper’s sections structure.)

In the news business, modernity no longer resides in the Western hemisphere. In Europe and in the United States, a growing number of readers are indeed getting their news online, but in a terrifyingly scattered way. According to data compiled by media analyst Jim Chisholm, newspapers represent 50.4% of internet consumption when expressed in unique visitors, but only 6.8% in visits, 1.3% in time spent, and 0.9% in page views!… “The whole battle is therefore about engagement”, says WAN-IFRA general manager Vincent Peyregne, who underlines that the level of engagement for digital represents about 5% of what it is for print — which matches the revenue gap. This is consistent with Jim Chisholm’s views stated a year ago in this interview to Ria Novosti [emphasis mine]:

If you see, how often in a month do people visit media, they visit the print papers 16 times, while the for digital papers it’s just six. At that time they look at 36 pages in print and just 3.5 in digital. Over a month, print continues to deliver over 50 times the audience intensity of newspaper digital websites.

One of the best ways to solve the engagement equation is to gain a better knowledge of audiences. In this regard, two English papers lead the pack: The Daily Mail and the Financial Times. The first is a behemoth : 119 million uniques visitors per month (including 42 m in the UK) and the proof that a profusion of vulgarity remains a weapon of choice on the web. Aside from sleaziness, the Mail Online is a fantastic data collection machine. At the WAN conference, its CEO Kevin Beatty stated that DMG, the Mail’s parent company, reaches 36% of the UK population and, on a 10-day period, the company collects “50 billion things about 43 million people”. The accumulation of data is indeed critical, but all the people I spoke with — I was there to moderate a panel about aggregation and data collection — are quick to denounce an advertising market terribly slow to reflect the value of segmentation. While many media outlets spend a great deal of resources to build data analytics, media buying agencies remain obsessed with volume. For many professionals, the ad market better quickly understand what’s at stake here; the current status quo might actually backfire as it will favor more direct relationships between media outlets and advertisers. As an example, I asked to Casper de Bono, the B2B Manager for the FT.com, how its company managed to extract value from its trove of user data harvested through its paywall. De Bono used the example of an airline that asked FT.com to extract the people that logged on the site from at least four different places served by the airline in the last 90 days. The idea was to target these individuals with specific advertising — anyone can imagine the value of such customers… This is but an example of the FT.com’s ultra-precise audience segmentation.

Paywalls were also on everyone’s lips in Bangkok. “The issue is settled”, said Juan Señor, a partner at Innovation Media Consulting, “This is not the panacea but we now know that people are willing to pay for quality and depth”. Altogether, he believes that 3% to 5% of a media site’s unique visitors could become digital subscribers. And he underlined a terrible symmetry in the revenue structure of two UK papers: While the Guardian — which resists the idea of paid-for digital readers — is losing £1m per week, The Telegraph makes roughly the same amount (£50m a year, $76m or €59m) in extra revenues thanks to its digital subscriptions… No one believes paywalls will be the one and only savior of online newspapers but, at the very least, paywalls seem to prove quality journalism is back in terms of value for the reader.

frederic.filloux@mondaynote.com

Two strategies: The Washington Post vs. The NYT

 

Both are great American newspapers, both suffer from the advertising slump and from the transition to digital. But the New York Times’ paywall strategy is making a huge difference. 

The Washington Post’s financials provide a good glance at the current status of legacy media struggling with the shift to digital. Unlike others large dailies, the components of the Post’s P&L clearly appear in its statements, they are not buried under layers of other activities. Product-wise, the Post remains a great news machine, collecting Pulitzer Prizes with clockwork regularity and fighting hard for scoops. The Post also epitomizes an old media under siege from specialized, more agile outlets such as Politico, ones that break down the once-unified coverage provided by traditional large media houses. In an interview to the New York Times last year, Robert G. Kaiser, a former editor who had been with the paper since 1963, said this:

“When I was managing editor of The Washington Post, everything we did was better than anyone in the business,” he said. “We had the best weather, the best comics, the best news report, the fullest news report. Today, there’s a competitor who does every element of what we do, and many of them do it better. We’ve lost our edge in some very profound and fundamental ways.”

