iPad: Killer of Newspapers

Two articles about tablet surveys were in my rss feeds yesterday that are perfect points for a post I have been wanting to make: Tablets are actually more a threat than a potential savior for newspapers.  Or any other traditional publication or program for that matter.

Article 1: AdAge reported that a survey of magazine newspaper apps found that quality had strongest correlation to revenue. 

Article 2: Per Nielsen, people use tablets while watching TV.

While both surveys discovered seemingly obvious results, the larger trend is both interesting and up for interpretation.  As an iPad owner for almost a year, I have observed the same behavior.  In other words, I do like to plop down on the couch and email, read, or play games while watching something on television.  There is starting to be a lot of discussion about the emerging second screen market, but at the moment I am consuming different content on the device than is playing on the television.  (I guess my demand is elastic afterall.)

The first survey that quality is important is both obvious and true.  The device in my hands contains almost infinite choices of content, it's almost a perfect market in itself.  While I have found myself trying more magazines and news apps on the iPad than I had been reading in print, my patience with them is very low.  If the content and experience is not good, unique, or providing any relevant value to me I move on to another place with the slightest flick of a finger.

So this is why newspapers or any publication is at risk.  I used to sit down on the couch with a periodical and as I was a momentary captive audience I would look at most of the different stories in each edition.  But now I will only read (or watch) the components that are relevant to me, and the best among all of the options.

Case in point: I have my local newspaper app on my iPad.  I look at it regularly as well as the website, which has more content.  But I only look for local news.  Maybe I scan headlines for breaking national news, but I reserve my attention on those topics for other national publications that I prefer that I can now easily read.  I did not have many print magazine subscriptions before, I would never read enough to justify. But now I can read in a single sitting individual articles from The New York Times, Bloomberg, The Economist, The Atlantic, The New Yorker, ESPN publications, as well as lots of blogs and other new sources when I would have previously focused on a single publication.  It is pigeonholing each publication to only its most unique and valuable content.

A related activity to this story is the role of content discovery. How do I choose to read those individual articles from different sources?

It used to be we relied on editors at our chosen publications to pick out topics and articles for us to read.  Like many, I used to love sitting at a coffee shop with the Sunday New York Times and discovering great, interesting, and important stories all contained in one place.  Now that discovery process is being replaced by various feeds from aggregators, social networks, and so-called "curators."  There is a lot of creative innovation in this area right now.  One particularly interesting experience is the custom magazines, of which there are several on the market.  I have been using Zite (recently purchased by CNN) for a few months now, allowing it to learn about my reading habits and interests by feeding my rss and social streams and then manually telling it which topics and sources I like, while it presumably keeps track and learns from which stories I click on and if I stay long enough to read the entire article.  Ignoring the privacy implications for the moment, I have to admit that this has been a rewarding experience as I the percentage of valuable content from a variety of new sources is very high.  I have found new magazines, blogs, and writers that I enjoy as well as new topics of interest.

Privacy implications and the question of seeking self-reinforcing ideas are critical questions that need to be addressed here.

Side note: As I was finishing this post I found this article in the LA Times about newspapers looking to tablets as a new business model, but from an integrated hardware opportunity.  My argument above has been that the tablet user experience will further pigeonhole newspapers as local content sources, and I don't think that will change even if they distribute hardware as the Philadelphia tablet has been described.  (I have tried the Philly device.)  The hardware opportunity is an entirely different question, but it starts with competitive positioning against all other hardware providers.  More to say on that later.

Paying for Content Part 2: Wallet Share

Continuing the question of whether I will ever pay for a newspaper online, or actually any content anywhere, the answer is a combination of how valuable the content is to me, the scarcity of the content in question, and how much it costs.

As for how do I define personal value of content, that gets into personal tastes and preferences, need and demand for specific information, and awareness of content.  I will look at some of these in later posts.

As I discussed in Part 1 of this post, the price per individual piece of content is dropping due to the internet.  The massive increase in the supply of all types of content that is good enough substitutes for content previously consumed has shifted the supply curve far to the right.  This means that the intersection with the demand curve is at both a higher quantity of content produced and consumed, and at a lower price.

Here is the same chart again.

The distance between the two supply curves really depends on the time frames we are comparing. To look at 1991 to 2011 would reveal and almost infintesimal shift.  (Although I want to explore in a separate post the upper limits of supply for any individual consumer, the observed supply is obviously a subset of the entire available internet.)  Comparing 2010 to 2011 would still show a noticeable shift to the right as more and more content is produced and becomes available to consumers.

