The digital revolution is fundamentally transforming the news as business even as the once-dominant print news segment wrestles with a broken revenue model and looks to price online news in a feeble attempt to fix it. By C.P. CHANDRASEKHAR
The newspaper industry had for long considered the Internet a poor, if not inappropriate, medium to carry its editorial content and a mere add-on to direct traffic to print, but it is now being forced to rethink. All of a sudden online editions are being seen as potential sources of subscription revenue to support the industry. The practice of setting up paywalls for access to online editions, which was earlier restricted to a few newspapers such as The Wall Street Journal and Financial Times, and then adopted by some general interest papers such as The Times and The New York Times is spreading fast. The most recent adopters of the practice include The Washington Post, Orange County Register (OCR), The Telegraph, San Francisco Chronicle and The Sun.
Most of them have set up metered paywalls offering free access to a specified number of articles or for a certain time period before the meter starts ticking. In the case of the OCR, for example, aspiring readers can register and do so for free for seven days, after which they will have to pay either $2 a day or $365 a year. The effort to charge for access to online content is gathering momentum.
The reasons for this search for online reader revenue are many. To start with, across the world, but with some exceptions like India, newspapers and magazines have experienced a steep decline in circulation numbers and advertising revenues. Back in 2010, the Organisation for Economic Cooperation and Development (OECD) in its study “The Evolution of News and the Internet” found that the annual growth of global newspaper circulation had been slowing since 2004 and had reached zero in 2007 and then turned negative. Relative to 2004, circulation in 2010 had fallen by 34 per cent in the United States, 22 per cent in the United Kingdom, and 18 per cent in Japan. Matters have only worsened since. In the U.S., in particular, weekday newspaper circulation, according to the Newspaper Association of America (NAA), peaked at 63.1 million in 1973, and fluctuated in the 60-63 million range until 1990, fell sharply to 50.7 million in 2007 and further to 44.4 million in 2011. Over 2012, the industry association WAN-IFRA reports, newspaper circulation fell by 4.3 per cent in North America.
The drop in print circulation is due to larger numbers of people accessing news from other sources. The first shift was to television. But the substantial difference in the way news is purveyed in that medium made this more an opportunity than a challenge. If newspapers could restructure themselves to provide the background and analysis to the events and developments captured by television’s immediacy, those whose interest is triggered by television news would turn to print. This did indeed happen in many contexts. The problem arises when both news and analysis of varying authenticity are made available from multiple sources that can be accessed on the Internet.
According to the Pew Research Centre’s 2012 News Media Consumption survey, 39 per cent of respondents reported accessing news online or from a mobile device the day before they were canvassed. When combined with other online and digital news sources, the share of people who got news from one or more digital forms on an average day rose to 50 per cent. That came close to the audience for television news, and was well ahead of the figures for print newspapers and radio (29 per cent and 33 per cent respectively).
The drop in circulation and the competition from the Internet for advertising dollars has, in turn, affected print advertising revenues adversely. According to the U.K’s Offcom, between 2007 and 2011 global newspaper advertising revenues declined at a compound annual rate of 6.9 per cent to reach £60 billion, while for magazines advertising revenues declined at an annual rate of 6.8 per cent to £28 billion.
On the other hand, expenditure on all Internet advertising grew at a compound annual rate of 16.0 per cent, to touch £48 billion. Only a small part of Internet advertising revenue accrued to the online editions of newspapers, which was inadequate to neutralise the loss in print. In the U.S., for example, print advertising revenue fell from a peak of $48.7 billion in 2000 to $18.9 billion in 2012: a fall of $29.7 billion or 61 per cent (without counting for inflation). Newspaper online advertising revenues on the other hand rose from a meagre $1.2 billion in 2003 to a paltry $3.4 billion in 2012.
The trend seems relentless. Since 2000 there have been only four years in which print advertising revenue growth was positive; in the crisis years 2008 and 2009, the decline was as large as 17.7 per cent and 28.6 per cent respectively.
Not surprisingly, many argue that the news as business is fundamentally threatened and that print (besides radio) as the means to deliver news is in terminal decline. The decision of Newsweek magazine to stop publishing its print edition after nearly 80 years of presence and to go “only digital” on a subscription platform as of the start of this year seems to confirm this assessment.
The words, after the closure, from Tina Brown, editor-in-chief of Newsweek and the online-only The Daily Beast, were also a form of corroboration. “When I returned to print with Newsweek, it did very quickly begin to feel to me an outmoded medium. While I still had a great romance for it, nonetheless I feel this is not the right medium anymore to produce journalism,” Tina Brown reportedly said. Clearly, the digital revolution is fundamentally transforming the news as business.
The challenge is, of course, not just to the news business. In the realms of book publishing, music and film, for example, the way in which content is produced and delivered to the user has changed and is changing dramatically. This has posed challenges to traditional businesses engaged in the production, marketing and retailing of these sources of information, analysis and entertainment. It is not just that the physical forms—ink-and-paper books, CDs and DVDs—in which these services were embodied to make them products that can be sold like goods on shelves are now disappearing. The wholesale and retail outlets that stocked and sold these services packaged as products are also disappearing as “download” becomes the mode of delivery and/or consumption.
