Newspapers have been hit hard by digital competition

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Source: Money Week UK News

The newspaper industry has been hit hard by the internet. And unlike the music industry, which has had time to adapt to the world of downloads, the publishing business is still struggling to find its way.

Fifteen years ago, the hope was that providing a free web version of the newspaper would bring in extra readers. The resulting additional digital advertising revenue would more than cover any loss of print readership.

In reality, that was pure wishful thinking. Because they could get the web edition free, people simply stopped buying the print edition. At the same time, the rates publishers could command for online ads proved far lower than hoped (between 10-20% of the price of an equivalent print ad).

However, there are glimmers of hope. The smarter papers – including the more specialist Financial Times – realised early on that the ‘free’ model wasn’t going to work. Instead, the FT used paywalls to limit the number of articles that people could view without paying, forcing them to take out subscriptions.

This model has gradually spread through the industry. Three years ago, The Times caused a big stir when it became the second major paper to limit access to its site. While this move was criticised, the new digital subscribers mean that its combined circulation has now risen.

Earlier this year, The Daily Telegraph rolled out a similar (but more flexible) version, while The Sun now charges for access to its website too. With the rise of tablets and smartphones, which make it easier to view papers on the go, this shows a way for papers to return to profitability.

The same thing is happening in the US. Just before it was bought by Amazon, the Washington Post announced that it was going to limit free access to its website. In fact, USA Today is now the only paper with completely free access.

Of course, the trend of moving content behind paywalls is also good for those who choose to remain free, since it reduces competition for ‘eyeballs’. Both the Daily Mail and The Guardian have won online readers from The Times, while people expect the Mirror’s website to benefit from The Sun’s paywall.

Betting on tycoons searching for status symbols

As well as finding new sources of revenue, the industry has also been cracking down on costs. One of the big problems papers have faced is that during good times, they over-expanded. In some cases this meant over-staffing – such as second-tier US papers having foreign bureaux for example. Like most other industries, newspapers have also had to struggle with large pension liabilities. However, after several rounds of downsizing they are finally getting to grips with the problem.

As well as cutting staff and pension bills, papers are also finding ways to cut distribution costs, one of their largest areas of spending. Moving logistics operations in house has been one cost-cutting move. But in the longer term, one of the benefits the digital revolution can offer the industry is that it costs next to nothing to distribute online magazines to a tablet or smartphone. Indeed, one of the reasons that Bezos bought the Washington Post was presumably to take advantage of the distribution network he has through Amazon’s Kindle e-reader.

And these savings apply even more to reaching readers in other countries. Instead of the expense of international editions, websites can be easily tailored with country-specific material.

Even those newspapers that are unable to make money may have a future. Even though their influence has declined, they are still able to set the tone of the national conversation. While this may not directly translate into profits, it does make them attractive to wealthy buyers.

The obvious parallel is with football. Even successful clubs are a poor investment, with most money going to players and agents. However, despite this, we’ve seen wealthy tycoons pour tens – and then hundreds – of millions into teams. Manchester City and Chelsea are the most obvious examples of this.

Betting on status-hungry billionaires is a high-risk investment strategy, of course. But the Bezos deal has set off a round of speculation that other wealthy entrepreneurs may follow in his footsteps. Indeed, James Fallows, writing for the American magazine The Atlantic, points out that in the early days of mass newspapers they were largely bankrolled by tycoons looking for prestige rather than profits. And over here in the UK, the Russian tycoon Alexander Lebedev already owns the Evening Standard and The Independent.




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