But coming back to demand, I will argue that the demand curve is steeper, or more inelastic, than most may assume.  What does this mean?  It means that there is a limit on the appetite for consuming additional content, even at low or near zero incremental prices.  Demand is not perfectly inelastic.  People surely consume more content and media today than they did 5 years ago, which was more than they did 10 years before that.  Each day has only  24 hours, but the increase in recent years has often come for the ability to easily consume content during times that were previously underutilized.  First was internet access on every work and home computer that facilitated surfing during every moment of down time.  Now we have the mobile explosion, which enables content consumption in almost every remaining nook and cranny of previously inaccessible times.  I can now read any book, news source, or watch a movie or listen to a podcast while taking a walk, sitting in a waiting room, riding a bus, and to some extent, even driving.  I guess we still have certain subways with no cell phone access, some rural areas, and the few minutes of an airplane's take off and landing that we are limited to our own thoughts. (Optional detour: Scott Adams has an interesting hypothesis on the loss of boredom.)  This reminds me of the story of the professor who puts stones in a jar and asks if it is full, then adds sand, then water, each filling in smaller and smaller voids.  It is amazing how much content I will have to consume on an upcoming flight from Chicago to Hong Kong from inflight entertainment and stored on an ipad.

The demand curve was elastic, having a slope, as people were able to increase the amount of content as the supply increased and the price dropped.  But at the saturation point, arguably about where we are now, the curve becomes steep, showing that no more total content will be consumed regardless of how much is produced or how low the price goes. 

I am going to argue that we have hit a saturation point of content consumption.  Out of our 24 hour day, we are consuming as much content as we can amidst our other activities.  Sure, this is going to make me look silly in a few years when I'm proven wrong in a big way, but let's work with that assumption for now.

The other fixed resource is money, especially in an economy such as today with stagnant personal income, less credit, and low inflation.  People only have so much discretionary budget to spend on information and entertainment content.

So now we can talk about tradeoffs.

Along the inelastic portion of the demand curve, people will not consume an additional amount of content, no matter how much more is produced, or how it is priced.  Even if it is free. That does not mean that someone will not choose to consume something new, just that they will do add it at the expense of something else.

Let's look at some examples and see how it works with a personal budget.

At the beginning of 2010 my family was paying roughly $150 to $200 per month for access to content.  This included in round numbers:

• $130 for cable bundle, with 100+ television channels, internet access, and phone
• $15 for daily newspaper subscription
• $10-50 average spending between books (physical), music (a la carte, iTunes), Redbox movie rentals and the occasional trip the movie theater.

Since then we have changed our sources of content, but we are paying about about the same each month out of pocket.

• $100 for cable bundle with 50 television channels, and internet access
• $10 for Netflix streaming
• $15 for daily newspaper subscription (still)
• $10-$50 average spending between books (digital), music (a la carte, iTunes), apps and other mobile content, and still the occasional trip the movie theater.

The total content available for consumption is higher.  Netflix has thousands of movie and television show titles that I can access.  Mobile apps (we have an ipad and recently added an iphone) and ebooks provide significantly more hours of content for $10-$20 than a single hardcover book.  And we will probably keep changing this mix.  At some point we will probably end or reduce our newspaper subscription because we don't actually read the print product any more, instead getting our news from a variety of sources online that are for the most part fine substitutes. (Disclosure: I work for a newspaper company so I am clinging on more than I would be rationally.) We would use that budget savings to purchase access to something new, or just pocket the savings.  

I still read content from my newspaper, occasionally in print, and almost daily online.  But of all of the content I consume, it represents a lower portion than before.  I glance at local and regional news, see what is the business section, and scan the sports columnists.  That's it.  I have different sources for national news, features, and even comics.

So... if the newspaper's share of content that I consume across all channels is decreasing... and I have more sources available... and my total budget on content is fixed... then it should follow that the share of my budget spent on the newspaper is less.

Then is it possible that I would ever pay for a newspaper online? Yes, it is possible.  But not as much as I ever paid for a print subscription.  It would have to be a small fraction of my budget, probably replacing a small portion of my print subscription, just as much as covers the value I get from those truly unique stories and analysis that I can't get anywhere else, mostly likely on local topics, priced competitively with similar online content.

Notice that I did not distinguish between platforms.  It doesn't matter if the news will be available on a website, in an app, embedded in a tablet, or even printed on a piece of paper.  I won't pay extra for access to any particular channel, but I will pay for valuable, unique content.  Just not very much.

Paying for Content Part 1: No Scarcity

So will I ever pay to read the newspaper online?

