Monday, December 5, 2011

Economics of Two-Sided Markets and the Future of Newspapers - Part II

This is a continuation of a previous post I did a few days ago here where we talked about general economics of any two sided market.

Let's apply it to the news business (ideas mostly from Dr. Alstyne's talk at UC Berkeley Media Tech Summit):

Ability to Capture Cross-Side Effects: The emergence of new digital platforms brought about the weakening of the newspapers' ability to capture cross side effects. Newspapers' subsidy side, the subscribers, started to flock to free digital platforms (Yahoo, CNBC, blogs) to keep up with daily news. Newspapers' money side, the advertisers, started to move to digital platforms that were either free (Craigslist) or more efficient (Google).

Marginal Costs & Value Add: The newspaper executives were just too slow to re-innovate their business models. When news facts such as who won the election or what's happening in Iran cannot be owned, they were bound to be disinter-mediated as new means of distribution became available thanks to the internet and search engines. Instead of trying to protect "content" (which they don't own anyway), newspapers executives should have realized that the marginal cost of distributing digital news is very low relative to print, and should have driven readership to their own digital websites (happening but a bit too late). A portion of the (subscriber) print revenues could be replaced by a fee-model through value added services on top of the free news content. One could argue that if newspapers could have retained (can retain) their subsidy side, the money side, the advertisers, would continue to be attracted to the newspaper network (albeit at lower rates).

So what kind of value added services a digital newspaper have that could attract readership away from blogs and other low quality sites.
  1. Interactive Data: Data such as state-to-state employment rate cannot be owned, but having an interactive application (such as here) is a good example of a value add.
  2. Credentialing: Anyone can aggregate data, but the ability to validate data using sophisticated algorithms is another example of value add. FiveThirtyEight is a polling website (now a licensed feature of New York Times) that rates errors of polls and produces pretty accurate statistical models. 
  3. User Generated Content: Amazon and Slashdot essentially created a business around the concept of using user generated content to add value. Today you see it as comments on a story on a digital news article, but one could go further by helping a user clear the cutter in smart ways (again look at Amazon or Slashdot).
  4. Ability to search archives: The search engines algorithm are smart when you are trying to find content that is hyper linked. So if you were trying to find content that is a few years old (this is a just an argument for long-tail), then the newspapers could add value by letting you search their print archives. Now imagine if I could connect this with my stock portfolio and quickly get a news time line for the last 10 years for all articles that have shown up on WSJ print that in my opinion would be super useful. 
Price Sensitivity: Dr. Alstyne gives the example of "technical" journals he receives today that are free (subsidy side) and the contributor is the one who is charged to reach the vast audience. I am not sure how this exactly applies to the newspaper business, but price sensitivity is one area that could be further explored.

Having said all of the above, I think the newspaper business is a tough one to be in going forward. When you have a business that goes from being a monopoly to one that faces multiple competitive threats, it is not an easy transition. 

I encourage you to listen to (or read) John Temple's talk about the lessons he learnt as an editor and publisher at Rocky Mountain News, one of the top newspapers in Denver Colorado. He tells you what kind of internal forces were at play within the company as these industry headwinds were playing out. I find this kind of postmortem analysis very interesting as an investor because "All I want to know is where I am going to die, and I'll never go there" (Charlie Munger).

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