01 March 2009

Failure of Newspapers Online. Arthur Ochs Sulzberger Jr meets Clayton M. Christensen.

Business Models of News has an insightful explanation of why newspapers have done so badly in the time of the internet.

When you buy a newspaper (if you still do), your money is not to pay the wages of the staff who produced the paper - the money is to offset distribution costs mostly. The printing, shipping and selling of newspapers is an inconvenient but necessary cost and in order to keep everybody from the newsagent all the way through to the inky-fingered man who produced the paper happy, you pay your pennies for the finished article.
The main source of income always has been and always will be, the advertising. In case you’re wondering, it’s the same story in the magazine industry. Now, let’s move things online. The distribution costs of a website are tiny compared to that of a physical newspaper. If you were to choose the comparatively costly hosting services of Amazon’s EC2 cloud resource, and had 10 small server instances running and were fortunate enough to be shifting a few hundred gigabytes of data a day, your total costs would be less than $60 a day. That’s about £40. Compare that to the £650m needed for the printing presses of the modern paper editions. Therefore if distribution costs are near enough to zero for online editions, why bother asking the customer to pay for them? It’s almost sound logic, except they then made a major, major error. They gave the advertising away for free.....
In essence to secure the advertising for the print edition, they have in the past completely undermined the business they need to survive in the future. They have told every one of their advertisers that online adverts are not worth paying for.
The take-away from this article is that if you are going to have to move from one technology to another then you need to think about the revenue models that will work under the new technology before you make the transition.

This is very difficult to do in large successful companies. The problem is known as the  Entrenched Player's Dilemma, and was described well in The Innovator's Dilemma: Large successful companies are guided by managers whose pay, prestige and job security are determined by the many small decisions they make. For each of these small decisions, the risks of embracing disruptive technologies  (and their revenue models) are extremely high while the potential rewards are low (probably to continue at about the same pay level in a disruptively changed company.) Therefore the tidal flow of small decisions drive the company to stick with technologies (and revenue models) that worked in the past.
It becomes clear just how a big a problem the entrenched player's dilemma is when you realize that the leaders of the organizations who suffered from it were talking about it while it happened to them. 


Matt said...

Another example of the Entrenched Player Dilemma from Michael Arrington.

Peter Williams said...

This Tim O'Reillypost says: The more I think about it the more obvious it's becoming to me that the next generation of authoring/production tools will have much more in common with today's software development tools than with today's word processors.
Software developers spend enormous amounts of time creatively writing with text, editing, revising, refining multiple interconnected textual works -- and often doing so in a highly distributed way with many collaborators. Few writers or editors spend as much time as developers with text, and it only makes sense to apply the lessons developers have learned about managing collaborative writing and editing projects at scale.

Dangerous Dave said...

See also Why advertising-is failing on the internet.

Julian said...

Matt Scott's epic description of the decline of news media is here.