The cyclical argument about whether or not readers will pay for content online over the years has been interesting and disappointing. In the early days of the web, traditional newspapers and magazines were wary of putting content online when there was not an online ad model that brought in revenue at the same level as print advertising. Today, traditional newspaper and magazines are wary of putting content online when there still is not an online ad model that brings in revenue at the same level as print. (And there probably never will be with the ability to use targeted advertising online instead of being limited to mass audiences, but that's a different post.) But the fact is that most previously print-centric media have more or less succumbed to the paradigm of republishing publicly online like everyone else and playing the traffic generation game for small, incremental revenue.

Many in the news industry believed they committed the digital sin over the past 15 years by putting free content online.  Now they want to try and correct what they did and avoid committing that sin again in new channels, such as mobile. 

The current trend toward paywalls is not new. We have seen several cycles of hope that readers can be charged directly for reading content. These are followed by periods of disappointment, believing that in fact readers never will pay online. The Wall Street Journal is always held up as the anecdote in both cycles. "It works for the WSJ!" or "It will only work for the WSJ."

The promise of enabling technology has been part of each cycle. We had hope in the micropayment systems. (Remember the W3C plans?) Then the promise of paywall solutions, which have been talked about since the 1990s (remember when Slate and Salon were subscription sites?), but we are only now seeing broad implementation?  Recently apps and tablets were the new-found saviors. Tomorrow it will be something else. But at the end of the day they are all trying to get someone to pay for the same content that they have been reluctant to pay for in other delivery packages.  But people paid for the print content,didn't they?  Hold that thought for a moment. 

First of all, this is not about technology providing a solution to the long-time problem, it is an economic issue.

There are two fundamental factors in whether I as a consumer will pay for any specific content--online or off. The first is scarcity and uniqueness and the second is wallet share. This post looks at the economic changes removing scarcity from content markets. My next post will discuss paying for all content from a consolidated personal budget perspective.

Several people have written about looking at online content from a scarcity perspective. (Jarvis, Shirky) The economics are simple to see if you compare available media sources today versus the early 1990s. Before the wide adoption of the web, the amount of sources available to a consumer was limited by geography.

• Each city's newspaper held almost a monopoly of news communication. Although television news, especially cable, was already adding direct competition for the consumer's attention as they could be providing the same information.We did pay for printed content, because that was one of the few choices.
• Books appeared to be abundantly available, but choices were actually limited by what was carried in local stores or libraries.
• Music was similar to books, limited by albums carried by the local music store.
• Movies were already changing from very scarce to less so. A local theater might be showing a few new releases while network and cable television broadcast a slightly wider selection of shows. However with VCRs and DVDs movie rental stores significantly decreased the limitation of movies to watch at any one moment. Although anyone like me who remembers being disappointed because all desired movies were already checked out from the video store and then still paying several dollars for an old movie I had already seen because it was that was available recognizes even Blockbuster priced based on scarcity.

Compare this with today. There is almost an endless supply of each of these types of content available at anytime anywhere because of the internet. Plus there are millions and millions of new websites, blogs, podcasts, videos, and various types of content instantly available at anyone's fingertips. Today, we create as much content every two days as was previously created over centuries.  Content is no longer scarce, therefore it cannot be priced and sold based on scarcity.

I am not saying content doesn't have value and cannot be sold, only that the models are different. Other factors still give content value, the most obvious one being quality. So what is quality? That is the multi-billion dollar question that industries are betting on.

In this context I am going to argue that quality is relevance, uniqueness, and some mix of reliability, thoroughness, composition, etc. Most discussions of quality content focus on the latter mix of those qualities. Those are traits that can be learned, or can come easily with talent. Good research. Good writing. Good reporting. Good directing. Good editing. Those are all important, but I see them more as a barrier to entry to be marketable content. In a lot of cases, more than most will admit, that barrier to entry is low. While the vast majority of what is produced today is almost-zero value user generated content, there are a lot of competitors with similar quality content to traditional media that are perfectly acceptable substitutes from the consumer's perspective.

The internet has increased the supply of content available to consumers, which effectively shifts the supply curve to the right, thus increasing the amount of content consumed, but also lowering the price of content.  This assumes the new entrants to the content market are substitutes for content supplied previously.  A following post will argue that the demand curve is steeply sloped, even more dramatically lowering the price closer to zero.

This is where decades of geography-constrained scarcity has put blinders on content publishers. Something that was the only source of one type of content to a consumer was perceived as quality back then, but now is just one of countless substitutable sources. A favorite example is recipes printed in a newspaper or magazine. They were great selling points as there were no other sources of recently published recipes available to readers other than cookbooks. Today those same recipes have been commoditized by databases of recipes online and endless cooking shows on cable food channels. The incremental value to readers of a recipe published in a local newspaper is now very low compared to what it was 10-15 years ago.

