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The News Biz: Don’t Be Happy, Worry

By 22 April 2010 No Comment

Google CEO Eric Schmidt spoke to the recent convention of the American Society of Newspaper Editors, assuring them that they do have a future, and that Google is their friend. (For a summary, see paidContent.org; for a video, see the Google Public Policy blog,) “We have a business model problem, we don’t have a news problem,” he said in a soundbite that made most of the stories about the talk. He thinks the business model of the future will be derivative of the models of the past, based on subscriptions, especially those over the new mobile devices, and ads, powered by Google, of course.

A bit of skepticism seems due. The newspaper as we know it was based on the convergence of a number of technologies – high speed and expensive presses, cheap paper and ink, truck transportation, telecommunications, unquestioned child labor. The result was that the newspapers could pool their news gathering efforts via the wire services and then give each member the franchise for its metro area. The paper could then combine news and features into a package that appealed to everyone, and expand the circulation base. This in turn made the product attractive to advertisers, which in turn made it even more attractive to customers, in a virtuous upward spiral. (Other synergies arose, too, such as symbiosis with news makers; for an expanded description, see here.)

The business had high fixed and low marginal costs, which made each news catchment area into a monopoly, and no newspaper needed to worry much about its intellectual property, which was protected by technological impossibility of mass piracy unless the copier duplicated the expensive infrastructure, and that would make them easily found and sued. For decades, the legal cases about fair use and other exotica of copyright doctrine focused on the edges and not on the core of the business.

The amount that readers paid for the paper was only a fraction of its cost. Most of the money came from ads, especially the cash cows of classifieds and retail display ads. The core of the business was that the newspaper’s readership was the product and the true customers were the advertisers.

The Internet destroyed most of this structure. The costs of distribution dropped to near zero, which ended the local franchise on the wire service product and the chokehold on classified ads. The Internet also eliminated the technological impossibility barrier to copying the news product, and the advent of Google, with its offer of click-based revenue, then created maximum incentives for everyone to take as much content as they could without going to the bother of paying to produce it.

Tech guru Nick Carr nailed it when he said:

The Web didn’t kill mediators. It made them stronger. The way a company makes big money on the Web is by skimming little bits of money off a huge number of transactions, with each click counting as a transaction. (Think trillions of transactions.) The reality of the web is hypermediation, and Google, with its search and search-ad monopolies, is the king of the hypermediators.

Which brings us to everybody’s favorite business: the news. Newspapers, or news syndicators like the Associated Press, bemoan the power of the middlemen, or aggregators, to get between them and their readers. They particularly bemoan the power of Google, because Google wields, by far, the greatest power. The editor of the Wall Street Journal, Robert Thomson, calls Google a “tapeworm.” His boss, Rupert Murdoch, says Google is engaged in “stealing copyrights.” . . . .   [Google talks of ] “A billion clicks.” “Millions of dollars.” Such big numbers. What Google doesn’t mention is that the billions of clicks and the millions of ad dollars are so fragmented among so many thousands of sites that no one site earns enough to have a decent online business. Where the real money ends up is at the one point in the system where traffic is concentrated: the Google search engine. Google’s overriding interest is to (a) maximize the amount and velocity of the traffic flowing through the web and (b) ensure that as large a percentage of that traffic as possible goes through its search engine and is exposed to its ads. One of the most important ways it accomplishes that goal is to promote the distribution of as much free content as possible through as many sites as possible on the web. For Google, any concentration of traffic at content sites is anathema; it would represent a shift of power from the middleman to the supplier. Google wants to keep that traffic fragmented. The suppliers of news have precisely the opposite goal.

Clearly, there is no way to recreate the structure of the old news business, with its local monopolies and high ad prices. This is not cause for grief; truth be told, when one adds up the numbers, the amount of money the old model spent on news production was pathetically small. The need is for new models to arise, as Schmidt said. But what he left out is that there must be some way for the proprietors of the new models to monetize the news they produce. They cannot simply toss it into the commons of the Internet ocean and let everyone then use it to fish for adclick dollars. The fruits of  investments in news production must be protected, whether the rewards are reaped by selling content to consumers or by selling eyeballs to advertisers.

Perhaps Schmidt recognizes this. The parts of his talk on subscription models could be read this way. But it is indubitable that we cannot have a vibrant news business of the future without mechanisms of intellectual property protection that are crafted for the Internet age.  Schmidt expressed an optimistic faith that “High quality journalism will triumph,” but not without some help it won’t.

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