Economists on pay-per-view online print news

Tyler Cowen has provided an interesting economist's perspective on the plans of Rupert Murdoch and News Corporation to start charging subscription fees for online news. He doesn't think that it will work, but can recognise that on this occasion the capacity of news proprietors to collude around common business interests will have an impact. He does think that public service media will come into their own as providers of free, quality news content.

This time around plausibly all the major newspapers will follow suit and charge for their content as well. It's like one of those Lester Telser/George Bittlingmayer models except now we are at the point where the major players realize they are all below their average cost curves permanently and they are not willing to incur losses indefinitely. Since we've not yet been in an all-charging equilibrium, we don't know what the price will be. What does the NYT business model look like at $50 a year for access, with price breaks for India?

In that equilibrium does any newspaper gain from defecting and moving back to p = 0? Is there a stable core to the game? Isn't Murdoch simply signaling that all the newspapers ought to collude?

Won't NPR, and NPR.org, be the big winner?

I'm not saying the Murdoch move is going to "work." I am saying that if the game has no core the idea of charging for content will not go away.

Joshua Gans is also thinking about the issue at Core Economics. Key point here is that that "producing news involves high fixed costs and low marginal costs.".

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.

Its on - Rupert Murdoch to introduce pay online news

Today saw Rupert Murdoch's News Corporation announce one of its largest corporate losses in history. Details from ABC News are below:

The global economic downturn has had a huge impact on News Corporation's results, with Rupert Murdoch announcing a 30 per cent decline on last year's performance.

News Corp reported a fourth quarter loss of $US203 million ($241 million), in line with its forecasts.

Across the fiscal year the company recorded a $US3.4 billion ($4 billion) loss.

Mr Murdoch says newspapers have been hit particularly hard, with classified advertising never expected to return to previous levels.

"The last year has been one of the toughest in our history and the results today outlined for fiscal 2009 clearly reflect the sour economic environment that affected our businesses throughout the year," he said.

But Mr Murdoch says he is confident the worst is behind the company.

Mr Murdoch has also indicated that access to News Corp material on the internet may soon come at a price.

"The extended downturn has only increased the drum beat for change, but the secular challenge is clear," he said.

"Classified advertising revenues will never again reach the levels that print once offered.

"Quality journalism is not cheap and an industry that gives away its content is simply cannibalising its ability to produce good reporting."

The big news is that Rupert Murdoch has indicated that all News Corporation online news sites will become fee-based in the near future:

"The digital revolution has opened many new and inexpensive distribution channels but it has not made content free. We intend to charge for all our news websites."

...

At present, only the Wall Street Journal charges a fee for online access and until recently, received wisdom in the publishing industry was that readers would not pay to read newspapers on the internet.

Murdoch said he had completed a review of the possibility of charging and that he was willing to take the risk of leading the industry towards a pay-per-view model: "I believe that if we're successful, we'll be followed fast by other media."

He said he was thinking in terms of "this fiscal year" to introduce charges. He said News Corp would avoid a migration of readers to free sites by "making our content better and differentiated from other people".

The charging model will be extended to red-top tabloids such as the Sun and the News of the World. Murdoch said he was keen to capitalise on the popularity of celebrity stories: "When we have a celebrity scoop, the number of hits we get now are astronomical."

As Bobbie Johnson observes in The Guardian:

A divisive split has emerged between those who believe that readers must be forced to pay for access to stories or see traditional reporting disappear altogether, and those who believe that a great deal of the information we consume each day is merely a commodity, and journalism must adapt itself to the changing environment.

News Corporation is at the forefront of the former camp, and plans are well advanced to make news on News Corp sites available onto on a fee-paying basis. Jeff Jarvis thinks that this won't work, as it misunderstands the nature of value creation through the Internet:

Newspapers have had 15 years since the launch of the internet browser to reimagine and rebuild themselves for the reality of the post-Guttenberg age. But they didn't. Now they are trying to reclaim old business models for a new media economy — a link economy, I call it, in which links give content value. Cut yourself off from links, behind pay walls, and you cut yourself off from the internet and its real value.

With any radical change to business models of this nature, some of the issues to be considered are:

• Consumer reaction: will consumers simply shift en masse from News sites to other sites that provide free news content?
• Competitor reaction: how will sites such as the Fairfax sites in Australia, or The Guardian in the UK, respond? The role of public service media is another factor here - the ABC and BBC are almost certain not to go down this path;
• Advertiser reaction: will advertisers identify potential "premium clients" here, or simply migrate to where the consumers are going, if they leave News sites for free content?
• Implications for different News properties: fee-based access to the Wall Street Journal can be profitable. But does this apply to The Sun, The Australian, The Courier-Mail, the Hobart Mercury etc.?
• Implications for News journalists: if news is understood as a low-value-adding commodity, then status differentiations among journalists are not so great. But if there is a need to produce content that people will pay for, will this leave a small cadre of "star" journalists, and mass layoffs for those who provide everyday news content?

News Limited has being laying off journalists and other news staff in Australia, and this would be likely to continue under a pay-per model. There is also the interesting point, which was considered in Tech Crunch last week, of whether "star" journalists - those whose content attracts a personal following that readers would be willing to pay for - are better off leaving large flagship newspapers and starting their own sites, hoping to take readership and advertisers with them. Harvard Business Review blogger Umair Haque has been thinking along similar lines with his Nichepaper Manifesto.

(Hat tip to Tim Mansfield for the latter).

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.