The Daily’s rocky performance shows legacy brands create digital advantages

The News Corp’s launch of the tablet newspaper The Daily in February 2011 was heralded as the future of news and revealing opportunities for major new entrants in the news market. After a year and a half of operation, the digital newspaper has lost more than $30 million, managed to gain only 100,000 subscribers—not a trivial amount but low for a global player, and has just announced that it is cutting 1/3 of its editorial staff and ending original production of sports news and commentary.

Journalistically The Daily is not a bad news product and its app is facile and effective. So why hasn’t it been more successful? The fundamental problem is that the digital-only paper has been overshadowed by the success of legacy print newspaper brands in the market for digitally delivered news.

The Daily has never been so brilliantly written and edited that it could gain the significant attention and acclaim needed to overcome the brand advantages of legacy news providers. Major newspaper—such as The New York Times, The Guardian, and The Financial Times—have used the strengths of their reputations and brands to make the largest inroads in digital subscriptions. Concurrently, larger

local and regional players have also been grabbing paid digital customers in their markets and providing additional competition to the digital startup.

The Daily has also had to compete with widespread availability of free digital news from news providers such as BBC.com, CNN.com and aggregators such as Yahoo! and Google. These have all been successful in attracting consumers who are less attached to print news providers and paid services.

Those who predict the demise of legacy newspaper companies often forget the critical importance of the credibility and trust those companies have with news consumers and many assume that print organizations cannot transform themselves into digital players that may become so successful they may one day drop their print editions. 

Brands are important for habitual news consumers and they tend to be highly loyal consumers of specific news brands. The Daily has been unsuccessful in breaking that loyalty, but more successful in creating relationships with persons who have not been strongly bonded to legacy brands. It remains to be seen whether News Corp. will be willing to maintain a relatively small news digital brand among its holdings, even if it manages to move The Daily into operating profitability.

News of the World Closure Shows the Business Cost of a Bad Reputation

The decision to close the News of the World in the UK because of the fallout from the phone hacking scandal shows the importance of ethical behavior and public credibility for media firms.

The paper had been hacking the private communications of celebrities, politicians, crime victims, and even relatives of soldiers killed in Afghanistan and then spent four years trying to cover it up by paying hush money and—according to some reports—bribing police officers to ignore its crimes.

The paper, owned by Rupert Murdoch’s News Corp., was Britain’s largest selling Sunday newspaper until it spectacularly unraveled in recent weeks. Continuing revelations of illicit activities and the announcement of Parliamentary and police investigations led advertisers including Ford, Sainsbury, Lloyds Banking Group, Virgin Media, Dixons, and Vauxhall to pull their advertising.

Perhaps it was embarrassment—but it was more likely the loss of revenue, the loss of almost $3 billion in market value for the parent company because of declining share prices, the hundreds of millions of pounds in damages that will have to be paid, and the fact that the paper’s meltdown was endangering Murdoch’s takeover of BskyB—that led him to kill the paper.

Unfortunately, the scandal shows that some journalists and news organizations will go to any length to get a story, no matter how disgraceful and unethical it may be. Fortunately, the number of journalists who will go as far as those at the News of the World are limited, but the outrageous conduct highlights the growing chasm between those who believe everything should be public and that journalists have a right to do anything to get information and those who believe in a right to privacy and a right to be left alone.

The culture at the News of the World that led to the behavior shows that pressures on organizations to put their interests above those of the public needs to be resisted. It is hardly a culture reputable news organizations and companies should emulate. Not only the reputational costs—but the economic costs as well—are far to high.

MySpace Sale Underscores the Risks of Exuberant Digital Investments

The decision by News Corp. to dump MySpace once again reveals the risks of over exuberance toward digital companies that do not have a proven business model or long-term customer loyalty.

There are plenty of digital investments that meet those requirements, but a number of the most hyped firms moving toward IPOs and acquisitions do not. They need to be considered with hard headed pragmatism.

