Who will pay for online news?

With the revenue downturn for Fairfax Media being announced on Monday, I got the call from Ashley Hall at the ABC’s PM program to give my opinion. At 2.45pm I may not have been sure that I had an opinion, but the nature of the relationship between news journalists and academics is that it would be good for all concerned if you could get an opinion, and give that to us to put on air. With Crikey publisher Eric Beecher and former ACCC head Allan Fels also offering their opinions, I was in good company on the PM program.

My comments were picked up by Shaun Carney, the associate editor of The Age, for his opinion piece on Wednesday. In Carney’s view I am one of those who argues that the future of digital media is free content, as we are moving from an environment of information scarcity to one of information abundance, and that is driving down the price of online content of all sorts. The editor of WIRED magazine, Chris Anderson, is another seen to be holding to this view, in his most recent book Free: The Future of a Radical Price.

Carney disagrees with this, arguing that the era of free online content will be seen as a short-lived phase, since commercial businesses ultimately need to set a price for their content or they will go out of business. Carney is also of the view that consumers will ultimately accept the need for this. Just as what were once free sample bags given out at the various Royal Shows around Australia (Easter Show, The Ekka etc.) became show bags with a price attached, so too will once free online news become a commodity for which consumers will pay.

Since Rupert Murdoch said the hares running on this issue earlier in August by declaring that News Corporation sites around the world will move to a pay model, there has been a lot of commentary on this. Among those offering views have been Brian McNair, Roy Greenslade and James Harkin. The jury is clearly out on what will happen next, with there being some high profile examples where a subscription model for premium content has worked, such as the Financial Times and the Wall Street Journal, and some high-profile failures, most notably The New York Times.

I wanted to pick up on a specific criticism that Carney makes of my claim that we have been moving from information scarcity to information abundance in ways that affect the ability to charge for access to online news:

It's true that there are a lot more places where people can get information ''about'' news, such as boutique political websites and one or two email newsletters, but when it comes to finding actual news he's wrong. So far, the Internet has not ushered in any substantial new news organisations; the vast bulk of Australian online media consumers still rely on Fairfax, News, ninemsn and the ABC for their news. Scarcity still applies.

Carney is right to argue that the big news organisations continue to dominate the online news space in Australia, and no substantial new players have emerged that are Internet only. News, The Age, SMH, ninemsn and the ABC are all sites that are in the Alexa top 25 most accessed Internet sites in Australia, and probably account for about 80% of traffic to Australian news sites, even allowing for a relatively flexible definition of news. While it is difficult to compare the number of users of a site such as Crikey to that of theaustralian.com.au as more people get the former in a “push” format via emails, it would be somewhere in the range of 10-20% of page views for Crikey as compared to that of The Australian, which in turn is well below the site statistics for The Age, ninemsn or the ABC.

Carney has pointed to what is known as power-law distribution, where the majority of an activity tends to cluster around a minority of possibilities, Also known as Pareto’s Law (after the Spanish economist Vilfredo Pareto) or the 80/20 rule, it has been a feature of media industries that the majority cluster towards a minority of options, be they TV programs, Britney Spears CDs, Dan Brown novels or whatever. Put differently, of course the ABC would love to put more arts programs to air, but with a 1 to 2 per cent audience share, it has to be on Sunday afternoons, not Monday nights.

What the Internet has changed, and what Chris Anderson points to with the long tail concept, is that as digital media distribution costs tend towards zero, the less popular options also can become commercially viable. Social media can intensify this by promoting new ways of gathering a reputation, through ranking systems, word of mouth, shared links via Facebook, Twitter feeds etc.

Moreover, Anderson also suggests that assumptions about popularity may have been an artefact of distributional limits. When the number of books for sale was determined by the size of the store, that set physical limits to the number of titles that could be held; there is no such capacity constraint on the Internet, and so more specialist tastes and interests can be catered for through online book catalogues.

What Shaun Carney points to – as does Rupert Murdoch – is that the business of getting news is not free. As economist Tyler Cowen puts it, all of the major news providers have found that their revenues are falling below their average costs curves, and they are not prepared to make losses indefinitely. The problems are that no-one knows what the price should be, what is the best approach to charging (subscriptions, pay-per-view, freemiums, or what?), or whether enough consumers will pay to offset the losses arising from those who will inevitably opt out once some form of charging for news is introduced.

At this point, two further complications emerge. One is the possibility that new opportunities may emerge for commercially viable free news services that capture the convenience users who opt out of pay models. This may be a new provider who also captures the imaginations of those who are now vocally critical of what they term the "mainstream media", and who access sites such as The Huffington Post in the U.S.

