Getting It Wrong: The FTC and Policies for the Future of Journalism

Following hearings on the state of newspapers this past year, the U.S. Federal Trade Commission staff has now prepared a discussion paper of potential policy recommendations to support the reinvention of journalism.

It is a classic example of policy-making folly that starts from the premise that the government can solve any problem—even one created by consumer choices and an inefficient, poorly managed industry. Most of the proposals are based in the idea of using government mechanisms to protect newspapers against competitors and to create markets for newspapers offline and online.

The FTC’s staff ignores the fact that most newspapers are profitable (the average operating profit in 2009 was 12%), but that their corporate parents are unprofitable because of high overhead costs and ill-advised debt loads taken on when advertising revenues were peaked at all time highs. It also fails to make adequate distinction between longer term trends affecting newspapers and the effects of the current recession. The staff thus blends the two together to give a skewed picture of the mid- to long-term health of the industry.

Policy alternatives suggested by the staff for consideration include:

• Limiting fair use provisions of copyright and providing new protection for “hot news,” which would give first news organizations to distribute a story a proprietary right to the facts in their article
• Providing a variety of types of subsidies for news providers
• Changing tax exempt status laws to make it easier to obtain not-for-profit status and funds from charitable donors
• Taxing advertising, spectrum, internet service provision, consumer electronics, and cell phones to provide funds for news organizations
• Creating new antitrust exemptions allowing price collusion and market division

It is hard to ignore the irony and incongruities of a government agency whose purpose is to protect competition and effective markets suggesting anti-competitive practices and taxes that will have negative effects on consumers, competitors, and other companies. Setting those aside, however, none of the suggestions deal with the real underlying economic and financial problems of the news industry: that fact that many consumers are unwilling to pay for the kinds of news provided today and that news organizations need to radically change their management practices and begin reducing organizational inefficiencies.

If commercial news enterprises can’t effectively manage themselves, compete in markets for their products and services, or find effective business models for themselves, why does anyone think that bureaucrats in the government have any ability to solve those problems for the news industry?

Challenges of Product Choices and Prices in Multi-Sided Media Markets

Commercial media have faced product and price challenges in 2-sided markets for more than a century, but are encountering greater difficulties in getting it right as they try to effectively monetize multi-sided markets.

2-sided and multi-sided markets are ones in which more than one set of consumers must be addressed and there is an interaction between strategies and choices for each set of customers. Prices for one group of consumers affects their consumption quantity and this, in turn, affects the prices for and consumption by the other groups. Optimal revenues can only be achieved by dealing with all groups of consumers simultaneously.

Newspapers are a classic example of 2-sided platforms. The first product is the content sold to audiences and the second is access to audiences that is sold to advertisers. This has been the basis of the mass media business model since late 19th century and the strategy has been to keep circulation prices low to attract a mass audience and then to make the majority of revenue from advertiser purchases.

In this model, success in selling the newspaper product affects ability to sell advertising access because more readers makes a paper more attractive to advertisers; conversely, success in selling advertising affects ability to sell the newspaper to readers because it provides resources that improves content and make the paper more attractive.

Getting prices right in this model is crucial, but most media have traditionally been relatively unsophisticated in setting prices. Few have used demand-oriented pricing, based on what the market will bear, or target return pricing based on achieving a specific rate of return. Instead most have set prices based on what the closest competitors are doing or on industry average price. They were historically able to get away with it because elasticity and price resistance were relatively low because of the near monopolies of past in many markets.

Today, however, product and price choices are getting much more complex because of rising competition and because media are shifting from 2-sided to multi-sided platforms in which relationships among consumers are compounded. This complexity is evident in the difficulties newspapers and magazines are having figuring out effective ways to provide and sell content online.

The problem occurs because there are paying audiences and advertisers for the print edition; free audiences and paying advertisers for the online edition; and some joint audience and advertisers who use both the print and online offerings. If one alters the free price online to create a paying audience, it not only affects the willingness of online advertisers to pay, but affects the willingness of joint audiences and advertisers to pay and thus effects performance of the print sales as well.

Creating the correct combination of content available in print and online, getting the content prices right, generating audiences in both places that are right for advertisers, and properly prices advertising is no mean feat. The situation is made even more difficult as publishers add eReaders and mobile services to the mix.

Those who think they can easily monetize newspapers, magazines, or other information products online ignore the significant challenges posed by multi-sided platforms and need to carefully consider the impact that these factors have on product and price choices.

SEARCH FOR ALTERNATIVE MEDIA BUSINESS MODELS HAMPERED BY NARROW THINKING

Media executives around the globe are clamoring for new and alternative business models and industry associations everywhere are holding seminars and conferences on how to create and discover them. There is just one problem: They don’t know what business models are.

When you cut through the rhetoric, you find that most executives are merely interested in finding new revenue streams. Even when you consider firms touted as having best practices in that regard, none have been very successful in establishing them. The reason is simple: The dominant thought about business models is highly limited and far too narrow to solve the contemporary challenges of media industries.

Business models are not merely about the revenue streams. Instead, they establish the underlying business logic and elements. They involve the foundations upon which businesses built, such as companies’ competences, value created, products/services provided, customers served, relationships established with customers and partner firms, and the operational requirements. If you get those elements right, the revenue issues take care of themselves.