The iconic newspaper has been slow to adapt to the digital era. Its transformation really started around 2008. Since then, it has checked all the required boxes: integration of print and digital productions; editors are now involved on both sides of the news production and all relentlessly push the newsroom to write more for the digital version; many blogs covering a wide array of topics have been launched; and the Post now has a good mobile application. The “quant” culture also set in, with editors now taking into account all the usual metrics and ratios associated with digital operations, including a live update of Google’s most relevant keywords prominently displayed in the newsroom. All this helped the Post collect 25.6 million unique visitors per month, vs. 4 to 5 million for Politico, and 35 million for the New York Times that historically enjoys a more global audience.

Overall, the Washington Post Company still relies heavily on its education business, as show in the table below :

 Revenue:.......$4.0bn (-3% vs. 2011)
 Education:.....$2.2bn (-9%)
 Cable TV:......$0.8bn (+4%)
 Newspaper:.....$0.6bn (-7%)
 Broadcast TV:..$0.4bn (+25%)

But the education business no is longer the cash cow it used to be. Not only did its revenue decrease but, last year, it lost $105m vs. a $96m profit in 2011. As for the newspaper operation, it widened its losses to $53m in 2012 from $21m in 2011. And the trend worsens: for the first quarter of 2013, the newspaper division’s revenue decreased by 4% vs. a year ago and it lost $34m vs. $21m for Q1 2011.

Now, let’s move to a longer-term perspective. The chart below sums up the Post’s (and others legacy media’s) problem:

Translated into a table:

                  Q1-2007   Q1-2013  Change %
 Revenue (All):....$219m.....$127m.....-42%
 Print Ad:.........$125m.....$49m......-61%
 Digital Ad:.......$25m......$26m......+4%

A huge depletion in print advertising, a flat line (at best) for digital advertising, the elements sum up the equation faced by traditional newspapers going from print to online.

Now, let’s look at the circulation side using a comparison with the New York Times. (Note that it’s not possible to extract the same figures for advertising from the NYT Co.’s financial statements because they aggregate too many items.) The chart below shows the evolution of the paid circulation for the Post between 2007 and 2013:

..and for the NY Times:

Call it the paywall effect: The New York Times now aggregates both print and digital circulations. The latter now amounts to 676,000 digital subscribers that have been recruited using the NYT’s metered system (see previous Monday Notes under the “paywall” tag). (Altogether, digital subscribers to the NYT, the International Herald and the Boston Globe now number 708,000). It seems the NYT found the right formula: its digital subscribers portfolio grows at a 45% per year rate, thanks to a combination of sophisticated marketing, mining customer data and aggressive pricing (it even pushes special deals for Mother’s Day.) All this adds to the bottom line: if each digital sub brings $12 a month, the result is about $100m that didn’t exist two years ago. But it does not benefit the advertising side as it continues to suffer. For the first quarter of 2013 vs. the same period last year, the NYT Company lost 13% in print ads revenue and 4% for digital ads. (As usual in their earning calls, NYT officials mention the deflationary effects of ad exchanges as one cause of erosion in digital ads.)

One additional sign that digital advertising will remain in the doldrums: Politico, too, is exploring alternatives; it will be testing a paywall in a sample of six states and for its readers outside the United States. The system will be comparable to the NYT.com or the FT.com, with a fixed number of articles available for free (see Politico’s management internal memo.)

It is increasingly clear that readers are more willing than we once thought to pay for content they value and enjoy. With more than 300 media companies now charging for online content in the U.S., the notion of paying to read expensive-to-produce journalism is no longer that exotic for sophisticated consumers.

frederic.filloux@mondaynote.com

 

The Need for a Digital “New Journalism”

 

The survival of quality news calls for a new approach to writing and reporting. Inspiration could come from blogging and magazine storytelling and also bring back memories of the 70′s New Journalism movement. 

News reporting is aging badly. Legacy newsrooms style books look stuck in a last Century formalism (I was tempted to write “formalin“). Take a newspaper, print or online. When it comes news reporting, you see the same old structure dating back to the Fifties or even earlier. For the reporter, there is the same (affected) posture of effacing his/her personality behind facts, and a stiff structure based on a string of carefully arranged paragraphs, color elements, quotes, etc.

