Innovation in Software

There is an awful lot of consternation going on amongst the suits behind online news websites.

The problem, it seems, is a colossal error made by most newspapers in offering you all their content without asking for some money from you. Their reasoning is that this forced them into the route of monetising their websites through advertising. This has never been profitable from the day they first did it. Now, they argue, the time has come to change all this and you must pay.

I want to briefly point out how this happened, why it’s the news organisations’ own stupid collective faults, why people will never pay for this content, and how business models online will need to evolve over the next few years. I pick “News” as a sector, simply because that’s where my head is right now but it applies to any other sector as much.

I also want to point out that whilst I contribute to a blog over at The Manchester Evening News this isn’t about the MEN. This is about a global industry that is in trouble. I don’t know if a single word of what is written below applies to the MEN, because I don’t work for them and don’t have enough experience of the inside of the organisation to know what happens there. Maybe some of the below does apply, but I’d be surprised if it all does.

Let us travel back in time to the early 1990s. Back then, 28.8K modems were considered speedy and there were but a handful of ISPs offering dial-up access in the UK – typically for about £10/month – to the Internet. The main applications were mail and Usenet. The web did not exist.

But one bright day, it did, and then there was light, etc. There was a rush to this new territory and a few keen early adopters started to think about what this might all mean to newspapers.

Strangely, the gentlemen of perhaps the UK’s then most-traditional newspaper, The Daily Telegraph, were the first to consider publishing their content online. They decided then that advertising was the way to support this venture and so the first UK newspaper website was launched with all manner of gaudy, flashing images helping to prop up its cause.

Why did they do that?

Well, let’s think about how newspaper management typically think about their business. To you or I a newspaper is a source of news. To a journalist it is a means of employment that allows keen types to investigate the World around them.

To newspaper owners, it’s an advertising hoarding they sell space in, and in order to get people to look at it, they shove some news stories in next to the main content in as inexpensive a manner as possible.

That might sound cynical, but reality often does.

When Rupert Murdoch’s advisers were trying to convince him to buy MySpace the argument that sold him was “you’ll be selling advertising next to content you didn’t have to pay for the production of. What gets better than that?”. That mindset is dominant in online news.

When you buy a newspaper (if you still do), your money is not to pay the wages of the staff who produced the paper – the money is to offset distribution costs mostly. The printing, shipping and selling of newspapers is an inconvenient but necessary cost and in order to keep everybody from the newsagent all the way through to the inky-fingered man who produced the paper happy, you pay your pennies for the finished article.

The main source of income always has been and always will be, the advertising. In case you’re wondering, it’s the same story in the magazine industry.

Now, let’s move things online. The distribution costs of a website are tiny compared to that of a physical newspaper. If you were to choose the comparatively costly hosting services of Amazon’s EC2 cloud resource, and had 10 small server instances running and were fortunate enough to be shifting a few hundred gigabytes of data a day, your total costs would be less than $60 a day. That’s about £40. Compare that to the £650m needed for the printing presses of the modern paper editions.

Therefore if distribution costs are near enough to zero for online editions, why bother asking the customer to pay for them? It’s almost sound logic, except they then made a major, major error.

They gave the advertising away for free.

Phone any regional newspaper title in the country and speak to their ad sales team. The conversation will result in them offering you a rate card for the print edition. Sound sceptical about the costs and benefits. They will offer space online for free. Every time. I know, because I’ve spoken to quite a few ad sales teams in the last year.

In essence to secure the advertising for the print edition, they have in the past completely undermined the business they need to survive in the future. They have told every one of their advertisers that online adverts are not worth paying for.

Let’s move forward and look at the state of business affairs within the news sector today.

All of a sudden, as if by magic, the clouds have moved apart and revealed that their website is a cost-centre. In order to keep up with the Jones’ they have had to build dedicated online news teams, larger server infrastructures, bring programmers onto the staff and throw money at their website in order to remain attractive to shareholders and other investors. Slowly the ad sales team realise that in fact the future of their business is online and they start to unpick their years of collective suicide, slowly trying to build up the revenues they have worked so hard to destroy.

It’s all a bit grim. One newspaper group dominant in a Southern part of the UK almost sounds desperate when you phone them and enquire about online sales. I genuinely feel sorry for them sometimes.

