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Who says paper is dead? business model innovation in the newspaper industry

The newspaper industry is suffering these days. Besides the economic crisis that leads to less advertising spending the traditional business model is under attack by the Internet. The large papers have reacted with large Internet activities that attract a lot of traffic. But the revenues of the online ventures are not sufficient to compensate for the decline in print. So what shall they do?

I had the pleasure recently to be invited back to my university, the University of St. Gallen, to give a speech on business model innovation in the media industry. Prof. Martin Eppler was so kind to sponsor the discussion. I used 8 theses to present my thoughts. Below you find the slides of my presentation.

[slideshare id=1974656&doc=090907changingmediaindustry-090909155105-phpapp02]

Tradition is not a business model

The media industry is an interesting case since their traditional business model is under attack by new technologies. I use the music and the newspaper industry as cases to make my points. Although both are affected by the Internet, they face

very different challenges.

For the music industry the digitalization of the music led to disembodiment of the piece of music from the carrier medium like the CD or the LP. Unfortunately, the business model of the music industry is based on the sale of physical carriers of media. And with the disembodiment the emotional impact of the carrier medium like the LP’s cover vanished. And due to the easiness of digital distribution the value of owning a piece of music diminishes for the customer. Today, we have more music around then we can ever consume, we have thousands of songs on the hard drive, on the iPod. There are thousands of radio stations on the web. So music is around but not as a physical piece anymore.

The music industry reacted with the traditional way all endangered species do. They do not adapt, they just do more of what they did in the past. They publish even more CDs than ever before. And of course, they started to sue their best customers. But it did not work. The sales of music is still decreasing and the most interesting new business models like iTunes, LastFM, Spotify or Nokia’s “It comes with music” come from outsiders. At the same time people listen all the time to music and they spent fortunes to go to live concerts but they do not spend money for physical pieces of music anymore.

The newspaper industry faces a different set of challenges. Newspapers were in the last five years very active in the digital space and launched large digital sites that attracted users in great numbers. According to a PwC study the newspapers could double their online revenue share to 3-20% of total revenue.

Source: PwC newspaper publisher survey
Source: PwC newspaper publisher survey

The NY Times Corporation with all its newspaper sites (NYTimes.com, Boston.com, etc.) and also sites like About.com claims to be No. 13th in America regarding traffic on the Web. The belief was that the digital business will compensate the loss in their traditional business, so they invested heavily.

But, it did not.

The revenue model on the Internet for traditional newspapers like the NY Times or Neue Zürcher Zeitung does not work. The digital space does not allow sufficient revenues to pay for the content. The newspapers reached millions of users but they could not monetize the users. Online might offer a contribution margin to the content production but print still pays the majority. The NZZ is loosing CHF 3 million on sales of 7 million.

Particularly in Germany, the publishers reacted by attacking the one firm that makes a fortune from the Internet, Google. The publishers claim that they provide the valuable content Google lives from. Again, a typical behavior of an industry under attack. Instead of changing their business model they attack somebody else. It is much easier to blame somebody else and play the victim instead of blaming oneself for not being innovative and for holding too long to a dated business model.

You can see easily from the two cases that there is not such a thing as ONE media industry and therefore not ONE solution. Music industry and newspapers have very little in common, except the traditional business model is challenged by the Internet. But the challenges are very different and just enforcing the copyright does not give the media companies their revenue sources back.

The problem does not lie in the copying of valuable content but in the weak value proposition. Times have changed but the business models have not.  So, dear politicians, please think first before you act.

Print is three completely different business models hold together by paper

I will elaborate in more detail about the newspaper industry and how they can change their business model. To start with it helps to understand the business model of today’s business and how they have reacted to the Internet. Let’s start with the former.

Let’s talk first about the value proposition of a traditional newspaper. To identify the value proposition we have to identify the customers. Newspapers have three very distinct groups of customers they serve. The first is the reader, the second the marketeer and the third is a person/company that places a classified. So what is the value proposition for them? And very closely related what is the revenue model associated with the value proposition?