MySpace was launched 2003 and rapidly became the toast of the digital world as a social networking site and “the place” for musical stars and fans to connect. By 2005 it was the fifth most visited site on the Internet.

New Corp., which was anxious to benefit from growth in digital media, jumped at the opportunity to acquire the service and paid $580 million in 2005. It was an enormous price for a company with an unclear revenue potential.

Within two years MySpace had grown to be the world’s number one social networking site and was receiving 100 million unique monthly visitors. But it still had revenue problems; its visitors weren't paying customers and advertising wasn't paying its costs.

Despite landing a $900 million ad deal with Google, MySpace reported just one period of profitability. On top of that, it lost its cache with users and its leading position was soon eclipsed by Facebook.

Overall, it is estimated that the MySpace lost at least $1.5 billion under News Corp. and those losses dragged down the News Corp.’s overall earnings. The extent of its losses has never been completely clear because its results were not transparently presented in News Corp. financial reports.

After desperately trying to revive MySpace, News Corp. put it up for sale with an asking price was $100 million. It was sold in June to the online advertising network Specific Media for $35 million (about 6% of what News Corp paid for it), but the company was really just giving it away to get it off its books. As part of the deal, News Corp. took a minority equity stake in Specific Media.

Investing in emerging industries is always more risky than investing in established ones, so it requires a good deal of realism and clear headedness about the opportunities and their potential. It is not good enough merely to throw money on the table in hopes of drawing a winning hand or because the crowd is encouraging you on. A solid business plan that it is already working and producing financial growth and a user model based on more than popularity and status are required unless you investing high-risk capital you can afford to lose, as well as other opportunities it might have funded.

CAN PUBLIC BROADCASTERS HARM COMPETITION AND DIVERSITY?

This is not trick question and it is being increasingly asked as public broadcasters grow larger, offer multiple channels, move into cross-media operations, and increasingly commercialize their operations.

The Federal Communications Commission will have to consider that question shortly when it considers the effort of WGBH Education Foundation—operator of WGBH-TV, the highly successful Boston-based public service broadcaster—to purchase the commercial radio station WCRB-FM.

WGBH is the top ranked member of the Public Broadcasting Service in the New England and produces about one third of PBS’ programming. It operates a second Boston television station, WGBX-TV, and WGBY in Springfield, Massachusetts. In addition it operates FM radio stations WGBH (Boston), WCAI (Woods Hole), WZAI (Brewster), and WNAN (Nantucket) and is a member of National Public Radio and Public Radio International. It operates two commercial subsidiaries involved in music rights and motion picture production.

This month it announced it was planning to purchase WCRB-FM, a classical music station that serves the Boston area. The purchase would allow it to alter its WGBH-FM format to compete more directly with WBUR-FM, the leading public radio station in Boston that is operated by Boston University.

WGBH Educational Foundation is an enterprise with $580 million in assets and revenues of $280 million annually. It has more than 600 employees who are paid more than $50,000 annually and has 5 paid more than $225,000. Its president and CEO is paid about $340,000 and 2 vice presidents about $250,000 annually. This is not a small, poor charitable enterprise.

Were WGBH a commercial broadcaster, those who hate big media would be howling in protest, arguing that it puts far too much control of the airwave in the hands of one organization and that the concentration will create market power that harms competition. But they are strangely silent.

However, in deciding whether to permit the purchase, the FCC will have to consider whether the expansion of the public broadcaster harms competitors and plurality and diversity.

Similar questions are being asked elsewhere as well. Across the pond, the British Broadcasting Corp. has recently been the target of a good deal of criticism because of its increasingly commercialized operations and because its expansion of public service operations in TV, Radio, and Internet at the local, national, and international level are seen as affecting commercial firms and competition.

The BBC is one of the largest broadcasting companies in the world, operating on revenues of £4.7 billon ($7.4 billion) and it has assets of £1.5 billion ($2.4 billion).

Many commercial broadcasters and publishers in the U.K. have criticized the growth of the BBC operations and the debate became especially heated recently when James Murdoch, the News Corp. head in Europe and Asia, made a public speech charging the BBC was engaging in a “land grab” and that its ambitions were “chilling.”

