MoneyWatch Tech

How Tech Can Save News Media from Financial Tsunami

By Erik Sherman

Updated on: March 17, 2010 / 1:42 PM EDT / MoneyWatch

Sudden market shifts can kill. Companies don't have enough time to adapt to changing conditions. Before they can make the necessary adjustments, new conditions remove barriers to competitive entry, dry up vital revenue streams, or eliminate operational advantages.

All three scenarios apply to online news media, I'm sorry to say. Many companies are in trouble: Unable to make enough money to stay in business or to make the next jump their business plans require. The tsunami of disaster will be ugly to watch, brutal to bear, and pervasive, both for traditional print media and online companies. Tech giants should consider lending a hand, if for no other reason than rational self interest.

It should be clear that most media is moving to electronic formats. Not that print will cease to exist, but the broadly based, well-resourced, paper-wielding publishers are about to hit levels of suffering they hadn't realized were possible. That will have a ripple effect that you could more accurately call a tsunami, because much online media bases its work directly or indirectly on what larger established news companies produce. Three factors come into play:

economic models
lack of audience valuation for news
operational costs

On all three fronts, old and new media are losing.

Economic Models

The Pew study is downright depressing on this front. Online ad spending has decreased on a dollar basis. I'd further wonder if the volume of ads is down, or whether advertisers are continuing to twist arms, as they always have and always will, to pay the least for what they're getting. In either case, the outlook is dim for media companies that want to exist on advertising, unless they can demonstrate such connection to audience members that they can command premiums.

Publishers clearly know this, which explains their increased interest in pay sites. The problem is that apparently so few people are willing to pay for what they read that there's virtually no chance of most online sites making a living. Here are some figures from Pew:

Over half (53 percent) of adult American get news online, but only 35 percent have a favorite site.
Of those that have a favorite site, only 65 percent check it daily.
Of that 65 percent, only a relatively small portion (19 percent, which is under a third) is willing to pay for news online.

Work the numbers, and you see that only 6.7 percent of adult Americans are willing to pay for online news, and that includes the ones who already pay. Even if you consider just the people already going to online news sites, and not all adults in the country, only 12.4 percent either do pay or would be willing to do so, and that's any amount. Could the average site charge 12.4 percent of its readers enough to maintain everything? Is that enough to make up the difference for ads, which don't pay enough to keep most of these companies in business? You can't charge everyone because, according to the study, the remaining people say that they would find another place to get the news. That's a result of the second problem.

Lack of Audience Valuation

People aren't willing to pay for news because they don't value it. Media companies offer too little perceived value to make payment worthwhile. People find that the news they get is available from multiple sources. The lock that news organizations once had on distribution -- pay attention and/or money to us as the gatekeepers of what you can conveniently get -- is long gone.

The alternative is to produce something that can't be easily found, probably in the form of analysis and more complex looks at what people otherwise see as cheap information. Now we're at the third problem, which makes lack of audience valuation even harder to surmount.

Operational Costs

Publishing is expensive. The business takes more people and technology than most of the public realizes. Publishing on the Internet has relieved some major costs, such as printing and paper, but left all the other expenses. Even the simplest reporting requires people to acquire data and assemble it into recognizable forms. Past that, you need an increasing degree of contextual knowledge to recognize what an audience will likely find important or not. Greater analysis, context, and related material, which could lead to greater audience valuation and make revenue models possible, requires more experienced people who are more expensive to employ. However, publishers are trying to cut the personnel expenses because the money isn't appearing in the first place.

Publishing is in a death spiral. Low audience valuation leads to insufficient revenue, which leads to cost cutting, which further reduces audience valuation. Mind you, I'm not saying that no media companies can exist under the current conditions. There are niche interest publishers, both online and print, that manage quite well. Some survive on advertising while others eschew it. But all have devoted audiences -- and all can focus on just one area, rather than having to subsidize unprofitable ventures, like general news.

The big news producers are likely doomed. I don't mean this as some hyped theme, but what I think is an almost inevitable and unavoidable conclusion. When the large news producers collapse, their fall sets off the tsunami that swamps all the small producers that look to the news stories as fodder for their musings. At this point, the only hope I could see would be for large companies -- Google (GOOG), Microsoft (MSFT), Apple (AAPL), Verizon (VZ), AT&T (T), to name a few -- to create a pool of money. The funds would subsidize the news organizations whose content keeps much of the online world humming -- but that don't have enough perceived value to attract revenue sufficient for their upkeep.

This has its problems; companies would need the discipline to kick in their share even when they weren't getting favorable press. However, it's like trucking companies that pay high road taxes. The alternative is to have roads inadequate for commerce. Without content, the Internet quickly collapses in size and everyone's revenue drops.

Image: Flickr user TooFarNorth, CC 2.0