I hate useless quotes. Most often, for journalists, such quotes are the equivalent of the time-card hourly workers have to punch. To their editor, the message is ‘Hey, I did my my job; I called x, y, z’ ; and to the  the reader, ‘Look, I’m humbly putting my personality, my point of view behind facts as stated by these people’ — people picked by him/herself, which is the primary (and unavoidable) way to twist a story. The result becomes borderline ridiculous when, after a lengthy exposé in the reporter’s voice to compress the sources’ convoluted thoughts, the line of reasoning concludes with a critical validation such as :

“Only time will tell”, said John Smith, director of the social studies at the University of Kalamazoo, consultant for the Rand Corporation, and author of “The Cognitive Deficit of Hyperactive Chimpanzees”. 

I’m barely making this up. Each time I open a carbon-based newspaper (or read its online version), I’m stuck by how old-fashioned news writing remains. Unbeknownst to the masthead (i.e. editorial top decision-makers) of legacy media, things have changed. Readers no longer demand validating quotes that weigh the narrative down. They want to be taken from A to B, with the best possible arguments, and no distraction or wasted time.

Several factors dictate an urgent evolution in the way newspapers are written.

1/ Readers’ Time Budget. People are deluged with things to read. It begins at 7:00 in the morning and ends up late into the night. The combination of professional contents (mail, reports, PowerPoint presentations) and social networking feeds, have put traditional and value-added contents (news, books) under great pressure. Multiple devices and the variable level of attention that each of them entails create more complications: a publishing house can’t provide the same content for a smartphone screen to be read in a cramped subway as for a tablet used in lean-back mode at home. More than ever, the publisher is expected to clearly arbitrate between the content that is to be provided in a concise form and the one that justifies a long, elaborate narrative. The same applies to linking and multi-layer constructs: reading a story that opens several browser tabs on a 22-inch screen is pleasant — and completely irrelevant for quick lunchtime mobile reading.

2/ Trust factor / The contract with the Brand. When I pick a version of The New York Times, The Guardian, or a major French newspaper, this act materializes my trust (and hope) in the professionalism associated with the brand. In a more granular way, it works the same for the writer. Some are notoriously sloppy, biased, or agenda-driven; others are so good than they became a brand by themselves. My point: When I read a byline I trust, I assume the reporter has performed the required legwork — that is collecting five or ten times the amount of information s/he will use in the end product. I don’t need the reporting to be proven or validated by an editing construct that harks back to the previous century. Quotes will be used only for the relevant opinion of a source, or to make a salient point, not as a feeble attempt to prove professionalism or fairness.

3 / Competition from the inside. Strangely enough, newspapers have created their own gauge to measure their obsolescence. By encouraging their writing staff to blog, they unleashed new, more personal, more… modern writing practices. Fact is, many journalists became more interesting on their own blogs than in their dedicated newspaper or magazine sections. Again, this trend evaded many editors and publishers who consider blogging to be a secondary genre, one that can be put outside a paywall, for instance. (This results in a double whammy: not only doesn’t the paper cash on blogs, but it also frustrates paid-for subscribers).

4/ The influence of magazine writing. Much better than newspapers, magazines have always done a good job capturing readers’ preferences. They’ve have always been ahead in market research, graphic design, concept and writing evolution. (This observations also applies to the weekend magazines operated by large dailies). As an example, magazine writers have been quick to adopt first person accounts that rejuvenated journalism and allowed powerful narrative. In many newspapers, authors and their editors still resists this.

Digital media needs to invent its own journalistic genres. (Note the plural, dictated by the multiplicity of usages and vectors). The web and its mobile offspring, are calling for their own New Journalism comparable to the one that blossomed in the Seventies. While the blogosphere has yet to find its Tom Wolfe, the newspaper industry still has a critical role to play: It could be at the forefront of this essential evolution in journalism. Failure to do so will only accelerate its decline.

frederic.filloux@mondaynote.com

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