  • The reader is interested in the content in form of news, comments, insights and background stories that help him to stay informed about the world. At the same time the newspaper can be a past time and enjoyment to the reader. The classical newspaper serves also as a guide to local entertainment offerings like theater, museums, galleries or parties. The important function of the newspaper is to filter and classify which news and information are relevant for the reader. The reader trusts the paper that it makes the right choice for him. For the content and the classification the reader is willing to pay in the traditional world a price either in form of a subscription (great since you get the money for one year in advance) or just for a single copy at a newsstand. The subscriber gets the extra benefit of house delivery. Brand is in this context extremely important since you cannot test how much the information is worth to you beforehand since as soon as you have read the information the seller cannot charge you anymore since you have obtained the information without having to pay for the physical medium newspaper.
  • The marketeer wants to reach its potential customers with his advertising message. In times before the Internet newspapers were a great medium to reach a great number of your potential clients. The biggest competitor in mass communication was TV that reached even a larger audience than newspapers. Newspapers were an efficient medium particularly, when the readers belonged to the groups of decision makers most marketeers wanted to address. The marketeers were willing to pay for the reach the papers had. The currency for the marketeers was how much they had to pay for thousand contacts or CPMs (cost per thousands contacts). Actually, the newspapers were selling the attention of the reader to the marketeers even when the readers did not buy the paper for being bombarded by ads. Readers accepted advertising as long it was not too intrusive.
  • The third group of customers where people or corporation that wanted to close a transaction like selling a used car, filling a job opening, renting out a flat or offering sex services. These advertisers just want to find a counterparty for a transaction. The classified market works well with just text ads in papers. The value proposition of the papers was to bring buyers and sellers together. The reach of the newspapers was important since the chance to find a counterparty is much bigger if you reach thousands of readers. The price for a classified depended from the size and length of the text.

These three different value propositions of a newspaper were tied together by the physical medium paper. The classical newspaper is a bundle of three different business models that needed each other. No content without the income from classifieds and advertising and no reach without the content. All three businesses needed the other. Very simple! The classical revenue mix for subscription based newspapers is 30% from subscription fees and single copy sales and 70% from ads and classifieds.

Newspapers transferred their print content model to the Internet

Difference between print and online NY Times

So what happened with the advent of the Internet. Skeptical at the beginning the newspapers invested heavily into the new medium and build up large digital domains on the Web. Besides their content from the print edition they added video, blogs and comment functions to the Web. They connected to social networks like facebook and used user generated content from youtube et al. From their point of view the newspapers had transformed their content model to Web 2.0. Some newspapers like the NY Times wanted to play at the forefront of the development and opened their own R&D divisions to shape the development.

The online content model of newspapers is very much an information portal with news, information and background stories about everything and for everybody. The NY Times covers international, national, state news, culture, business, investing, gardening, you name it. And the newspapers are successful in their traditional metrics of success: reach. In America the NYTimes.com is No. 1 for content according to a Nielson study mentioned in the annual report of the NY Times Corporation.

So, the world could be great for newspapers. But it isn’t.

The Internet is not paper with multimedia and some interactive features

Newspapers managed to attract users (not just readers like with the print model) they lost two of their revenue sources. First, the subscribers turned their back on them. The willingness to pay for information is very low on the Web. The next free news site is just a click away. So, the first revenue flow vanished.

Subscribers turn back on newspapers

As did classifieds. What once needed the reach of the newspaper does not need editorial content anymore. To close a transaction you do not need thousands of readers but the few that are really interested in the transaction. And the Web is very good at matching even the most eccentric interests together. The Web is just made for longtail markets and most classifieds are longtail markets. To close a deal you just need one interested party not millions. So new marketplaces like Craigslist evolved and “nuked” the once very profitable business of the newspapers.

Ok, subscription fees and classified were lost on the Web but there is still the attention of your users you can sell. Right?

The newspaper makers believed that they could sell again the attention of their users to marketeers. But again, the Internet showed that having lot’s of readers does not automatically translate into a high income stream from ads.

Why? The Internet showed that it might be very efficient to reach thousand of users with banner ads but it also showed that this form of advertising is not very effective, meaning that banner ads lead to very few leads or actual sales. That might have already been the case in the print version but due to lack of more effective advertising marketeers had no other choice. But now, they have.

