This is probably the best economically-literate account I’ve yet read of the historic problems facing newspaper publishers. It’s from a blogger called Robert Heath and I’d encourage you to read the full post here.
To quote, with important bits in bold:
Historically, the market structure of the newspaper business enjoyed a virtuous circle as depicted above. Once the sunk cost of the editorial staff is incurred, the printing press paid for, and the distribution system in place (collectively representing yesterday’s technology), the incremental cost of including an additional classified ad — or any other feature — in the daily newspaper is negligible. Hence, newspapers had incentives to bundle many forms of content in addition to their own editorial content: TV listings, horoscopes, movie schedules, stock listings, comic strips, classified ads, etc. A reader paid for the bundled product even if he used the classified ads maybe once a year, or never read the horoscope or used the TV listings. The high fixed costs, offset by the surplus economics from bundling and low marginal distribution costs gave rise to something akin to a natural monopoly…
Now imagine you’re a newspaper subscriber (maybe you still are). If you could disaggregate the horoscopes from the weather from the sports from the local news from the international news from the business news from the TV listings from the almost non-existent stock price listings, how much would you pay for the parts of the paper you actually intend to read? Probably less than the $10-$15 per week it currently costs at the newsstand. Probably less than the $6-8 per week it costs to subscribe.
Probably a lot less.
This is the problem faced by the newspapers. Bundling is a pricing strategy that delivers surplus economics to the supplier by enticing customers to buy more than they would if the bundled products were sold separately. By weight, the majority of your local newspaper (and its website) is information sourced from third parties (ads, stock listings, classifieds, lightly edited excerpts of corporate news releases, etc.) readily available elsewhere on the internet (see note 2). By allowing readers to disaggregate the newspaper’s traditional bundle of content, the internet may be exposing the market value … of the original editorial content produced by the publisher itself.
As publishers experiment with revamped online pricing models they may find that the true value of their original content will give horrifying meaning to the term micro-payment. No newspaper has a monopoly on “the news”. It certainly has no monopoly on the third-party information it republishes. The newspaper industry suffers from a notion that it should enjoy monopoly economics on content (“Hey, that’s copyrighted!”) when in reality its historical monopoly was a distribution channel and much of the profit was based on aggregating and organizing other people’s content. In the internet age, that distribution monopoly no longer exists and others, like Google, do a pretty good job of aggregating third-party content.
So, in summary, newspapers had a monopoly (or with the national press in the UK, a near monopoly) on distribution. Printing presses are very expensive and thus out of the reach of most. They exploited this monopoly by bundling content and charging a higher price for it. So my daily newspaper today has 68 pages – I could never read the whole thing in a day even if I wanted to. It has news, sport, classified ads, obituaries, letters, TV listings and lots of other stuff, all in a big bundle. Even if I wanted to read only 2 pages I am still forced to pay for the remaining 66 pages due to a distribution monopoly that means I can’t get the information anywhere else. And that’s how the newspaper industry used to make its money – by selling a bundled package to a wide variety of consumers (and then selling this bundled advertising package to a wide variety of advertisers).
Couple of things I take from this:
1. A lot of the publishing industry’s claims about the ‘value’ of their copyright is just hot air, based on a fallacy. The newspaper industry’s version of this story is that 1) they make intrinsically valuable content, and (2) the internet is destroying this value because Google and others are giving it away for free (sometimes in the face of copyright). What the analysis above shows is that the content was never that valuable in the first place, it was the distribution monopoly and the bundling economics that produced the value. And that’s now been destroyed by the internet. So what we are now seeing is the transparent ‘true’ value of content. And, disappointingly for the publishing industry, the true value lies somewhere between ‘not very much’ and ‘nothing whatsoever’.
2. Micropayments = a Whole World of Pain. Micropayments are the current fashionable idea in the UK for structuring a paywall. But losing the advantage of bundling economics means consumers only pay for those parts of newspapers they actually value. Here’s an interesting exercise: ask a newspaper executive which of their content producers would make a profit if they were considered as independent P&L centres. Which journalists could set up as independent businesses and sell what they do to consumers/advertisers for profit? Which photographers? Which subeditors?!? Tell them that’s what they’re facing with micropayments – every one of these guys needs to be responsible for generating profit. Then watch them break out in a cold sweat.
In the UK sense, it’s guys like these that *might* be OK – the Jeremy Clarksons and Charlie Brookers of the world (in fact, all columnists who already sell their content for profit in book form). But there would be a really, really, extremely long tail of journalists and content producers with absolutely no chance of paying their way. Depressing huh?