Borrell’s Blog

By Gordon Borrell
Walter Hussman’s letter (“How to Sink a Newspaper”) in The Wall Street Journal on May 7 lay blame for the industry’s dwindling circulation on fellow publishers’ strategy of giving away their local news content on the Internet. While Mr. Hussman outlines a perfectly logical concept, I must point out that smart businesspeople in many other companies –Woolworth’s, IBM, Kodak, and many others – followed similar instincts when faced with a disruptive industry trend. They applied their tried-and-true business model to the new business of discount department stores, minicomputers and digital photography – and failed to achieve new net revenue.
There is a reason that all but a half-dozen of the 1,450 daily newspapers in the U.S. have abandoned the model espoused by Mr. Hussman, whereby Web visitors must either subscribe to the newspaper or pay to access local news content.  It’s because they are absolutely committed to keeping their generations-long domination of the local advertising marketplace. And it’s because they know an interesting little secret about the industry:  Roughly half of the people who read their newspapers are not interested in the local news at all. They’re interested in the advertising, according to surveys by the Newspaper Association of America.
That’s why newspapers such as The Palm Beach Post began several years ago digitizing all their most valuable content – advertising – and placing it into a searchable databases online. When you look into any local market using Scarborough Research data, you’ll find that Internet users are two to three times more likely to go to the Web for local advertising content than they are local news.  They are very comfortable, thank you very much, getting their local news from TV or the printed newspaper.
I wouldn’t write off the newspaper industry just yet. While circulation dwindles and key advertising sources shrink, long-term strategies are at work.  To wit:

• In 2002-2003 we conducted an applied research project with Clark G. Gilbert, then a professor at Harvard University, with four of the largest newspaper companies – Tribune Co., Media General Inc., Knight Ridder Inc. and Belo Corp. Using some of the findings from Prof. Clay Christensen’s work on how smart businesses failed when faced with a disruptive technology, we laid the groundwork for the newspaper industry’s understanding of how they might fail as well when it came to the Internet.
• By 2004, the newspaper industry commanded a 44% share of all locally spent Internet advertising – the largest single share of any industry segment.
• By 2006, newspapers operated the largest-grossing Web sites in 95% of all U.S. markets.  And 60% of those Web sites were generating more cash flow for their companies than the largest-grossing terrestrial radio station in those markets.
• Today, newspaper companies are averaging 8% of their total gross revenues from Internet advertising, while these operations now contribute an amazing 25% to 35% of gross company profits.  In several large markets, the newspaper Web site is generating more than $10 million in cash flow.

The story doesn’t stop there. The newspaper industry has seen its local online advertising share slip from 44.1% in 2004 to 35.9% in 2006 – a disturbing 8.2-point loss in just two years. The reason is that publishers have not yet realized that they must go beyond merely up-selling their print advertisers with a “convergent” package. That slice of the pie has been thoroughly picked over by now. They are falling into the fatal trap identified by the disruptive technologies scenario – missing the larger opportunity at hand to use the Internet to grow the business into new segments – serving customers they have never served before – rather than merely protecting their existing segments by selling to current customers.
If you were an entrepreneur starting an independent local Web site, would you tell your investors that you were going to sell advertising only to people who happened to be advertising in the newspaper?
Through the American Press Institute, the industry has launched a project called Newspapers Next.  Part of that project, keyed off the early research on disruptive technologies, has focused the newspaper industry on becoming the disruptor instead of the disrupted. The result is that – believe it or not – of the $161 million spent on local video advertising on the Web last year, newspapers were collecting half of that. They have beaten their local TV competitors to the punch!  Many newspapers have used the Web to launch what amounts to their own TV stations without an FCC license – including The News Journal in Delaware, The Naples Daily News, and The Virginian-Pilot – and they are targeting television advertisers. They are also aggressively launching online directories and selling against their local Yellow Pages competitors.
Mr. Hussman is correct that daily circulation at The Columbus Dispatch has fallen 5.8 percent since it dropped its subscription model for content on its Web site. What he did not state, however, was that The Dispatch’s Web reach went from five percent under the subscription model to more than 25 percent under the free model, according to Nielsen data. According to Gerry Barker, general manager of the company’s digital operations, “The resulting growth in online revenue dwarfs anything we could ever generate as a paid site.  This is about building a sustainable business model and positioning our company for the future.”
I do not know whether the newspaper industry can make the transition from a purely analog world of ink, paper and printing presses. But I do know that even though their erosion in circulation may be partly their own doing, it’s a necessary consequence of changing to survive in an increasingly fragmented – and “free” – world of content.