In short, none of the people responsible for picking up revenues really know what they’re doing any more. The World has changed around them whilst they have stood still, and it’s all too much. They are thinking in terms of traditional newspapers and traditional ad sales, and struggle to find the revenues they need to break even. Slowly, they realise they can’t fix this. They need people to blame. The usual people they wag their fingers at are:

• The BBC. They get a license fee, they operate the largest online news websites and hey, it’s just not fair, right? They should stop!
• The advertisers for not spending enough, mainly because for 15 years they’ve been told that online adverts are basically free
• The audience for demanding free online news like some sort of self-interested collective mob (which they are!)
• Anybody and everybody but themselves.

But wait, there’s hope. Amazon’s Kindle is being thought of in some quarters as the “news iPod”. The people behind the curtain at major newspapers groups all over the World are lining up to try and sell you subscriptions to their content via eBook readers like the Kindle (and perhaps the iPhone and other mobile platforms), and then slowly their digital operations will move to subscription-only content. News websites will slowly shut down and become adverts for the print and subscription-only content via the new technologies sure to become dominant in coming years.

Except of course, the audience won’t care. They won’t sign up. Why would they if even a few websites remain free and open for business? Nobody at Wikinews is busy trying to find a business model that works. I’m pretty certain the BBC won’t be allowed to. That’s enough to wreck this plan.

And yet, the news organisations lumber on hopeful something will change soon. No changes in business structure, no clear thinking about how to go forward, no understanding of online business models.

Here’s a good example of bad thinking about what it takes to succeed online. Craigslist has about a dozen employees and clears about $100m a year in revenues, thanks to their UGC structure. That’s some margin! The BBC gets £3 billion a year in license fees, so by the same gearing (ignoring the obvious differences in structure and intent of a non-commercial entity like the BBC) they shouldn’t need more than perhaps a few hundred journalists. Do you know how many journalists the BBC employs? 7,000. Seven. Thousand. And they, for their budget, are considered quite an efficient news outfit.

So, let’s summarise where they’ve gone wrong so far:

• Newspapers didn’t understand the web when they got started
• The ad sales teams on newspapers took too long to understand online business models
• They then undermined their own business model
• Newspapers realised they need to take a new mindset and blame everybody else for where they are right now
• They then decide the option is to try and get customers to pay for content they don’t want to pay for
• Absolutely no consideration is made of what being an online newspaper consists of

Not sounding good is it?

What to do? It’s OK me sat here mouthing off about how stupid they all are, but can I offer some insight? Well, here’s some thoughts to people running newspaper groups right now:

• Online news is not the one-way broadcast medium you’re used to. Use your audience. Wikinews is cheap to produce. Your newspaper could be. Kagtum will be.
• Online ads are not the same as print ads and can’t be sold in the same way. I don’t know of a single news website in the UK where I can buy PPC ads with my credit card right now.
• Even worse, online ads aren’t very profitable anyway. Google ads work because they enhance the product. How do you make money whilst enhancing your own content? Price comparison, auction and digital distribution models have figured this out well.
• Customers do not want to pay for anything. Ever. You have to work hard to convince them it’s worthwhile. You’re doing an awful job of that, so stop trying to do it
• Invest in journalists, programmers, graphic designers, information visualisation specialists and people who understand online content. Fire the majority of your middle management who aren’t directly involved in producing content or ad sales.
• People will always value investigative journalism
• Think laterally about revenue in an online medium

It might all sound a bit extreme, and I’m sure many will criticise me for my naive attitude, but I say these things because I care. We need good journalism. Wikinews might be cheap to produce, but it doesn’t allow for investigative journalism, an aspect of news reporting which I believe is critical to democracy. We need newspapers.

I’m writing this because I want to both signal where I’m thinking in terms of my own projects, and because I’m also fed up sifting through dozens of articles a day by everybody in the industry from the Western US to the East of Asia all blaming the dire position of news today on a lack of subscription models. I think there is a future for online news, but I suspect it will need the current generation of newspapers to go bust for the new models to successfully emerge.

What fascinates me about all this though, is that there are so many people whose future relies on online business models, and yet they don’t understand what that means operationally. Interesting times.