“The expansion of state-sponsored journalism is a threat to the plurality and independence of news provision, which are so important for our democracy," Murdoch told the Edinburgh International Television Festival. Whether you agree with him or not, you have to give him credit for co-opting the language of critics of big commercial media.

News Corp. and the other commercial firms competing with the BBC obviously have self interests at heart, and some commercial firms have certainly behaved in ways that harmed public interests in the past, but their arguments should not be casually dismissed.

If competition among commercial firms, between commercial and non-commercial firms, and among non-commercial firms is good for pluralism and diversity, cannot concentration and reductions in sources of news and entertainment due to acts of large not-for-profit firms also harm competition, pluralism and diversity?

The Challenges of Online News Micropayments and Subscriptions

The impetus toward subscriptions for access and micropayments for single use of online news is growing because online advertising alone cannot sustain the news organizations necessary to provide high quality and broad coverage.

In recent weeks Rupert Murdoch announced News Corp. will begin shifting its newspapers to an online paid model in the next 12 months, starting with Wall Street Journal and then progressively shifting papers such as the New York Post, The Times of London, the Sun and The Australian to a paid model. Dean Singleton followed by indicating MediaNews Group will begin doing the same for its papers, including Denver Post, San Jose Mercury News, Detroit News, St. Paul Pioneer Press, and Salt Lake city Tribune.

Clearly charging for online news is likely to reduce online consumption because of elasticity of demand, but—setting aside the extent to which demand for online news will fall if a price is imposed—moving to a paid model will also creates two common, industrywide challenges.

First, it forces each publisher to bear costs of setting up their own payment system. Secondly, it imposes a heavy burden on consumers. The latter burden results not from having to pay for news, but from the fact that online readers typically do not use only one online news source—unlike the market for print newspapers in which readers typically subscribe to only one paper.

It currently appears that each online newspaper or their corporate parent will set up their own payment systems. The options being most discussed are subscriptions for use or electronic wallets from which to make micropayments for occasional use.

These factors will have a particularly negative affect on the heaviest online news users—voracious and promiscuous readers who seek news from multiple news organizations. If each newspaper sets up its own payment system, for example, these readers will have to have separate payment accounts for the New York Times, Washington Post, Los Angeles Times, Wall Street Journal, The Guardian, and dozens of other publications they wish to visit.

To deal with this challenge the newspaper industry should seek to create a joint venture or cooperative to solve the problem. Companies should work together to developing a single system that is usable across sites and one that can be extended to handle payments for other types of online content. Such a system would simplify and encourage payment for content, but also develop a new revenue stream by turning the payment system from a cost center to profit center by charging companies for its use.

Free is clearly not the right price for news, but the movement to a paid model will not be as simple as transferring the existing subscription and single copy payment models for print newspapers to their online counterparts. Seeking payment online creates new challenges and opportunities that will require new thinking about how payments are made and more cooperation across the industry.

3 BIG FAMILY OWNED MEDIA FIRMS FACE SIGNIFICANT CHALLENGES

Family owned and controlled businesses face challenges because of difficulties in passing firms on to succeeding generations of the family. Tax issues are a common problem, but the biggest challenges involve finding effective managers among the family and the needs for new capital that diminishes family control.

How family members view the company over time create problems for sustainability. Individuals who establish firms tend to view it as a business enterprise; their children tend to see it as supporting the family; and multigenerational family businesses tend see it has providing status in the community. These latter priorities can interfere with profit and reinvestment objectives and endanger long-term sustainability.

As a consequence of these kinds of factors, only about 30% of family firms are passed to a second generation and only 13% reach a third generation.

This brings us to the challenges facing media firms. Three big companies—News Corp., Viacom, and New York Times Co.— all are struggling with succession and control issues.