Some news reporting also fits this pattern.  In the past several reporters representing different publications would cover the same event to create here-are-the-facts news articles.  This was justified because each was reporting for a different market that did not overlap with the others.  Newswires like the Associated Press simplified this to an extent so that every little newspaper did not have to have reporters all across the state, country, and world.  But there was still a lot of overlapping reporting.  For a visual, just imagine media day at the Super Bowl.  Each reporter does not bring something unique to the story.  Now that a reader in any one market can access many of these news articles, the incremental value of any single report is negligible. 

Of course there still is some content that stands above the crowd. This is due to uniqueness and relevance.  The truly premium brands that have survived usually do represent a quality that is in fact scarce.  The New York Times, Wall Street Journal, leading book authors, top film directors, award-winning musicians all bring talent, skill, and resources together to create content that has unique value.  I will gladly pay for a new book by Michael Chabon or to read an issue of the New Yorker because the millions of other books and articles available at lower prices or for free are not equal substitutes. And my local newspaper still can report on news that is local and relevant to me about my home town with a breadth of coverage and a quality from credible investigation and reporting not easily replicated by other media.

So content scarcity does still exist, but it in itself is scarce. The risk for media is not recognizing when their content has been commoditized by the deluge of good-enough substitutes from the consumer's perspective.  And that takes a very honest conversation, putting away egos, and trusting consumers' choices.

So will I pay to read a newspaper online?  If it is for truly scarce, quality, relevant information....maybe.   And it depends how much it costs.

The Subsidization Model is Dead

In the 19th Century news journalism was supported by government patronage of printing contracts.

In the 20th Century news journalism was supported by mass advertising and classified advertising.

Both existed because local media had an information distribution monopoly over a geographic population. Radio and television didn't really change things as local oligopolies continued to exist with a limited number of channels available to readers as alternatives. Now that that monopoly has been eliminated by the internet, those revenue models, which really had nothing to do with the editorial product, have disappeared. The first transition resulted in the reduction of many smaller newspapers and outright political publications and eventually helped gave rise to the larger media enterprises and the goal of unbiased journalism.

We are now in the next transition needing a new subsidy. The same societal and human need for news and journalism exits, and the cost of employing professional journalists and investing in reporting still exists. But the cost structure is out of balance.

We are currently at the beginning of an era of entreprenurial journalism. What does that mean? With the physical and cost barriers to entry for publishing reduced to almost zero, and new technology and distribution channels popping up almost daily, there are opportunities to try to do "journalism" as a business. Many will try to get individual consumers to pay for their share of the societal benefit.

It's not going to work.

Some types of content and information will convert to new businesses. Feature content--food recipes, travel advice, health tips may be monetized at a sustainable level. News will not. In economic terms, news is a public good, displaying the qualities of having a beneficial externality, where the private marginal benefit is less than the societal marginal benefit, so the equilibrium supply determined by the market will be less than optimal amount, or at prices not sustainable by consumers. For example, the marginal benefit to me (and the sum of marginal benefits to each individual reader) of reading a lengthy investigation of state house corruption is not as high as the total benefit of the investigation being done and published for everyone to read.

In this graph, personal demand for news would result in the yellow star equilibrium, which is less news produced than is optimal for society, which would be the red star.  The price willingly paid by private consumers (P1) is not enough to cover the optimal amount of news reporting for society (Q2). 

This is what we are beginning to witness as newspapers have to rely increasingly on revenues generated by consumers, whether it be from print subscriptions, website paywalls, or paid apps.  These will not command high enough prices to pay for the quantity of reporting that was previously done (presumably because it was beneficial for society), and that is why we are seeing layoffs, bureaus closed down, beats eliminated, and the overall amount of news reported reduced. It explains part of the paradox that overall readership of some publications is up when you tally all of the print and digital readers, yet cost cutting continues.

In such cases of positive externalities, the government may intervene in the market to subsidize the industry or to legally require consumption levels. That's the tricky part for journalism. Due to the Press' unique call out in the Constitution and the fact that much of the societal benefit derives from its role as the Fourth Estate, it cannot look to the government for a solution.

At the end of the day, this is the problem that must be solved. There is not a satisfactory market equilibrium for journalism. It needs a subsidy that cannot come from the government. It used to be mass advertising, which has been disrupted. So what can be the next subsidy?