"Arguing in My Spare Time," No. 4.24
by Arnold Kling
September 6, 2001
David is a high school junior in Columbia, Maryland. He is taking a class where the teacher is asking the students to come up with a proposal for an Internet business. Apparently, such proposals will be entered in a contest, with the winner receiving some initial funding from the county.
When David asked me for advice, I recommended that he take on the Baltimore Sun, which is the city's major newspaper. It is one of my beliefs that such papers are Goliaths that will fall victims to the Davids of the Internet.
I am not suggesting that David put together an online version of a full-service newspaper. What I am recommending is that he pick off the newspaper in a specific niche where he has a strong interest--coverage of the Baltimore Ravens football team.
There are broad-based sports sites, such as espn.com, and there are "official" sites for individual teams. However, I believe that there is room for a site focused on an individual team that is built by and for the fans.In a battle of David against Goliath for on-line Ravens fans, Goliath has a few advantages:
However, Goliath has some disadvantages:
Fans do not participate or have any sense of ownership of the on-line sports coverage of a newspaper.
The newspaper web sites are very expensive to maintain, and those columnists and editorial egos are a big drain. Meanwhile, newspapers tend to miss the best opportunities for revenue on the Net, such as e-commerce affiliate marketing and email newsletters.
Newspaper readership among people under 30 is dramatically lower than it is for people over 40. With young people on the Net, newspapers' brand value is pretty small.
More could be said on the topic of sports and the Internet, but instead I would like to discuss the generic weaknesses of the typical large urban newspaper on the Internet. As you read this essay, think of the Baltimore Sun, the Detroit Free Press, or similar papers. I do not have in mind The New York Times and the Wall Street Journal, which have a national following. Because of this, they do not share all of the weaknesses of the papers that have primarily a local following.
Classified advertising is the lifeblood of most newspapers. Its contribution to newspaper profits has been estimated at anywhere from 50 percent to over 100 percent. That is, it may be that without classified advertising, newspapers would lose money.
On the Internet, newspapers have already lost the classified advertising franchise. People who are looking for used merchandise turn to eBay. People who are looking for houses turn to Realtor.com. People who are looking for jobs turn to Monster.com or other on-line sites.
The current leaders of classified advertising may themselves be too broad. Ultimately, they could be replaced by specialized sites, with the job search category particularly amenable to niche newsletters and such.
In the print business, the minimum feasible scale is large. Printing presses and newspaper distribution systems are expensive. To defray the cost, you need many subscribers. To obtain many subscribers, you need to cover many topics. Thus, we have the "full-service" newspaper, with its news, sports, business, and other sections.
On the Internet, the minimum feasible scale is much smaller. Suppose that you have a niche email newsletter that goes out 50 times a year to 20,000 subscribers. You may need only $100,000 in revenue to pay yourself a good salary plus cover the costs of producing and distributing the newsletter. Here are two ways to get that revenue.
Your subscriber base gives you one million "views" per year. It is plausible that you could obtain $100 in advertising revenue for each 1,000 "views," or $100,000 a year.
If each subscriber paid $5 per year, that would be $100,000 per year. Alternatively, if each subscriber pays $50 per year to a "club" and the club pays you $5 per year per subscriber, that would be $100,000 per year.
The point is that an individual online journalist has low overhead. Although there is no such thing as an easy business model, an individual with an email newsletter is much more likely to achieve profitability than an online newspaper based on the current hard-copy paradigm of trying to serve multiple needs at once.
The online versions of urban newspapers have much of the overhead associated with their broad base. Compared to an individual journalist, an online newspaper needs much higher revenues per content unit to break even.
Another problem with breadth of scope is that you tend toward mediocrity in all areas. Strong competitors are likey to emerge in niches where there are profit opportunities.
In my opinion, Yahoo! faces the same problem as urban newspapers. Its breadth is a misfit for the Internet. It can only operate as long as its investors are willing to forgive a low rate of return.
Suppose that Yahoo! manages to develop an effective revenue model for one of its services, such as web-based email accounts. Other web-based email services, such as hotmail, are poised to compete, driving the profit margin to zero.
Suppose that Yahoo! tries to charge consumers for doing searches. Then people will turn to other search engines. Finally, suppose that Yahoo! finds a niche in which it is successful at electronic commerce. Then some other competitor will come in and focus on serving that niche. With low overhead, that competitor will win.
My view is that on the Internet broad scope loses and narrow niche focus wins. Traditional urban newspapers are poorly positioned if that is the case.
Cultural habits change slowly. I would not predict that the demise of newspapers will occur as soon as 2005. However, the long-run death of newspapers is "baked" into the demographics.
Young people do not read newspapers. They do not plan to read newspapers. They are not going to start reading newspapers. Newspapers will subsist on those of us who are their current readers. As we die, so will the papers.
The online versions of newspapers will die even sooner. The online versions are being subsidized by the print versions. As the print versions lose profitability, the online versions will have to be shut down.
My guess is that in the future, journalism will be more decentralized. My guess is that individual journalists will have to develop specialties and obtain followings, rather than depend on large corporations to provide them with jobs and readers.
My guess is that in the future, reputations for editorial judgment will belong to individuals rather than corporations. To sort out what is important for me, I will rely on individual editors rather than a single Goliath. I will use one editor for my favorite baseball team, another editor for developments in the Middle East, and another editor for developments in Internet marketing.
Actually, I probably will use multiple editors for each topic. Each editor will function somewhat like Lawrence Lee of Tomalak's Realm. The editor will choose the most relevant articles, whether they are written by Davids or Goliaths.
My guess is that in the future, the average journalist will not be highly paid. Journalism is one of those fields that, if it were lucrative, would attract a tremendous amount of excess supply. Because of the nature of the supply schedule, journalists are doomed to earn mediocre incomes. However, some journalists will get rich, because of a combination of superior talent and network effects.
Overall, the outlook in journalism is that the Davids will earn a living, but it will not be spectacular. However, they will be considerably better off than the Goliaths.