The Great Unbundling

From The Big Switch: Rewiring the World, from Edison to Google, the inherent economic tragedy of moving newspapers from print to online (get ready to be okay with lower reporting standards):

“For virtually every newspaper,” says one industry analyst, “their only growth area is online.” Statistics underscore the point. Visits to newspaper Web sites shot up 22 percent in 2006 alone.

But the nature of a newspaper, both as a medium for information and as a business, changes when it loses its physical form and shifts to the Internet. It gets read in a different way, and it makes money in a different way. A print newspaper provides an array of content—local stories, national and international reports, news analyses, editorials and opinion columns, photographs, sports scores, stock tables, TV listings, cartoons, and a variety of classified and display advertising—all bundled together into a single product. People subscribe to the bundle, or buy it at a newsstand, and advertisers pay to catch readers’ eyes as they thumb through the pages. The publisher’s goal is to make the entire package as attractive as possible to a broad set of readers and advertisers. The newspaper as a whole is what matters, and as a product it’s worth more than the sum of its parts.

When a newspaper moves online, the bundle falls apart. Readers don’t flip through a mix of stories, advertisements, and other bits of content. They go directly to a particular story that interests them, often ignoring everything else. In many cases, they bypass the newspaper’s “front page” altogether, using search engines, feed readers, or headline aggregators like Google News, Digg, and Daylife to leap directly to an individual story. They may not even be aware of which newspaper’s site they’ve arrived at. For the publisher, the newspaper as a whole becomes far less important. What matters are the parts. Each story becomes a separate product standing naked in the marketplace. It lives or dies on its own economic merits.

Because few newspapers, other than specialized ones like the Wall Street Journal, are able to charge anything for their online editions, the success of a story as a product is judged by the advertising revenue it generates. Advertisers no longer have to pay to appear in a bundle. Using sophisticated ad placement services like Google AdWords or Yahoo Search Marketing, they can target their ads to the subject matter of an individual story or even to the particular readers it attracts, and they only pay the publisher a fee when a reader views an ad or, as is increasingly the case, clicks on it. Each ad, moreover, carries a different price, depending on how valuable a viewing or a clickthrough is to the advertiser. A pharmaceutical company will pay a lot for every click on an ad for a new drug, for instance, because every new customer it attracts will generate a lot of sales. Since all page views and ad clickthroughs are meticulously tracked, the publisher knows precisely how many times each ad is seen, how many times it is clicked, and the revenue that each view or clickthrough produces.

The most successful articles, in economic terms, are the ones that not only draw a lot of readers but deal with subjects that attract high-priced ads. And the most successful of all are those that attract a lot of readers who are inclined to click on the high-priced ads. An article about new treatments for depression would, for instance, tend to be especially lucrative, since it would attract expensive drug ads and draw a large number of readers who are interested in new depression treatments and hence likely to click on ads for psychiatric drugs. Articles about saving for retirement or buying a new car or putting an addition onto a home would also tend to throw off a large profit, for similar reasons. On the other hand, a long investigative article on government corruption or the resurgence of malaria in Africa would be much less likely to produce substantial ad revenues. Even if it attracts a lot of readers, a long shot in itself, it doesn’t cover a subject that advertisers want to be associated with or that would produce a lot of valuable clickthroughs. In general, articles on serious and complex subjects, from politics to wars to international affairs, will fail to generate attractive ad revenues.

Such hard journalism also tends to be expensive to produce. A publisher has to assign talented jorunalists to a long-term reporting effort, which may or may not end in a story, and has to pay their salaries and benefits during that time. The publisher may also have to shell out for a lot of expensive flights and hotel stays, or even set up an overseas bureau. When bundled into a print edition, hard journalism can add considerably to the overall value of a newspaper. Not least, it can raise the presitge of the paper, making it more attractive to subscribers and advertisers. Onine, however, most hard journalism becomes difficult to justify economically. Getting a freelance writer to dask off a review of high-definition television sets—or, better yet, getting readers to contribute their own reviews for free—would produce much more attractive returns.

In a 2005 interview, a reporter for the Rocky Mountain News asked Craig Newmark what he’d do if he ran a newspaper that was losing its classified ads to sites like Craigslist. “I’d be moving to the Web faster,” he replied, and “hiring more investigative journalists.” It’s a happy thought, but ignores the economics of online publishing. As soon as a newspaper is unbundled, an intricate and, until now, largely invisible system of subsidization quickly unravels. Classified ads, for instance, can no longer help to underwrite the salaries of investigative journalists or overseas correspondents. Each piece of content has to compete separately, consuming costs and generating revenues in isolation. So if you’re a beleaguered publisher, losing readers and money and facing Wall Street’s wrath, what are you going to do as you shift your content online? Hire more investigative journalists? Or publish more articles about consumer electronics? It seems clear that as newspapers adapt to the economics of the Web, they are far more likely to continue to fire reporters than hire new ones.

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