Internet advertising can be measured with click-through-rates or CTRs. So you see how effective your ad is and in the case of performance based advertising systems like Google Adwords you just have to pay when people click on your ad (pay-per-click).

Unfortunately, the reader of a news site is not really interested in anything else when reading an article on Obama than on Obama. He is not interested in health care insurance even when Mr. President talks about his health care reforms. With Google search it is another case. If you search for health care, you have a shown interest in the subject and therefore you might be open for ads about health care plans.

So the Internet proved to be very damaging for newspapers. They attracted millions of users but found no way to monetize their reach. And at the same time, their traditional print business model was under attack. In print they lose subscribers and readers. The classifieds have migrated totally to the Web and marketeers look for more effective ways of advertising.

Solution anybody?

So what shall they do? I have no shrink-rapped solution or one solution fits all. This is exactly what business model innovation is not about. Business model innovation is all about understanding your business and finding a solution that makes you distinct from your competitors. If everybody does the same nobody will profit.

Still, it is interesting to look at examples that work. First, there is a paper that has doubled its circulation in the last 10 years and that has increased its global impact. Well, it is not a daily newspaper but a magazine that does exactly what the dailies (should) do: Filter information for relevant news, provide insights, give background, analyse the global events, and give you information on areas most newspapers think are irrelevant to their local readers.

Any idea which magazine I have in mind? Well, it is The Economist. The Economist has a highly successful magazine on paper and it advertising market works as well. The Economist still calls itself a newspaper, not a magazine. Interestingly, their Internet version of The Economist does not work that well. Somehow it seems that the success of The Economist is bonded to paper. The content The Economist provides is very well suited and adopted to paper. The stories and analyzes just have the right length and style for paper. Will it work forever? Who knows, but it still works today very well.

Free commuters’ newspapers as a business model innovation: Using a clear customer insight

The second example is daily papers for commuters. The value proposition is very simple and is based on the customer insight that commuters that use public transport have time to read in the train or bus. But if they do not bring a paper from home or buy a paper at a newsstand, they have no easy access to a paper. Why not change that and use the attention you get from the commuters and sell it to marketeers? And since commuters are always in a rush the only revenue model that works is to give it away for free. Well, from this insight the free commuters’ papers were developed.

2 commuters' free dailies: 20 Minutes and Metro
2 commuters’ free dailies: 20 Minutes and Metro

The typical reaction of traditional publishers was to blame the “free” for the success of the new dailies. They argued that it is not difficult to launch a paper successfully if you do it for free. For them the free dailies were the ugly duckling in their industry. But it was the customer insight that commuters have time that made the commuters’ dailies successful. The brands of free dailies show exactly this insight: You have 20 minutes to read the paper in the Metro.

Solution: Understand the characteristics of the medium and look for fresh customer insights

So how can the newspapers escape their dire situation in print AND online? Well, the first tip is to understand what each medium can better than the other and than design your offering around the characteristics. We will see that the news will move online but the analytical background story and insights are well suited for paper. But the archive is again better hosted on the Web.

The second tip is to look at the behavior of your potential readers and users. When do they have time? When do your readers really read the paper? On the same day of the publication or when they have time? When are they not distracted by other media? Look not just at your current readers but at your non-readers. The commuters’ dailies attracted the young which were long lost to subscription newspapers. A generation of non-readers became readers again.

We will see daily newspapers that will be published not daily anymore. Sales on Mondays and Tuesdays are already low. Why not publish the “dailies” just on Tuesdays, Thursdays (with a big “must-have” section of the upcoming weekend events), Saturday and Sunday? Besides the commuters’ dailies the biggest winners in the German speaking press are the Sunday papers that focus on the news of the week. And of course, change the content: away from the daily news to background stories and analytics.

Is the loss of the daily paper a cultural disaster? No, when newspapers started the started quite often as weeklies and later with the advent of better dissemination of news via telegraph paper even had several editions per day. So we just go back to former times.

The Internet is not just another channel!

And what to do with the online version of the papers? The Internet is not just a new channel for the print content. And not just the traditional content with some Web2.0 features. The Internet has some characteristics that changes also the economics of the content business.

