Aftermarket Journalism

(MoneyWatch)  I've heard many people insist that the future of traditional news media is to work with aggregators like Google, because they represent a new model of delivering the news. Recently, I noticed a blog post by Jeff Jarvis, which was about the auto industry. Although it may seem off-topic on first thought, it actually isn't, and the flaws in his argument about cars explain the underlying problem with the "embrace Google" argument.

In his post, Jarvis discusses a company called Local Motors, which uses a few principles that he espouses, including the following:

• The company uses a community approach and collaboration, with the group essentially voting on details and features.
• It's small, and so is not saddled with the overhead costs of a GM or Ford or Chrysler.
• Its designs are open, not proprietary.
• It is local, so designs are for specific communities.

That's fine. But a problem soon comes to the surface.

He is creating the platform and API for new cars that are designed collaboratively by communities and built in microfactories across the country by staffs of only 41 using almost entirely off-the-shelf parts. He says he will be profitable selling only 500 cars. He plans to build 3-5,000 of each model and he's months away from delivering his first.

The problem, a whopper, is in that term "off-the-shelf parts." When I saw that, I realized the underlying flaw in this approach to business. Off-the-shelf parts only exist because very large companies -- GM or Ford or Chrysler or Honda or Toyota -- design cars that use those parts. Even if they are using an existing part in an auto design, at some point in the not-too-distant past, the part had to be engineered, with tooling designing. These incredibly expensive and time-consuming undertakings only happened because some enormous corporation that happened to build cars wanted a custom part to fit its specifications, and the parts company created it.

It may be that the auto company did the design. Or, often the parts manufacturers do the design. But in either case, no parts company can take on the project of creating a part for the first time without the clear guarantee of enough volume of ordering to make it cost effective. And this isn't volume that might come along in the next five or ten years. It's volume that one of the big auto companies contracts at the start, because they know they have to give to get. It is only because there was the initial custom design and large order that a part can eventually exist in an off-the-shelf form. Aftermarket companies are actually having their expenses subsidized by the companies that make it possible to order parts at a relatively low price per unit, because the astronomical expenses have been amortized for them across significant volume.

Similarly, aggregators are the news aftermarket. They depend on the creation of news stories so they can link and generate traffic. In some cases, the aftermarket runs ads to derive revenue. In other cases they don't run ads, looking, instead of direct revenue, to bind consumers more closely to them and generate other traffic that will create ad opportunities. Like its automotive cousin, the news aftermarket has some particular characteristics:

1. It doesn't create the material is uses for its business, but depends on finding new uses for what others have created.
2. It isn't creating and engineering so much as assembling.
3. If the creation of standard "parts" ever stops, so does the creative potential of their businesses.

Unlike the automotive industry, however, the news aftermarket has a significant problem. Off-the-shelf parts can be around for decades. News, by its definition, is largely ephemeral. Unlike Local Motors, which could probably crank on for some years with the number of parts that are already available, the news aftermarket needs the constant creation of new material.

The aggregators have effectively been lying to themselves, their employees, their business partners, and their investors. Yes, they can make economic use for now of content. But they cannot create the material that drives those parts of their businesses. They have essentially shifted significant portions of their cost structure onto others. So long as the main industry -- auto or news -- cranks along, then it generates what the aftermarket needs. But when the driver goes into a tailspin, the aftermarket faces the real problem of a cessation of their source of parts. And unless the aftermarkets want to find themselves having to create all sorts of parts that they are in no position to engineer, manufacturer, or pay for in the volume that makes the per unit cost low enough, they had better pray for the health of the main industry companies. Without them, they have no business, and going to the junkyard as a source of what you need only lasts so long.

Related Posts by Erik Sherman Show Me the Spreadsheet Engine image via stock.xchng user organicpxl, standard site license.