Rupert Murdoch, who built the News Corp. global empire after inheriting the firm from his father, is now 77 and having difficultly convincing an heir to take over. The oldest son, Lachlan, left the company three years ago and his other children, James and Elizabeth, recently declined to become his number 2. James still runs the company’s European and Asian operations, but Elizabeth prefers to run her own independent TV production company. Whether the company can remain family run in the coming years is unclear.

Sumner Redstone—who is 75 and has had strategic disagreements with many managers at Viacom—turned to his daughter Shari Redstone to help manage National Amusements, Viacom and CBS. She proved quite adept and by 2005 it was assumed that she would succeed Sumner as head of the company. The two had a serious falling out two years ago over succession and governance, however, and it is now uncertain who will lead the firm in the future. Certainly it won’t be Sumner’s son Brent, who sued him over disputes about his portion of the family business.

The Sulzberger family is struggling to maintain control over the strategic direction and operation of New York Times Co., despite the greater influence they have because of that companies preferential share structure. They increasingly have to go outside the company for capital—such as making the deal with Mexican mogul Carlos Slim—and they are continuing struggling with other major investors who are demanding more influence on company management. The family is slowly losing the automony it once had in running the company.

If solutions to succession and family control issues are not found, it is likely that these firms may have to turn to outside managers. History has show that when that occurs, family members become detached from the firm and are more likely to sell their shares and leave the business altogether.

MONETIZATION CHALLENGES IN DIGITAL VIDEO MEDIA

The real challenges facing media companies today are not technology or opportunities, but how to monetize activities in digital video media. The popularity of video downloads and streaming video on internet and mobile devices is growing exponentially and motion picture and television production companies are rushing to create deals to participate in the phenomenon.

The biggest challenge is finding workable business models. A combination of technology and capricious consumers are altering existing media business models and making success with new models difficult. The traditional business models of media are eroding as audiences and advertisers respond to changing media markets and today both legacy and new media are struggling to find effective new business models for their existing operations and new products and services.

It is complicated because a fundamental shift in financing media is underway and many companies are finding it difficult to adjust their business perspective. During the period of industrial society consumers made relatively few direct payments for media and business models worldwide were based primarily on advertising expenditures, license fees, and tax payments. In post-industrial society, the rise of new social and economic arrangements and the proliferation of types of media and media content, business models are shifting toward a consumer model. Today, for every dollar spent in the U.S. on media by advertisers, consumers now spend 7 dollars. Media have shifted from a supply driven market to a demand driven market.

This means that companies must spend a good deal of effort ensuring they are creating value for customers. However, it is not enough to create value for customers. At the end of the day, economic value must be created for the company or it is not running a business.

Although media firms are rapidly entering digital video provision, there are significant business problems with contemporary deals involving new forms of digital video media. Companies are not buying return on investment, but are buying market share in hopes that income will follow. The trend is especially evident in social media, where companies are pinning their hopes on Internet advertising growth and increased abilities to better target advertising. It is a big gamble because social media users have been ad averse and click through rates are less than one-tenth of those on other internet sites.

You Tube was purchased by Google for $1.65 billion but has advertising revenues of about $250 million and My Space, which was acquired by News Corp. for $580 million, receives about $450 million in advertising revenue. On the face of those numbers these do not appear to be rationale business investments, but what the firms are actually doing is buying large audiences in hopes of positioning themselves as leaders in online advertising.

They are doing so because Internet advertising expenditures are heavily concentrated and the top 10 sites in the U.S. account for 70 percent of the total advertising expenditures. The high prices for social media are part of a fight for the top because of the ad revenue concentration. The companies are taking a business risk that may or may not pay off depending on the willingness of the users of those social media to accept advertising and monitoring of their activities.

Across digital video media we are now seeing a variety of company strategies. Some firms are pursuing ad-supported free media business models, whereas other firms are taking the road toward conditional access as part of subscriptions to Internet and mobile services. Still others are mixing income streams from both conditional access and advertising. The industry is not yet mature enough and consumer preferences are not yet clear enough to determine which will be the most successful revenue model. As a result, firms need to be agile, flexible, and able to change rapidly in their approach to digital video media.