The biggest problem of media business models today is not that the revenue model is diminishing in effectiveness, but that most media companies are still trying to sell nineteenth and twentieth century products in the twenty-first century. And they are trying to do so without changing the value they provide and the relationships within which they are provided.

Because of the enormous changes in technology, economics, and lifestyle in recent decades, the needs of customers have changed, they kinds of content they want, and the ways they obtain news, information, and entertainment have been dramatically altered. If media firms do not address these changes in consumer needs and behavior, no amount of worry about revenue streams will stem the fundamental challenge that audiences are leaving traditional print and broadcast media behind for content providers and distribution platforms that better serve their needs.

The content of traditional media products were created in specific technical, economic, and information environments that no longer exist. In order to evolve and prosper media companies must revisit the foundations of their businesses, ensure they are providing the central value that customers want, and provide their products/services in a unique or different way from other media firms.

The range of technologies and distribution and interactive platforms available in the twenty-first century require that firms increasingly see their business activities as cooperative processes requiring coordination and interdependence with external firms and customers themselves. Standing isolated and alone—at arms distance from the customer—is no longer a viable option.

This is not to say that firms must make sudden and dramatic changes in their business models, but they must start revisiting all the aspects to make regular incremental improvements and changes. Questions need to be asked about what is provided, why it is provided, how it is provided, and the entire structures and operations of firms. These need to be addressed first, then the revenue models can be sorted out and improved.

The Business: Fantasy Basketball League Spectacular

On March 31st, The Business was down three members, with Alex Koll, Chris Garcia, and Bucky Sinister all working elsewhere. To address the lack of manpower, we invited all of the members of the about-to-conclude SF Comedians Fantasy League to perform. We welcomed Jeff Cleary, Joey Devine, Eliot Langford, Julien Rodriguez, Chris Remmers, and the great W. Kamau Bell, along with Businessman and host, Sean Keane.

Some comics discussed basketball extensively, both their fantasy teams' generally woeful performances or the woeful performances of their favorite team, if that team was the Golden State Warriors. Joey Devine told a touching story about receiving the Most Inspirational Player Award at Tim Hardaway's basketball camp, an honor usually given to a kid with a disability or a fatal disease. Joey was neither; he was simply terrible at basketball, and prone to skipping wind sprints in order to sneak upstairs and eat hamburgers.

Eliot Langford mentioned the disappointing Warriors, before closing his set with a cover of Billy Joel's "Movin' Out." Julien Rodriguez told us why white people have no excuse for homelessness, Jeff Cleary told heartwarming stories about abusive Bostonian fathers, and Chris Remmers tried to explain the appeal of the Texas Rodeo. W. Kamau Bell took us home with the set that was as impressive as his last-place fantasy team was dismal.

Adding to the excitement and general basketball theme was comedian Joe Tobin, working as a sideline reporter. After every comic finished their set and left the stage, he would speak with Tobin, who asked hard-hitting questions about their performance. He asked Joey, "I noticed you went to your notes after six minutes. What was going on with that?" Tobin wondered if Langford was trying to rub it in to the other comics on the bill by talking about his successful relationship. Overall, Tobin and the rest of the comics left it all out on the floor that night, giving 110%, and making the first-ever basketball-themed Business show a slam dunk!

NEWS HAS NEVER BEEN A COMMERCIALLY VIABLE PRODUCT

Industry, scholarly and policy discussions about the future of the news industry in North America and Europe continue to focus on how news enterprises can sustain themselves in the 21st century. Publishers keep asserting that things will be fine if they can erect pay walls and charge for news online and they argue that governments should provide legal protections for online news so they can make news a viable digital business product.

Their approach is wrong and ignores the fundamental reality that news has never been a commercially viable product because most of the public has been, and remains, unwilling to pay for news. Consequently, news has always been funded with income based on its value for other things.

Historically, the first collection and dissemination of news was funded in ancient times by emperors and kings, who used governors and officials throughout their realms to collect news and information and send it to the seat of power. Emissaries, consuls, and ambassadors collected foreign news and information in places important for trade or seen as potential threats to the realms. In this Imperial Finance Model, news and information were collected and shared with officials throughout the realms to assist in governance activities. This revenue model was based on official financial support because it served the interests of the state.

In the Middle Ages, a Commercial Elite Finance model developed in which wealthy merchants hired correspondents in cities and states with which they traded to collect information about political and economic developments relevant to their trade. Linen, porcelain, sherry, and spice merchants used the news for commercial advantage and held it in confidence rather than sharing it with others.

In the 18th and 19th centuries a broader Social Elite Finance Model developed to support newspapers that served the needs of the aristocracy and widening merchant class. Even with high cover prices, this model news was not viable and newspapers were subsidized by commercial printing activities and income from other commercial activities, governments and political parties, and merchant associations.

The Mass Media Finance Model appeared in the late 19th and 20th century, made possible by the industrial revolution, urbanization, wage earning, and sale of finished goods. In this model news was provided for the masses at a small fee, but subsidized by advertising sales. Because most of the public was uninterested in day-to-day events and “hard” news, the bulk of newspaper content was devoted to sports, entertainment, lifestyle, and features that increased the willingness of the public to spend pennies for the product.

