Does It Even Know What It’s Selling?

As Bill Gates recently wrote, "the next sea change is upon us." For newspapers, that means they must do no less than reconceive their basic business model.

Bill Gates, the most successful businessman in the world, recently wrote in a memo to the troops at Microsoft that, thanks to the evolving nature of the Internet, the company needs to revolutionize its business for the third time in just ten years.


By that measure, newspaper companies are two revolutions behind.


In 1995 Gates wrote of what he called The Internet Tidal Wave. Newspaper publishers got that one, and jumped into the net fray fairly early, and in many cases creatively and aggressively. In 2000, Gates wrote another memo, this one about technical Internet publishing tools, which admittedly is more distant from newspapering as we know it. But his latest missive, and the companion piece from Gates’ colleague Ray Ozzie, speaks in terms that should be both familiar and frightening to newspaper executives: We are facing, in Gates’ words, a “‘services wave’ of applications and experiences available instantly over the Internet to millions of users. Advertising has emerged as a powerful new means by which to directly and indirectly fund the creation and delivery of software and services along with subscriptions and license fees.”


In other words, Microsoft is going into the advertising sales business in a big way, and in its core products. And, needless to say, this additional competition for scarce advertising dollars is not good news for newspaper publishers.


By now, the problems facing these publishers are familiar: Competition to deliver news and analysis is exploding, as barriers to entry crumble and audiences fragment. News is increasingly being treated as a commodity. Print outlets, which assumed their reporting and analysis would distinguish them from the competition online, struggle to hold readers’ attention on the Web. Scandals are weakening the authority of leading news brands — and viewers’ and readers’ increasing acceptance of partisanship in news delivery threatens this authority further. People who have the habit of reading print newspapers are losing it, and most young people are failing to develop it. Opportunities for targeting advertising abound online, in ways that print outlets cannot compete with.


The consequences are also quickly becoming familiar: Traditional display advertising is in secular, not cyclical, decline. Classified advertising is well on its way to completely disappearing from print publications. Circulation is dropping industry-wide (the reported numbers actually mask the extent of this trend, as paid circulation is falling even faster). True, Internet advertising on newspaper sites is increasing, but the gain is largely in volume, not in price, and the price gap between reaching a newspaper reader online and in print remains enormous. That is, if it takes one dollar to reach a reader using print newspaper advertising, the same paper has been charging only, say, 15 cents to reach the same reader through its Web site. Thus, while it is true that Web ad revenues are growing quickly for newspapers, the cost savings on newsprint, production and delivery realized as readers move from print to the Web doesn’t come close to offsetting the net loss in advertising revenue.


What is to be done? The newspaper industry right now seems to have been seized by an attitude similar to that Mark Twain noted with respect to the weather: Everyone complains, but no one does anything about it. Or, when they do do something, it doesn’t address the core problem. Consider:


• Raising dividends and buying back stock with free cash may make sense for newspaper companies, and may even raise stock prices in the short term. But these are financial moves; they do nothing to change the business dynamics.


• Diversifying by moving into other media (or even other types of enterprises altogether) may be wise, particularly as the newspaper business moves from one with low risk and high margins to a business with higher risk and lower returns. But that, too, does little to attack the problems of the core business.


• Cutting costs — the latest corporate media trend — may also be necessary to satisfy shareholders or just to improve efficiency. But cutting costs is a tactic, not a strategy, and in and of itself doesn’t do anything to solve those looming problems. And publishers need to be careful to avoid the vicious cycle of cutting product quality in response to diminishing sales. Like most vicious cycles, that one only gets worse.


So much for non-solutions. As Gates writes, “the next sea change is upon us.” For newspapers, that means they must do no less than reconceive their basic business model.


From the birth of modern newspapers nearly three centuries ago, news has been their core product. The change the Web brought about wasn’t with the product itself, but with the realization on the part of publishers that the product could be delivered in many ways — that they could, in looking to the future, become “platform agnostic,” and that “newspaper” companies might end up becoming principally Internet publishers or television content providers or some combination.


But now it may be turning out that, while news remains the core competence of “newspaper” companies, news will ultimately not be their core product at all.


Instead, services will drive company revenues and profits, even as news continues to shape brand identities. If this seems cuckoo to you, just consider Google and Yahoo!. Both are growing at brisk clips, largely from advertising sales, and, to some extent, doing so at the expense of newspapers. Both make copious use of news to generate the Web traffic that drives their growth, including substantial amounts of news published by newspapers; millions of people use Google’s email alerts, or learn of breaking news when logging on to their Yahoo! Mail accounts. Yet neither has an independent news operation to speak of.


What Google and Yahoo! do provide are services that make their users more knowledgeable, better informed, more productive. Newspaper companies have valuable tools to play this game, if only they will.


What, specifically, would such services look like? There is much work to be done, and quite urgently, if news outlets are not to be left behind in the race to find out. Here are some of the questions they need to pose:


• Some services will grow naturally out of existing news content. For instance, how much longer can business publishers be satisfied to let Yahoo! and AOL dominate the market for online portfolio tracking and related tools? Is there a way for metropolitan papers to capitalize on the large business in fantasy sports leagues by tapping into a local angle? DVRs are great at making it easier to watch what you want on television, but do almost nothing to help you decide what to watch. Can newspapers use their excellent coverage of what’s on TV as the basis of a service that fills this gap?


• Publishers will tell you that readers pay them not only to report the news, but to edit it, to select what is important and what is not. Yet, if selection is so valuable, why do newspaper sites largely leave the aggregation of important news, analysis and opinion from competing outlets to blogs and a few online magazines? If aggregation begins from strength rather than weakness — if market leaders in particular coverage areas such as business, or books, or national politics, or local sports, supplement their own reports with the occasional exclusive news or analysis generated by competitors — publishers could create truly comprehensive, and must-have offerings. The audience assembled around such an aggregation, in turn, would make the site an ideal platform from which to offer tailored services.


• How can newspapers spur the conversion of their (passive) audiences, both print and online, into (active) communities? Chats are an element of this, but there are other elements likely to be even more powerful- the power of collaboration, for instance, has only begun to be demonstrated through wikis and other new tools. How can this power best be harnessed? Again, the resulting business opportunities will probably center on services.


The answers to such questions will be difficult to find, and the execution of solutions will, in many cases, be even harder. But those who fail to act now because no one has yet proved out a particular course of action are making a bet that the ship, left to drift, will still avoid the rocks. Smarter publishers are coming to realize that it will not.


Franklin Roosevelt put it this way in one of this country’s darkest hours: “It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something.”


In this dark hour for publishing, Roosevelt’s dictum needs to become the new mantra of the newspaper business.


Richard J. Tofel was formerly the assistant publisher of the Wall Street Journal, and, earlier, an assistant managing editor of the Journal.

Richard J. Tofel is general manager of ProPublica and the author of Restless Genius: Barney Kilgore, The Wall Street Journal, and the Invention of Modern Journalism.