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.