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Google Thoughts on the News Business: Of Cups Half Full & Half Empty

By 26 July 2010 No Comment

Jeff Jarvis wrote a book titled What Would Google Do?, blurbed as explaining why “Google is not just a company, it is an entirely new way of thinking,” so it surprises not that his recent post in Buzz Machine, “Google takes the FTC to school,” chortles about how Google’s comments (July 20, 2010) on the FTC’s Staff Discussion Draft on  Potential Policy Recommendations to Support the Reinvention of Journalism is: “a wonderful document that takes the FTC — and the news industry — to school on the First Amendment, copyright, fair use, antitrust, media history, business, and technology. The government and publishers should be embarrassed to need such remedial education.”

This characterization is a bit over-the-top, but the comments do make some excellent points, and have some fun while doing so. My criticism of them is that in some respects they are insufficiently destructive, not explaining exactly how completely the present structure of the new business has been destroyed, and, because it pulls this punch, Google never gets to the real question of how to rebuild, or new-build, a news business.

Among the good points that Google makes:

  • The publishers who bitch about search engines have an easy out – program their webpages so search engines do not index them or refer to them. It’s simple, so put up or shut up.
  • The newspapers were never really in the business of selling news to readers; their main activity, which generated 80% of revenues, has always been in selling eyeballs to advertisers. This business was for decades very lucrative because advertising space ina major newspaper was a limited commodity that commanded a price premium. The Internet has created an abundance of advertising channels, so naturally the price of each has fallen.
  • Perhaps the biggest blow to newspapers was the decline in classified advertising. But this had little to do with search engines, and much to do with Craig’s List.
  • The Internet also disaggregates the package, and makes cross-subsidization difficult, which upsets current institutional arrangements.
  • The newspapers responded badly to the Internet, trying to make the Net mirror the existing ways of doing business rather than adapting to new realities, which let them be outmaneuvered by new entrants with less baggage.

From FTC Website

There is more along the same lines – good stuff.

But Google shrinks from making the big point – the newspaper business is a dead man walking.

Fundamentally, the structure of the business was built on cheap paper, high speed presses, and the expense of producing/distributing the product combined with massive economies of scale due to the low marginal cost of each additional copy printed. The structure of the business was that each metropolitan daily got a monopoly on its viewer catchment area, while they pooled resources in the form of wire services to cover the news on the cheap. The efficiencies are, or were, amazing. As of 2007, the AP, with 4,100 employees, had revenues of $710 million. Divide this up among 51 million newspaper subscribers and it comes to about $14 each, and this overstates it, because AP gets revenues from radio, TV, and the Internet, too.  Against this, each subscriber generated over $1,000 of revenue for the industry.  Of course, each individual paper is also spending money and staff and then feeding money into the cooperative, so the news product is somewhat more expensive than this, but it was a pretty good business while it lasted. (For extended discussion, see Preparing the Obituary, The American, March 3, 2009.)

The business model had other benefits. It had a symbiotic relationship with newsmakers, who had to go through the news structure to garner public attention. It was a gatekeeper for experts, who would write for a pittance for the sake of reaching an audience. It provided a barrier-to-entry service for its big advertisers, such as department stores, because advertisers had to be large to take advantage of metropolitan paper’s reach, which made it difficult for niche competitors of big stores.

Frank Norris once wrote a muckraking novel about the Southern Pacific Railroad called The Octopus, but he never met the modern newspaper business.

The Internet destroyed all the props of this business model, and there is no way that it can be reconstructed. The stock market currently values the Washington Post, one of the greatest of nameplates, at about zero. All the value of the company is in its other businesses.

But here is where I part company with Google, because the fundamental problem is not that the old business model is gone – that is a given – but that many of the rules of property rights governing the news were established in this specialized context.  So while Google is right to say that we should not twist these doctrines to protect the old model, it is wrong to say that we do not need to re-assess them to figure out how to enable the creation of new and vibrant businesses.

In this context, issues of how to adapt principles of “the First Amendment, copyright, fair use, antitrust” to allow new possibilities are considerably more difficult than Google credits. For business to exist, of any kind, it must have some degree of market power; the old “perfect competition” model is absurd. For decades, the news business did not need to worry much about its intellectual property rights because the basic industrial technologies gave it market power. Now, this is no longer true, so the market power needs to come from intellectual property rights  — or some other source, if one can think of any.

It is in this area of thinking creatively instead of just destructively that Google falls short. I agree with it that the FTC is focused to much on the current structure, but at least the agency is concerned with how to promote the existence of a viable market and business structure, and with  avoiding a non-system in which everyone tries to free ride on everyone else. So it is not only the FTC that needs some schooling.

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