This mass media financing model remain the predominant model for financing news gathering and distribution, but its effectiveness is diminishing because the “mass” audience is becoming a “niche” audience in Western nations as those less interested in hard news continue abandoning newspapers for television, magazines, and the Internet. This is creating a great deal of uncertainty how society will subsidize and pay for journalism in the twenty-first century.

Focusing on news as a commercial product appears futile and commercial news providers would do well to put their efforts in creating other commercial activities that can subsidize news provision, such as events, education and training, bookstores, travel agencies, and a variety of merchandising activities. Many publishers subsidized news activities with these types of activities a century ago and some continue to do so. It is likely that news providers will rely on a far wider range of revenue streams in the future than merely on the consumer and advertising streams upon which they depend today.

RECORD COMPANIES, DIGITAL DOWNLOADS AND ARTISTS RIGHTS

Pink Floyd was always a unique rock group and understood its music as a form of artistic expression. It evolved from psychedelic music in the 1960s to progressive rock known for rock instrumental and acoustic effects in the 1970s. The group often saw their albums as integrated works of art in which subsequent tracks built upon earlier ones. They considered their entire recording to be art; that the ordering of tracks was part of the expression and should not be altered, and that the album should be enjoyed as a whole not merely as a collection of individual songs. Even the album covers got special artistic attention reflecting their content and experiences.

The band felt so strongly about the art of its music that it negotiated a contract with EMI that included a provision to “preserve the artistic integrity of the albums.”

Consumers obviously thought Pink Floyd got the art right, helping the group achieve 16 gold, 13 platinum, and 10 multi-platinum albums. Two of its albums sold more than 10 million copies. The group’s recordings are second only to the Beatles recordings in terms of their value, something not missed by the group’s label EMI.

With sales of digital downloads exploding (accounting for nearly $4 billion in industry sales last year), the record company saw gold in selling individual tracks from albums such as “The Dark Side of the Moon” and “The Wall”. It licensed Pink Floyd’s tracks for sale on iTunes. It was like EMI was cutting up a Kandinsky painting and selling the pieces individually.

The band wasn’t amused and headed to court. It argued that it albums were indivisible and that EMI had violated the contract with the group by splitting them up. EMI countered that it was all just a matter of the new way of doing business in the digital age and that the contemporary technology and business model made it necessary to do disaggregate the albums.

This week the court ruled in favor of Pink Floyd, awarding them $60,000 for the contract violation and $90,000 for legal costs. The court said EMI cannot distribute the group’s music "by any other means than the original album, without the consent of Pink Floyd."

The case is another in a long line of disputes over major media and online companies using content without appropriate permissions of copyright owners. These are the same companies that vigorously protect their own interests against individuals and other media companies and that regularly tell legislators they need more rights so they can protect the interests of authors, artists, and performers. The arrogance and duplicity could not be clearer.

It is also a stark reminder that most media enterprises are somewhat unhappy alliances between content creators—whether journalists, authors and writers, filmmakers or performers—and business creators who often have differing perspectives on the roles and functions that media perform for society and the individuals who use media for art and expression.

HONOLULU JOINS THE RANKS OF NEWSPAPER MONOPOLY CITIES

I was sorting through some of my father’s belonging recently and came across the 1941 souvenir edition of the Honolulu Star-Bulletin (Jan 8, 1941), “The March of Hawaii.” Its lead story was the reorganization and strengthening of the Pacific Fleet and the appointment of Admiral H.E. Kimmel to head it.

My father acquired the paper while stationed in Hawaii with the Army Air Corps. Eleven months later the U.S. was at war, with Kimmel taking heat for having the bulk of his capital ships anchored in Pearl Harbor during the Japanese attack.

I was reminded of the find this week while reading the news that Gannett has agreed to sell the Honolulu Advertiser to the Star-Bulletin. The two have a 130-year history of competition, somewhat muffled until they escaped their relatively difficult marriage in a joint operating agreement between 1960s and the millennium. Now the smaller paper is buying the bigger paper, if it can comply with or skirt antitrust provisions.

We are now in the last throes of consolidation of the newspaper industry, brought on by audiences shifting to television, cable channels, and the Internet for news and information, and advertisers following audiences. The consequence is the newspapering has become a monopoly business in more than 1360 cities and towns and big city papers—even when they are monopolies—are having difficulties competing for advertising dollars. Only two percent of cities have competing dailies.

This change calls into the question the traditional view that a competing press is the foundation of democracy. If competition among perspectives on news and information is necessary for democratic functions, we have to think of it beyond the printed press and begin recognizing the important functions provided by other providers of news, information, and commentary.

Rather than constantly challenging their abilities to carry out functions in the same way as the press once did, we need to find ways to support and improve their activities—whether they be broadcast or Internet based. And we need to find ways to ensure that the papers remaining in place reevaluate their democratic functions and find ways to provide service to the spectrum of observations and ideas that has been diminished by the newspapers monopolies that now dominate our land.