Spare us this rare indulgence. Which-50 turned eight today. But in fact, the idea first germinated two years earlier, while I was writing a lengthy analysis on how the death of the newspaper industry was entirely predictable from the earliest moments of the web.  This analysis was published in November 2011.

Not all stories end badly, but this one does. Of all the industries unraveling upon our screens since the advent of the Web almost 20 years ago, traditional news media is dying the hardest, or at least the loudest, since it has its own platform from which to decry its inevitable undoing. Slowly, stupidly and with contagious incompetence, metropolitan news media companies around the world are drafting the longest obituary in commercial history.

The managers who run these empires are often steeped in journalistic practice and are traditionally driven as much by a desire to propagate bylines as to buttress the profits of the business. They remain trapped by nostalgia, or hubris, or just sheer bloody-mindedness in the case of Rupert Murdoch’s News Corp.

Murdoch at least has an excuse; they’re his newspapers after all. And if a billionaire wants to indulge his passion for ink, then who’s to blame him. Murdoch still commands a majority of shareholders at News Corp through his family, his proxies and his Saudi allies despite all the legitimate criticism about governance to the contrary. And until the ice melts in the old man’s veins, it will remain so.

Murdoch also has a get-out-of-jail-free card. While his newspapers are described by the investment analysts as “toxic” assets and his web strategies over the years have delivered nothing but loss and brutal failure, he is murdering it in pay-TV, notwithstanding his well-publicised problems in the UK.

News Corp is a hydra, but most newspaper companies and the people who run them remain anchored to a single idea. If only the news was a little bit stronger, if only we were better journalists, everything would be all right. But it won’t be, because journalism no longer matters to the commerce of the advertising sector. Print is dying, no surprises there, but so is web-based news and that’s the part everybody is missing.

The law of unintended consequences

It turns out the real problem with the free news model is not that the news is free, but rather that the advertising is effectively free. When you can buy several million-page impressions on marquee sites such as The New York Times and the Guardian overseas, or the Sydney Morning Herald in Australia, for less than the price of one small advertisement in print, then the economics of the model have broken down irreparably.

It’s important to understand that we arrived here by choice and design, not by accident. From the mid ‘90s to the heights of dotcom 1.0 in the year 2000, consumption of news on the web flourished. Suddenly, publishers had access to customers at their desktops all day long. Drunk on the easy currency of page impressions and the seemingly insatiable demand for online inventory by emerging dotcoms, publishers missed the curse within the curve. They shouldn’t have missed it. It was simple mathematics and underlying it was an idea that had been known about for decades — Moore’s Law — which to bastardise for the purposes of this story represents the capacity of Web servers to spit out twice as many pages every 18 months for the same unit of cost.

Infographic: The Dramatic Decline of Print Advertising | Statista You will find more infographics at Statista

Inventory (the stuff publishers really sell) was apparently infinite. If a website didn’t have sufficient inventory to meet a campaign they just manufactured more of it. Initially, this took benign in slightly annoying forms, such as breaking longer stories into two or three pages to double or triple the value of the piece. These days, celebrity photo galleries are the big volume play. As page inventory became the defining measure in the beauty contest for emerging online dominance, media companies took to inflating inventory any way they could. All that mattered was topping out in the Nielsen data each month. And when fair means weren’t enough, other opportunities presented themselves.

The foulest of common mispractice is auto-refresh. Here, publishers artificially generated page inventory by refreshing the page every few minutes with a piece of code. The excuse given, it is required to refresh the news content, is nonsense of course. Pages can be refreshed without the need to republish the advertisements. The issue is that most of the advertisements can never be seen by human eyes because of the way modern browsers work. Auto-refresh is banned under the audit rules in Australia, and in the US and the UK, but that hasn’t stopped the biggest publishers locally — News Limited, Fairfax, and NineMSN from continuing with the practice. Without auto-refresh, their inventory would more than half.

Back to the curse, the problem with inventory levels trending towards infinity is marketing budgets are finite. Now, when you take any finite number and divide it by a number trending towards infinity you end up with an outcome that trends towards zero — and that is exactly what has happened to yield. Pricing, along with scarcity, collapsed. This is the curse within the curve.

Also, it fed a vicious cycle. As prices collapsed, ever-more inventory was required to fill the revenue bucket. Publishing companies, which for years prided themselves on building quality environments and valuable audiences through the exercise of news judgment, abandoned the core values that made them successful in their addictive pursuit of scale.