The second is that it is unlikely that the public service media providers – ABC, BBC, SBS, NPR etc. – will charge for news, as it is contrary to their Charter obligations of providing universal access. At any rate, I doubt that Shaun Carney is right that consumers will simply accept paying for what they are currently getting for free simply because they recognise the costs that exist for the established news providers.

More on Murdoch and pay-per-view news

Roy Greenslade offers this commentary on Rupert Murdoch's announcement that News Corporation news titles will go towards pay-only access to online content:

I have never received so many calls from so many places across the world to talk about the momentous decision by Rupert Murdoch to charge people for access to his newspaper websites.

As so often with statements by the world's most famous media mogul, the announcement is being treated as the word of god. Where Rupert goes, said several TV and radio presenters, others are sure to follow.

Excuse me if I disagree with those slavish reactions, and with Murdoch and, incidentally, with Lionel Barber, the editor of the Financial Times, who also believes that paid-for content is inevitable.

I tend to agree with Jeff Jarvis (Murdoch's move to charge for content opens doors for competitors), Guido Fawkes (Murdoch bucks the market) and John Temple, publisher of the now-defunct Rocky Mountain News (charging for a basic news service is flawed).

But I concede that there are many supporters of Murdoch's move too. The split is both philosophical and practical. There are those (with whom I agree) who believe that the digital media revolution is in the process of transforming journalism and those (such as Murdoch and most traditional newspaper publishers) who believe the net is merely another platform rather than an instrument of transformation.

It follows that if you wish to continue to fund traditional journalism that you require similar revenues, hence the Murdoch charging strategy.

Oddly, there are advocates of Murdoch's approach who believe him to be a journalistic hero and even a revolutionary, as I discovered when taking part yesterday evening in a BBC World Service discussion.

I was taken by surprise by the passionate support for Murdoch offered by by Tim Luckhurst, professor of journalism at Kent University (and a former editor of The Scotsman).

This also from James Harkin, also available (free) from The Guardian:

The cheerleaders of a free, digital utopia want to resurrect the mass market for news by having us chat to each other and our newspapers all day long. But between the fusty old newspapermen who refuse to tweet and the gadgeteers who do little else, there is little evidence that the rest of us have the time to be cogs in an all-purpose electronic machine. Long before the net tore apart its business model, the truth is that many newspapers were looking bloated and fat, as if lifestyle supplements and the advertising which went along with them was all readers wanted.

What they wanted, it turns out, was focused content, written by journalists who know what they're talking about. The freshest news outlets springing up in the US, for instance, are Politico, the magazine aimed at political junkies which broke the scandal of the Washington Post charging companies for access to its reporters, or TMZ, the well-connected celebrity mag which broke the news of Michael Jackson's death.

News organisations will, as a consequence, divide into populist monoliths which try to be all things to all people – witness the growth of news aggregators, for example – or, more promisingly, slim down and concentrate on what they know about.

For those that can hold their ground and know their niche, the good news is that the advertising industry will eventually have to catch up to the fact that the production of news is moving away from national mainstream outlets into a more global patchwork of niches. What matters then is whether newspapers have anything distinctive enough to pay for, or audiences who are interested enough in reading them to see their demographic data sold on to advertisers in tune with their specific interests. In one way or another, Rupert is right and the free-lords are wrong – we'll end up having to pay for the news that we really want.

News Corporation's financial result

As was predicted on this blog (!!!!), Rupert Murdoch's News Corporation announced a dramatic fall in earnings in the second quarter of the 2008-9 financial year i.e. the period that the economic crisis hit from October-December 2008, with an operating loss of $US7.6 billion ($A11.6bn).

It gives no joy at all to foresee significant job losses at Rupert Murdoch's Australian newspapers. But I always had a sense, during the reporting of Fairfax's difficulties last year, of misplaced schadenfreude among News journalists. Moreover, a mindset of Murdoch good/Fairfax bad seemed to take hold, particularly at last year's Walkley awards, with Rupert Murdoch repeatedly hailed as the last, best hope for journalism.

Just as demonisation of Rupert Murdoch as the media antichrist was always misplaced, so too was his championing by the MEAA and others. At the time, it struck me that "I'll give this six months", as there was no apparent reason why the same forces hitting Fairfax newspapers (plummeting classifieds revenues, recession-hit advertising, declining newspaper sales, online competition for news) would hit the News stable.

As Matthew Ricketson notes, much of this commentary came from the pages of The Australian, where it was argued that News had invested in 'real' journalism, whereas Fairfax had succumbed to the dark side of online and celebrity fluff. What is not clear at News is the extent to which The Australian is insulated from the quite substantial cuts now coming to the rest of the News publications.

