Fundamentally, News Broke

During a recent podcast, Harvard Business Professor Clayton Christensen gave an overview of his recent HBR article on how companies need to change their business models to adapt to new threats. It's a very interesting concept and I plan to read the article as soon as I can get my hands on a copy.

The premise, as I understand it so far, is that traditional business models don't work when new threats arrive. As an example he pointed to IBM, which focused on mainframe computers, but when mini-computers hit the market IBM opened an entirely new division in a new location with new profit and loss models to combat this. It did the same thing when PCs hit the market, opening a different office utilizing different skillsets.

During the recent podcast interview Prof. Christensen praised the Boston Globe for taking steps to change its business model to combat the new reality. Not having spoken with Prof. Christensen yet I have to assume he is referring to Boston.com and the digital arm of the publication.

The concept, as I currently understand it, lines up with something I've been thinking about for a while: the fundamental problem with the journalistic business model. Traditional journalism is built on the concept that it can be supported by advertising, but separate from it. The journalist reports on the news, the news brings readers, the advertisers then pay for access to those readers.

This model extends back to the penny newspapers of the 19th century. Why sell a newspaper for a penny when it cost more to produce? So you can get the readers and sell access to that distribution channel to advertisers. The more people who read the paper, the more you can charge for the ads. This concept has grown up over the years but it's fundamentally sound.

The New York Times, for example, earned $1,950,021,000 from advertising in 2007, compared with $889,882,000 from circulation revenue according to its financial statements. Advertising figures in 2006 and 2005 were certainly more robust, but the same calculation applies.

Today it's not just the number of people who read your publication, but the type of people. If you're the Boston Globe, for example, and have great penetration in the affluent suburbs, then you can charge more for access to those readers. Most news organizations regardless of medium use the same basic concept: gain an audience, charge for access to the audience.

A main reason this worked was the high barrier to entry for any new news organization. In order to start one you needed:

• Capital for production;
• Access to production equipment (printing press, TV cameras, etc.); and
  
• A method of distribution (broadcast license, subsribers, newsstands sales, etc).
  

Each one of these factors made starting a new publication an uphill battle. Sure, there could be a "lonely pamphleteer," but the chances of that person gaining the reach and scope of a Washington Post were remote at best.

Now flash forward to the Internet. Today instead of a printing press you can use a free and publicly available blog, Facebook page or Twitter account. Instead of capital you can simply use the computer at the public library, or the $400 computer you bought for the house. As for distribution, any blog is technically available to anyone on the globe, you just need to tap into the right search terms to attract the audience from Google.

In other words, the news organizations no longer have the monopoply on the audience, so the advertisers no longer need them to reach an audience. The fundamentals are completly broken.

So what now? More on that later.

Restart: Branded Journalism

I am returning to this long-abandoned blog to play with a few concepts that have been floating around my head. Specifically, what is the future of journalism?

You don't have to go far around the web to find people lamenting the fall of newspapers, even as they take full advantage of all the publishing freedom the web offers. I'm not going to sit here and tell you that life is over because newspapers face certain death.

The way I see it, people will always want information. In fact, they'll pay when the information will benefit them in some way. However, we've created a situation in which people believe the basic information in life is free. So what we have is a demand and when there is a demand there will always be a supply.

The question isn't whether journalism will survive, but how it gets funded and who does the funding. I believe that funding will come from brands. Yes, those brands can be news brands like the New York Times or the Wall Street Journal, but they can also be from companies like Coca-Cola and Pepsi.

Over the next few weeks I'll expand on this.

But in doing research I spent some time playing with the New York Times company numbers and present the following two charts. This first compares revenue from circulation and advertising. If you notice, circulation revenue remains relatively steady while advertising revenue is on a relative decline.



The second chart compares circulation by source. The numbers seem relatively steady year over year, with the exception of single copy (newsstand) sales, which show a precipitous decline.



I have more research to do to see whether this is just the Times or industry wide, but the advertising decline seems to be almost independent of readers, and the increase in online readership seems to relate only to newsstand sales. This doesn't make sense from a business perspective, but I believe that it is not that newspapers are dying, but that they were never built on a solid advertising base to start.

The lines are blurred... now what?

When I talk with people who don't understand the changes going on in media (and there are many) I often point to the TiVo box. I note how life will get interesting when you return home from work, turn on the TV and see consumer-generated videos co-mingled with high-cost products produced by the major networks.

The way I see it, when the DVRs take content from the Internet just as they do from cable or satellite providers, and that content is delivered automatically based on your viewing habits, the distribution wall comes down. Throw in some smart search and you don't even need to put things on YouTube, you just put them on your blog or on your personal site, give it the right tags and viewers' boxes find the content.

Think about a person who loves historical documentaries. Imagine if they return home and find a documentary about small town in Wisconsin right next to a documentary about Jessie James from the American Experience.

I saw such a video during a recent trip to Milwaukee that traced the history of a piece of property. The man who owned the property commissioned it from the local historian just so he could show his friends what he owned. What if he put that on the Internet so it could find an audience? That audience may be just 10 people, but so what? It's already produced, the cost of distribution is almost nothing, why not put it up, tag it and let the audience find it?

Today TiVo took a step in this direction by announcing that it will expand its Internet-based content. That's not the only step toward this world. This weekend a John Markoff article in the New York Times indicated that Web 3.0 is about smart search. Maybe it's more hype than truth, but the search world is moving slowly in this direction.

So, what does this do to the traditional advertising and media relations model? Both are built on the one-to-many concept. That is, put out a few well-placed ads and you can reach a large audience. Buy an ad in the Sunday New York Times or on Lost, and people will see it.
Place an article in USA Today and the audience comes flowing in.

And that still works. But for how long? Advertisers are already starting to look at their spots more as mini movies and entertainment than just product ads. The idea is to make the ads as compelling and enticing as the rest of the content. Media relations companies are also branching into blogger relations and other open communications concepts. These are all great steps.

The thing is, the answer may not lie in marketing, it may lie in product development. If the market becomes fractured, then it's hard to reach a massive audience with a single product. You can, however, deal with the customized world by creating customized and personalized products.

For an example just look to the open source world. Need certain functionality but not others? Then go in and tweak the code. Or maybe someone has created the code you need.

Look at the tuner generation in the auto world. A used Civic may cost just a few thousand dollars, but the car they create has tens of thousands of dollars on top of it. The car is a platform.

Even with all this, I still think we're a long way from a completely diversified media market. There will still be blockbuster shows and big hits, but now is the time to learn how to make all this work.