This may seem odd since people like Rupert Murdock have been blasting Google for the downfall of the traditional newspaper business model; Google’s CEO Eric Schmidt has even described their reputation as “the vulture picking off the dead carcass of the news industry”.  But, from Google’s perspective, which I mostly share, they are helping the news industry by feeding them traffic. According to comScore 35-40% of all traffic to major US news sites come from search engines. The problem with this analysis is that, even after the tremendous growth in readership over the past 15 years, online ad revenues only account for about 3-5% of total revenue.

Google’s Chief Economist, Hal Varian, has a great slide show that explains the problem well. Traditionally, this is what a newspaper’s (and generally most print publications) balance sheet looks like:

Like the slide says and shows, printing and paper are more than half the cost component of putting out a publication. Internet distribution will cut that significantly, but not entirely, because you still have server costs. But now take a look at this next slide showing ad revenue as a %, and by type:

Internet advertizing is little more than a rounding error. If you are Google, picking up this spare change amounts to billions of dollars, but no news organization, not even Reuters or AP, has that much of a presence on the internet.

Here is where things start to get really interesting. If one can’t find good, accurate, and interesting information, they will not search for it. Therefore, the Google-Content relationship is symbiotic, and to help Google has lead three initiatives that they believe will help the digital transition easier to bare.

The first are ‘Living Stories’. In essence this is a subject based aggregator that any individual organization can use to pull together all of the related stories into a narrative through time. To me this is an algorithmic Wikipedia. A very good idea, but again one that does not pay.

The next project is called Fast Flip. The basic premise is to recreate a magazine feel of flipping through pages. This attempt, like living stories, while being interesting, does not attempt to answer the basic question of generating more revenue from its readers.

However, the last initiative has more than a little promise, YouTube Direct. It allows sites to directly implement the YouTube video service on their site, complete with back linking, while Google pays the hosting and serving costs. Now it’s important to be aware that YouTube is a huge money pit at Google, the bandwidth costs alone are staggering. But Video presents a gigantic revenue opportunity. Video usually gets around $18-23 per 1000 people for a 30 second spot on TV. Yet, unlike display ads, 30 second video ads get the same price per 1000 people online as they do in the traditional television format. This is why Hulu is a profitable enterprise, because the ad rates are substantial enough to warrant a large upfront investment in content, licensing fees.

That is why YouTube Direct holds promise, because video, even online, is sufficiently monitizable. That doesn’t mean it’s a sure thing, Wired tried to start a TV show and failed, the NYT tried a Discovery partnership to create a TV Channel which also failed. Implementation matters. But unlike the technical and tactical tweaks proscribed above, and tried before, this allows for experimentation at very low costs, but in a format that has large revenue opportunities.

What Happens When the Problem is Bigger Than You?

During subsequent reader follow-ups to James Fallows people pointed out that changing copyright standards are having powerful effects as well. And none of this has touched on the inane idea of using ‘click-through’ a good measure of ad effectiveness.

My point is that Google did not bring about this sea-change, and Google cannot drain the ocean. Craigslist and eBay broke the classified world into pieces, that’s not coming back. No one ever paid for general news content through subscriptions, hell they didn’t even fully pay for physical product at the newsstands, so why would they now?

The extinction level problem for newspapers and all print publications is one of high-impact brand-awareness display advertizing. A strong national and retail ad-buy has typically supplied 60-80% of the revenue. There are no measures on print ads, just ‘impressions’. Introducing people to new products and services is not something that can be done with an algorithm. A ‘click-though’ only shows the last step in the sales funnel, but no one is going to buy your product, or use your service if they have never heard of you.

Forget the iPad and Kindle, forget pay-walls (unless your highly specialized in some area, like Business), if NYT, Rupert Murdock, and thousands of journalists want to see the news business continue, creating a higher-value digital ad unit is the best, if not the only, way forward. Google can’t do that for you, because it’s not their business, it’s not what they do, and it’s not their responsibility.

His plan is not to create an online business or, even, to realize significant additional revenues from online readership. The plan is to get you to read newspapers—as in papers.

Basically he is set to charge you the price of a newspaper regardless of the medium, so you are really better off just buying the dead-tree version. To Murdock, who hates all things digital, the Web is just a value add, similar to the DVD inserts that he uses to goose newsstand purchases. This is a bold-faced effort to thwart the online news business, plain-n-simple.

Needless to say, I doubt that this will work. Jeff Jarvis put it best when he said this:

By building his paywall around Times Newspapers, he has said that he has no new ideas to build advertising. He has no new ideas to build deeper and more valuable relationships with readers and will send them away if they do not pay. Even he has no new ideas to find the efficiencies the internet can bring in content creation, marketing, and delivery.

Instead, Murdoch will milk his cash cow a pound at a time, leaving his children with a dry, dead beast, the remains of his once proud if not great newspaper empire.

Some have argued that in order for this to work, financially speaking, a conversion of around 5-10% would be sufficient. Because online advertising is so meager, and the additional cost savings of not printing and distributing paper are so great.  But I will take a bet that he doesn’t crack 3% conversion on digital subscriptions. Less than 1% have expressed a willingness to pay for online content, and my suspicion is that many of those willing to pay, are willing to pay for things like the FT and the WSJ, highly niche journalism; not competitive journalism like what is found in the Times, Sunday Times, Independent, Guardian, BBC,  AP, Reuters, AFP, ect.

