At dinner last night in Baltimore with my good friend, Pulitzer prize winning classical music critic Tim Page, it occurred to me that we can finally end the charade.
Newspapers are no longer about news. They haven't been, for quite some time.
Ironically, Tim and I both work for the same employer: the Washington Post Company. Tim works as a journalist for The Washington Post; I oversee editorial for a division of Kaplan, the for-profit education business of the Post.
For the past five years, those of us in the education division have watched with a certain bemusement as revenues for the traditional newspaper division, The Washington Post, have steadily declined while education revenues soared. In fact the balance has tipped so far in recent years that the Washington Post Company no longer describes itself as a "newspaper/online publishing" company, but a "diversified media and education" business.
Which got me thinking: what do newspapers sell?
The layperson's perception may be that newspapers sell news. It seems simple enough: my local newspaper keeps me informed and, in exchange, I gladly pay them something for providing that service. Long ago the value we placed on that service was high enough to support the means of production and then some. For years the price of admission was a two-bit transaction—billions of them: microtransactions long before it was fashionable in VC circles to call them that. But as time went on, and each new communication medium emerged—first radio, then television, and more recently the Internet—we had more sources from where we could obtain our news. So, the value we've placed on news provided by newspapers has declined.
So how have newspapers survived? By delivering eyeballs. Over the years newspapers had built highly efficient, localized distribution networks optimized to deliver eyeballs, an amazing set of competencies and supply chain interdependencies that stretched from paper plants to paper boys. When I first moved to Chicago some twenty-five years ago, you could enter the editorial offices of either the Chicago Tribune or Chicago Sun-Times at street level, but the real action was one level down, below street level, where massive rolls of newsprint were off-loaded from rail cars, and a fleet of delivery trucks sat idling at the loading docks in the middle of the night awaiting the release of the next edition.
As any newly-minted Wharton or Kellogg MBA could tell you, the real value in newspapers was in the platform: one highly targeted eyeball delivery service. Radio and television could reach millions of people at a time but they were like using a spray gun instead of a fine-tipped, horse-hair brush—great for broad coverage but lousy at targeting a specific spot. If you wanted to reach local markets, newspapers were the only game in town. So much so, that by the mid-20th Century newspapers had learned to capitalize on their highly targeted eyeball delivery services, and chief among these services: display and classified advertising. Department stores, supermarkets, car dealers, or help-wanted ads: my parents' generation turned to the local newspaper, or to a lesser extent the Yellow Pages, for every minor life decision or major household purchase, and advertisers knew it.
To expand their reach and compete more effectively with the broadcast model of radio and then television, local newspapers were swallowed whole into one of a dozen family-owned conglomerates: McClatchy, Knight, Ridder, Thomson, Hearst, each newspaper chain provided the advertiser with the best of both worlds: national reach with local precision. Others such as Gannett, Dow Jones, and the New York Times Company pursued an alternative strategy, focusing instead on leveraging new distribution and printing technologies into building national brands that could compete toe-to-toe with the broadcast television networks. Only the Tribune Company chose a different path, attempting to leverage economies of scale and distribution across media, in pursuit of a supply-side, cost-containment strategy that failed to recognize the necessity of a strong brand in the modern content era.
All that changed with the invention of the Internet.
The Internet accelerated a trend toward disaggregating content, a trend still playing out today. Why pay for the entire Compact Disc when all you really want is that one song? Why pay for the newspaper when all you really want are the help-wanted ads? In fact, why pay at all?
The Internet also held out the promise of a new, highly targeted, automated (i.e., cheap), and trackable advertising delivery platform. It took the better part of a decade, and a trail of failed business models, before it became apparent that the pay-per-click model pioneered first by Overture and later Google could emerge as the new advertising platform. The brilliant insight of Google's management team was realizing that the core competencies required to index the Web—a massive investment in infrastructure, bandwidth, and parallel processing—could be leveraged to deliver eyeballs not just search results, a platform that offered the reach of broadcast television with the localization of newspapers. For Google the real art in execution was the ability to deliver advertising through contextual placement so as to optimize yield, and hence value, for the advertiser without diminishing the value that the user placed on the experience; i.e., the quality of the search results.
In little more than a decade, the traditional classified advertising business that had formed one of the two core sources of revenue for the newspaper industry vanished. In its place, a plethora of vertically targeted functionally oriented sites: Monster.com, CareerBuilder.com, Apartments.com, Craig’s List, etc.
Then at dinner last night with Tim, I realized that we may have reached the ‘tipping point’ in the disappearance of that other core revenue source—display advertising—with the demise of the local department store. Cincinnati-based Federated sounded the death knell a year ago when it acquired May Department stores and embarked upon a strategy to rebrand itself and all its regional stores as Macy's, Inc. A national brand makes local advertising less critical, especially when the combined reach of television and the Internet can more effectively deliver those precious eyeballs.
Ironically, unlike the efforts of May and Federated before it, Macy’s strategy may succeed precisely because it realizes what the Tribune Company didn't: an awareness of just how important brands have become in defining an experience and a lifestyle in an era when consumers have more choices than ever between increasingly commoditized offerings.
So what do these trends portend for newspapers? Perhaps a future where there are less than a dozen 'lifestyle' brands of news, and a Washington Post Company that defines itself as a "diversified education and media" business.