There is appeal to a 'flagship' publication, and the economics of online news do point to an opportunity here (e.g. The Economist, The Guardian, and Murdoch's recently acquired Wall Stret Journal), but the extent to which investors are pressuring media businesses that have a strong stake in newspapers or advertiser-financed television also cannot be underestimated.

Which way for News Corp in 2009?

There has been a lot of discussion about staff layoffs and alleged "dumbing down" of Fairfax newspapers in recent months, with a good deal of the discussion led by News Corp's national flagship newspaper The Australian.

This week sees the announcement of News Corporation's quarterly results for end-2008, and it could have considerable implications for News's Australian newspaper operations for 2009 and beyond. Note the view in this SMH article that investors increasingly view newspapers as a "legacy asset".

When the economy cratered last September, News Corp Chief Executive Rupert Murdoch quickly told investors his media empire would feel the pain.

After that, silence. With a week to go until quarterly results, investors wonder how bad things will be and are girding for sharper-than-expected profit declines, asset writedowns and perhaps more severe job cuts.

Punishing drops in the stock market, coupled with a slump in advertising spending, make it likely that News Corp will join peers such as Time Warner Inc and CBS Corp forced to revalue the assets on their books, analysts say.

So far, Murdoch has resisted big cuts for his 60,000-plus employees: News Corp has made limited cuts, including several hundred jobs at Fox Interactive Media, home of the MySpace social network. Media reports say more are on the way at The Wall Street Journal and New York Post newspapers, while Australian newspapers are also trimming staff numbers.

If Murdoch wants to keep the business healthy, it is time to make "hard decisions" and prune older media like papers, Pali Capital analyst Rich Greenfield said.

"We are concerned that the News Corp growth story, propelled by cable networks and Sky Italia, will be far less exciting over the next few years," Pali Capital analyst Rich Greenfield wrote in a note.

"It just feels like the legacy assets are weighing too heavily," Greenfield added in an interview. "I think they've been the most aggressive in trying to develop businesses with long-term returns on capital...where others initially didn't believe or thought the start-up costs were too high."

Journal cuts

One unit seen ripe for a writedown is Journal parent Dow Jones, which News Corp bought in 2007 for $US5.6 billion ($8.8 billion), or a 65% premium to its market value then. More recently, News Corp has been trying to cut costs at Dow Jones, including freezing employees' salaries this year.

US newspaper publishers have seen their shares lose half to nearly all their value in the past 12 months, prompting some to write down 20% or more of their assets.

Besides The Wall Street Journal, which has typically performed better than other newspapers, Dow Jones also counts local US papers, the Dow Jones Newswires, the Barron's financial weekly among its assets. News Corp also owns The Sun and Times of London and The Australian.

UBS analyst Michael Morris pointed to a $US25 billion writedown at Time Warner and a $US14 billion one at CBS. Assuming News Corp writes off a similar percentage, he estimated that it could write down $US10 billion, or about a sixth of its assets.

"In particular, we see possible issues at the broadcasting and publishing businesses, including Dow Jones," he said.

A writedown would not affect News Corp's daily performance, but it would be an admission the company paid more for acquisitions than it should have. That in turn could weigh on the stock price.

Bad news

News Corp's shares have fallen 67% in the past 12 months, underperforming peers such as Time Warner, Viacom Inc and Walt Disney Co.

Murdoch in recent months managed down shareholder expectations. In a statement in November, he said operating income would fall in the low to mid teens percentage points, instead of rising 4% to 6%.

He also warned that weaker overseas currencies, particularly the euro and pound, could hurt the New York-based News Corp. A little more than half its fiscal 2008 revenue came from North America and about a third came from Europe.

Many media companies have warned of more advertising sales declines. Magazine publisher and broadcaster Meredith Corp said automotive ad sale pacings are down 70% this quarter - a dire sign for companies such as News Corp.

Wachovia analyst John Janedis expects a 26% drop in operating income for fiscal 2009, which ends on June 30. Greenfield forecast a 30% drop, along with an 80% decline in TV profits.

Barclays analyst Anthony DiClemente forecast a 35% drop in revenue for News Corp's Fox TV stations in the second half of fiscal 2009.

In recent years, investors tolerated Murdoch's love of newspapers because his cable, satellite and interactive businesses were growing.

But MySpace competitor Facebook is grabbing more share of the Internet social media space. And Sky Italia's satellite business could suffer because of the weaker euro and a troubled Italian economy.

As if that were not enough, MySpace's $US900 million Internet search advertising deal with Google Inc expires in 2010, about the time economists expect the markets to recover.

"We do not believe a new Google search deal is likely to be as favorable," DiClemente said.