All of this is still beside the point; Murdock doesn’t care if his papers make a single dime. They are underwritten by the rest of his media empire: SkyTV subscription fees, Fox News Spot Advertising, Box Office Ticket Sales and DVD Sales of Avatar and Transformers will keep his papers alive, because he loves them. But for the industry, this is a losing proposition, a way to somewhat delay the inevitable.

Ian Grayson is one of the few people arguing that this will work. He makes 4 points, which are worth sorting through.

1. News ain’t news: It’s true that general news has become a commodity on the internet, but it’s wrong to put all news in the same category. While it’s unlikely anyone will pay for celebrity gossip and coverage of breaking events, quality journalism is a very different deal. People who value well written stories, quality audio visual resources and informed comment will be happy to pay for it.

Writing is very much a commodity, the glut of talented writers killing themselves to get noticed, with excellent credentials, had never been greater. The competition among writers, with HD cameras in tote, makes fencing off any group a losing proposition for that group.

2. A one-stop destination: Newspapers work because they bring multiple elements into a single, easily digestable whole. Sure, some of it might be available in other places on the internet, but having content filtered, edited and presently as a whole makes it vastly more usable. It’s called adding value.

Adding value within the medium is exactly what Huffington Post, Newser, and Google News do, to a far better degree than any newspaper site in existence today. How a site, run by a man who hates the internet, and doesn’t know what Google does, will outwit the digital natives, seems more than far-fetched.

3. New platforms: Attention is focused on Apple’s iPad and its clear that it (or future devices like it) will provide a new and compelling way to enjoy news content. Having a slickly presented package of news delivered to such a device will be so compelling people will pay for it

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The iPad does nothing new. The other tables do nothing new, that a laptop can’t do today. If you haven’t been able to innovate for the internet, why is a new device going to save you? How is it different?

4. Quality versus quantity: There’s no doubt that traffic to the websites of The Times and Sunday Times will drop dramatically once the paywall is in place. However the traffic that remains will be vastly more valuable. Rather than getting excited about millions of visitors who come to the sites briefly before clicking away, the papers will have a core group of loyal readers that will visit on a regular basis. Such a group is much more attractive to advertisers and therefore far more lucrative for publishers. Less can be more.

This is an interesting point. It is true that paying website visitors do yield a higher CPM rate than non-subscribers. This is true for two reasons. One is that they are considered a captive audience, more attuned to the site’s brand, and therefore its brand contextual advertising. And two, is the known demographic profile. But there is no reason why you could not create a similar situation behind a free registration wall, rather than a pay wall.

My position is this: People will not pay for the news because they have never paid for the news, ever. When people had subscriptions to newspapers they were paying for delivery/distribution and a small part of the paper costs. (Many times subscription fees did not even cover that cost) But the CONTENT has been paid for by advertising (or patronage) for as long as the newspaper has been in existence. To now say, oh readers have to pay for content, because they OUGHT to pay is ridiculous, emotional entitlement is not economics.

So what would I do instead?

I’ll tell you tomorrow….

But one meme that has been floating around are bloggers most influential books, and on that note I’d like to share mine.

The Books Everyone Should Read:

White Tiger (Adiga) – A story set in modern day India, it’s a morally and ethically ambiguous story about what it means to be an Entrepreneur in an emerging economy. Extremely funny, it doesn’t pull punches and places the reader face-to-face with the reality of a globalized world. Its Fucking Amazing!

Small Gods (Terry Pratchett) – A wry mocking take on organized religion, its humor is priceless and very very British. Yet, his understanding of faith and devotion are quit sincere.

The Hitchhikers Guide to the Galaxy Series (Adams) – This book more than any other took the mundane and made it fantastic. It puts life into perspective and lets you laugh at it all. Plus, it doles out the greatest pearl of wisdom in the galaxy, no matter what happens: Don’t Panic.

The Books the Made Me Smarter:

Calculus (Stewart) – This text book taught me a new way of looking at math, and revealed the awesome power of mathematical logic and analysis. I can unequivocally say that this book made me ‘smarter’.

The Lives of the Renaissance Painters, Sculptures, and Architects (Vasari) – Discussing not only their biographies but also their techniques, this 2 volume set explains why these people were so special, and what it took to make their master pieces possible.

I Claudius (Graves) – A historical fiction told in the form of an autobiography (which did exist) by the Emperor Claudius. Its masterfully tells the ins-and-out of the Julio-Claudine dynasty from August to Nero.

The Books that Changed the Way I Thought:

Jefferson V Hamilton (Cunningham) – Drawing directly from their own writing the early ideological struggles for the creation of the constitution come into sharp focus, and made me move from a Hamiltonian to a Jeffersonian perspective.

The Prince (Machiavelli) – This changed the way I looked at international relations and politics from one of ‘right’ and ‘wrong’ to one of game theory.

Politics and the English Language (Orwell) – In addition to the Prince this book changed the way I view politics. And much like my Calculus book this book revealed the awesome power of words.

Capitalism: The Unknown Ideal (Rand) – This was the first Rand book I read, and it’s still my favorite.  Far better than her fiction, this book simply lays out her philosophy and makes a rational argument that is impossible to dismiss with ad hominem arguments. (It amounts to Nietzsche-simplified)

Honorable Mentions:

The Iliad and the Odyssey (Homer) – Most of western civilization’s art and literature stem from this set of works. If you aren’t familiar with them, you have a huge gap in your education.

Othello (Shakespeare) – It’s my favorite play, bar none, but I can’t say it really influenced me in anyway; except to read more Shakespeare.