On the Internet you can reach users from little niches that were unserved in the past due to lack of medium that made it possible to reach tiny, dispersed interests for an acceptable price. The Internet is all about these longtail niches. You can serve the local community super local news and create a online community for the local community. [Update: Jeff Jarvis and his team have developed some interesting ideas and working business models on these hyperlocal news.] Some other interesting thoughts on how publishers should address the Internet provides Andreas Göldi, founder of namics, a large Internet consultancy in Germany and Switzerland.

Or you can create communities with a sharply cut interest. How about girls that are going to marry? Weddings are highly emotional and excellent made for exchange of tips and gossip. Why not give girls a platform for this important event? And important, weddings are expensive and therefore the marketeers of weeding related goods like rings, jewelry, hotels, restaurants, wedding planers would just love such a Website where they could address soon-to-become-brides without much loss.

And of course there is already such a site: Weddingbee.com where 20 real brides write in blog form about their weeding, their planning, their emotions. And the site attracts around 1.33 Mio. Unique visitors per month that is just 0.2 mio less than the Tagesanzeiger.ch, one of the biggest dailies in Switzerland. And what about the cost? The 20 brides do it part-time vs. the 150 plus journalist at the Tagesanzeiger. Do the economics!

Sure, it is unfair to compare a quality daily newspaper with a “gossip” page for brides. But it just shows how the economics of the business have changed. And the advertisers do not think in categories of unfair or fair, just what suits their needs the best.

Chance for newspapers

Newspapers have a chance if they understand what paper can do better than the Internet and if they start designing a paper that uses these characteristics of paper.

Newspapers have to understand better the changing customer behavior and find a customer insight on which they can base their offering. Commuters’ dailies or Sunday papers are examples.

And the Internet is not another channel for content plus some Web 2.0 features. So transfering your content online and adding some blogs and comments function will not work. Today’s online portals (online version of a newspaper) attract a high volume of users but cannot monetized on their great reach. So design an offering that uses the special idiosyncrasies of the Web. It might be the best local super local offering, it might be another niche but it will not be a portal about everything which you charge for.

Update: The presentation was summarized in French by Le Figaro. And Anders Sundelin from the Business Model Database just posted a summary of the New Business Models For News Summit at the University of New York. It is a great summary of all the fresh ideas for business model innovation in the field of media. Still, nobody has found so far the solution for this fighting industry.

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13 Comments

  1. @Vivek Your distinction in magazine publishers and dailies is interesting. That distinction makes sense in the past. I think dailies will become more like magazines. They will not be published everyday anymore so we will see “dailies” that are published only every second day or less.
    On the internet, the distinction into daily newspapers and magazines does not make sense anymore. There is no publishing date on the web. Like Jarvis writes journalism is a process in the future not a fixed product.Like this blog post. Your comment added value to the article. And we gain new insights by this discussion. Thanks!

  2. Great post, I’m a huge fan of this blog, keep up the great work, and I’ll be a regular visitor for a long time.

  3. This is fascinating, please post more often about Who says paper is dead? business model innovation in the newspaper industry | Business Model Innovation!

  4. Love the post! I was searching for free classified advertising and classified related articles when I came across your website post on Bing. This is exactly what I was looking for. Thanks for the share. I’ve saved this post for future reference 🙂 Nice post – Best Wishes

  5. Thanks for the excellent article. It had clear my doubt, i m using it from past 2 months but getting the good result.

  6. Very interesting post, you raise some good points. It will be interesting to see where newspapers head next and what new models innovation brings.

    You may have seen that The Economist is running a month-long festival of online discussion and debate about the News Industry and the future of it. It’s a chance to have your say on this very topical debate: http://www.economist.com/ideasarena/news

    They’ve also got a special report on The News Industry here: http://lightbulb-factory.com/2011/07/14/the-news-industry-special-report/

    1. Nancy, that is a great honor to be found by the staff of my beloved Economist. I am a long term reader and subscriber to The Economist. I greatly enjoy reading the paper, but interestingly almost never visit your website.
      Thanks for the references. I will take a look.

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