March 5, 2009

Remodeling the Media

The News is Dead, Long Live the News

by Shawn Hoffman

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It's been a rough couple of weeks for newspapers. The Rocky Mountain News is gone, shut down by parent company E.W. Scripps. The San Francisco Chronicle and Seattle Post-Intelligencer may not be far behind, as Hearst has threatened to close both papers if it's unable to find a buyer or receive major concessions from its unions. And even the Wall Street Journal is taking it on the chin; News Corp had to take a $2.8 billion write-down on the paper (half of what they purchased it for just over a year ago), even though it has kept its circulation relatively flat.

This obviously isn't a new phenomenon. Newspapers have been on death row ever since the internet destroyed the barriers to entry in this space (it takes about four minutes and zero dollars to set up an online publication), but the recession has accelerated the process beyond anyone's reasonable estimates. If the advertising climate in the US doesn't improve by the end of this year, the Rocky will only be the first in a long line of papers going the way of the dodo.

One popular solution is for newspapers to shut down their print operations and begin charging for online content, either through subscriptions or micropayments (i.e., you would enter your credit card number once, and then pay a tiny amount for each article you read). Subscription revenue isn't really the problem though-newspapers were great businesses because they had de facto monopolies on local advertising. Warren Buffett, for one, used to love them for that exact reason. (He still owns a big piece of the Washington Post Company, which now makes more money from its education division than from its flagship newspaper.) With those advertising dollars now spread across millions of websites, we may just be at a point where a stand-alone newspaper with a massive editorial staff is no longer viable.

This could all result in major changes in the way that baseball is covered-or, more specifically, in who is covering it. Most of us already get our news from television, radio, and blogs, but it's the newspapers that still do much of the base reporting. That's especially true on a local level; bloggers and talk show hosts usually get their subject matter from what's been in the paper. And Major League Baseball has always had a you-scratch-my-back-I'll-scratch-yours relationship with the newspapers, to the point where teams used to pay for the writers' transportation and lodging when they went on the road.

Even if all of the local papers die, beat reporters won't just cease to exist. As long as people want to read about Noah Lowry's elbow problems, someone will be there to report on it, but the economics of the process will obviously need to change.

So the question is, who will be there to pick up the slack? Or, perhaps more importantly, what business models will support local news reporting? Here are the most likely candidates-all of which exist today-that should become more prevalent as traditional newspapers move toward extinction.

The Irreplaceable Content Model

If you're able to read this far down, you're probably paying to do so (either that, or you're mooching off of someone else's account). BaseballProspectus.com can charge for its content because enough of you find it valuable and irreplaceable. The same goes for the Financial Times and the Wall Street Journal, both of which charge for online subscriptions, but with millions of people producing content online, this certainly isn't an easy model to win with; it requires significant competitive advantages, which most newspapers simply no longer have (here's looking at you, Newsday).

The Wall Street Journal and Financial Times aside, most of the publications that use this approach will have to be very small (much like BP.com). Subscription revenue can certainly pay the bills and keep the lights on, but it won't produce a giant newsroom filled with full-time staff writers. And while there's a decent advertising business to be had here (given that subscribers will be highly-targeted and, in some cases, very wealthy), it's hard to scale up with an inherently closed model.

Could we see a bunch of startups in this space? Sure, but we could also see existing-but-defunct brands (like the Rocky Mountain News) recreating themselves as small, subscription-based online outlets that focus on local news. There would have to be very little competition in the area, and the content would have to be outstanding, but it could work in some limited cases.

The Up-Sell Model

If anything, though, we're inevitably trending away from subscription-based models. With more and more competition, it's constantly becoming harder to charge for written content, so a more practical approach is to use the news to draw eyeballs, and then sell them something else.

MLB.com is a pretty good example of this: you may go to MLB.com to read today's top stories, and end up leaving with a new shirt, two tickets to a game, and a subscription to MLB.tv. ESPN does this as well, but in a more indirect way, as the site helps to support the cable business, which accounts for an incredible 49 percent of Disney's total earnings. ESPN.com itself might be reasonably profitable, but it's still very much a side business for the company as a whole (at least until cable is outclassed by IPTV).

On a local level, the biggest news divisions will almost certainly have to use this approach. Don't be surprised to see existing companies (like RSNs) jumping on the opportunity to become bigger players in the reporting game, or even starting to buy newspapers out of bankruptcy at some point. Most sports stations already have some news on their websites, so this seems like a natural extension.

The No-Cost Advertising Model

This isn't meant to write off advertising entirely. When page views are high and fixed costs are low (which is possible when there's no monstrous printing press to run every night), ads can support a great deal of content. SB Nation, which has become a very valuable resource for sports fans, seems to be doing quite well with an ad-only model. And once the economy turns around, display ads should regain some of their pre-recession stature.

As far as replacing the newspaper revenues of old, however, that ship has sailed. Ten years from now, local coverage is going to come from publications that look a lot more like BP and SBN on the small side (nimble, inexpensive, and high quality), or MLB.com on the larger side (drawing attention to a more lucrative business). As time goes on, and more sustainable companies join the fray, the overall caliber of reporting should actually rise. After all, as much as traditionalists are bemoaning the loss of newspapers, competition always yields higher quality. And that should give us a very happy ending to this sad story.

Shawn Hoffman is an author of Baseball Prospectus. 
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