The coming revolution in higher education
Even higher education is seen as being challenged. Just two months ago, the U.K.-based think tank Institute for Public Policy Research released a report prepared by a team led by Sir Michael Barber, education expert and chief education adviser to the Pearson Group (which publishes Financial Times and The Economist), ominously titled “An avalanche is coming: Higher education and the revolution ahead”. It warned that unless traditional brick-and-mortar, contact-based, face-to-face universities respond to the challenge from much cheaper, or even free, online education, they risk closure. Massive open online courses, or “Moocs”, now not only provide high-quality course content and lectures on the Internet free of charge, but, as is likely to happen in the State of California that boasts the best public universities, could be recognised sources that deliver credits which regular universities must accept.
Finding niche strengths
In ways that are obvious and perceptible, the combination of computing power, advances in communication and human ingenuity have indeed brought about dramatic changes and posed new challenges. However, the challenge to the news business is even greater. In the other areas noted above, the challenge is to reorganise the way services are delivered and find niche strengths that permit charging a relatively high price or fee for physical, or face-to-face, delivery. This is because these, to start with, are services marketed at a price that covers costs and offers a profit. What the digital revolution has done is to change the way in which outputs are produced and sold. The brick-and-mortar distribution business may be challenged, but the industry is not.
The problem in the business of collecting, collating and reporting news and offering long-form news analysis is that its costs have not been covered by the price charged, whether it is in print or in television. It is not just newspaper profits but newspaper production costs—newsprint, industrial (printing, shipping, delivery) and editorial costs—that have been covered by revenues from advertising. Based on the basis of data from 17 representative newspaper companies, the NAA estimates that in 2012 circulation revenues accounted for only 27 per cent of total newspaper media revenue, whereas print advertising delivered as much as 46 per cent, despite its long-term decline. The balance came from digital advertising (11 per cent), new revenue sources such as digital marketing and e-commerce (8 per cent), and niche publishing and direct marketing (8 per cent).
Given this revenue structure, the conclusion must be that the sharp decline in advertising revenues is destroying the current revenue model in the industry. If looked at in terms of opportunities offered by audience behaviour, the appropriate strategy seems to be an increasing emphasis on online news repackaged to attract a larger share of netizens. Most newspapers seem to be doing just that. But that, too, does not seem to be a solution for a number of reasons.
The first is that it does not resolve the cost-price discrepancy that characterises the industry, with price falling far short of unit costs. As of now, online editions and news websites for print news enterprises are not substitutes but add-ons. So there are only additional costs to be incurred with little saving. But if the move, as in the case of Newsweek, is away from print to the web, some savings are inevitable. In the case of print, for example, one estimate suggests that costs can be divided into core promotional, editorial and administrative costs, amounting to 40 per cent of the total, and production and distribution costs that account for 60 per cent. The shift to the web is expected to cut production and distribution costs by at least half.
High cost business
However, this does not go far enough. As of now, costs are seen as absorbing close to 90 per cent of revenues in successful news ventures. But only about a quarter of those revenues come from sales, with the remaining coming from non-circulation revenues, principally advertising. So, even an online news venture must draw substantial advertising revenues. This is where the catch lies. Technology companies, such as Google, Yahoo, Facebook, Microsoft, and AOL dominate the digital advertising market, taking as much as two-thirds of the total. That leaves little for print providers seeking to move increasingly online.
Which is why there is a drive to monetise the web by creating metered or full-fledged paywalls. The idea clearly is to make news pay for itself to the maximum extent possible. The evidence is quite strong that those looking for quality reportage and news analysis are not too responsive to price. So setting up price walls may not in itself damage the transition in all cases, unless what is being offered is not worthy. The problem, however, stems from three other sources. Most newspapers did not choose to invest in the transition to online delivery when the times were good. Being worthy requires money, and the best time to spend it is not when times are bad.
Second, there are institutions, including The Guardian, that are investing time, money and ingenuity to build a valuable web presence. The Guardian has emerged as the third most visited newspaper website across the world but has done so while staying with a free access model. The presumption must be that advertising revenues would respond to finance the costs that give a news website its distinguishing character. Whether it does or not, the presence of such sites undermines those seeking to draw revenues from readers.
Finally, the competition from free access sources that news websites face are immensely more than the loss that music, book publishing or higher education sectors suffer on account of piracy. Copyright in the news business is difficult to define and administer. And there are innumerable netizens and their collectives that are willing and eager to use the net to report news and analyse developments for free.
All this only establishes the commonly accepted principle that the revenue model for the news business on the web is yet to be defined. The problem is that the current revenue model of the print news business is also broken. The attempt to price online news is a feeble attempt to fix it.