If you have ever questioned why so many news websites these days are little more than vehicles for celebrity and prurience, and why online brands are so in conflict with their print antecedents, there’s your answer.

The law of too good to be true

That entire inventory needed managing and selling, and the scale cost of adding ever-more salespeople opened the door to third-party advertising networks. These companies arrived on the scene during dotcom 1.0 with the seductive implication they would unload all that spare capacity at incremental rates, allowing the publishers to focus on building value (yield, in other words) amongst their core advertiser set. ‘Let us sell the leftover bits — we’ll send you the cheque, minus our commission of course’.

Agreeing to this bargain was a profoundly damaging error of judgment that even cursory analysis would have led them to avoid. And yet, almost everybody made it — it’s the madness of crowds. What the networks were really offering was to intermediate between the publisher and the client, and to sell the same set of eyeballs to the same advertisers on the same page at the same moment in time as the publisher, but at a fraction of the cost.

Advertisers, like all human agents, are rational. They simply stopped buying from the publishers and started buying from the networks, always at distressed rates. Furthermore, sales lead times contracted from months to weeks to days. Advertisers only had to wait until month-end to buy inventory and get the best deals, confident in the knowledge that they would never miss out because of the huge overhang in page inventory supply.

Since the emergence of the networks, online advertising yields have dropped from hundreds of dollars per thousand to cents on the dollar in Australia across general news websites. Tellingly, yields remained stronger for longer in niche sectors such as finance and technology where publishers ignore the false economy of auto refresh, or the lazy promises of networks.

The law of fool me twice

It may seem inconceivable that intelligent media managers could make such appalling errors of commercial judgment — but they actually made the same mistake, twice. Not only did they allow the networks to farm space, they invited the most rapacious competitor in the world to the party. Google gleefully offered publishers the opportunity to run Google linage adds on their websites. Again, the pitch was incremental revenue for the publisher at almost no cost. Just a few lines of extra code on the page, a few centimetres of extra space on the website and Google would send through a cheque every month.

Google, like the networks, was allowed to compete with the publishers on their own websites. Once again, like the networks, Google was selling the same eyeballs to the same advertisers on the same page, at the same moment in time, but at much lower prices. Except, Google applied search and targeting algorithms – and an auction based sales model – to its creative and this meant its advertisements were often more relevant and effective than those of the publishers. So not only was it cheaper, it garnered better results. Buyers made out like bandits while publishers piled irrationality upon irrationality. The madness continues to this day.

At the same time as online display prices were collapsing, the print revenue base was disintegrating. Sure, dollars where migrating online, but at a fraction of the value. By providing news for free online, newspaper publishers sent a very clear pricing signal to their customers to abandon print where the majority of profits were generated. Readers, like advertisers, behaved rationally.

A big problem was that media companies too often treated their print and online outlets as separate ideas, when in fact it was all the same bottom line to a shareholder. The industry’s leaders were so enthralled with the irresistible lure of scale online, that nobody bothered to do the basic analysis about whether that scale could be parlayed into profits.

The law of vicious cycles, revisited

Where real profits were unavailable, they could always be manufactured to keep the screen jockeys downtown in bonuses. The markets started paying much stronger multiples for online earnings than on print earnings, and for once the publishers followed the lead of their customers and behaved rationally in response to this pricing signal. They dumped costs into print and reclassified print revenues into online to create the illusion of success and to hold up their all-important price-earnings ratios.

It was fraud, pure and simple, but everyone was in on the grift.

Since the print operation subsidised the online operation through the provision of repurposed editorial content, the real bottom-line should have always been the net of the two.

To protect what little profitability remained in the business, the newspaper owners started cutting editorial staff both in print and by extension, editorial content online. As the situation worsened over time, short-term tactical responses such as cost-cutting became a long-term strategy. Editorial — the product engine of the media machine atrophied, and differentiation between media outlets crumbled, accelerating commoditisation.

The newspaper owners, having devastated their incumbent businesses in print through cost-cutting, poisoned the well for their new businesses online through catastrophic yield degradation, while at the same time enriching parasitic new entrants such as the ad networks and Google.

Thus they arrived at their Alamo moment.

Up go the paywalls

There is only one reason for a paywall — to improve the profitability of the business. If a paywall will make you more profitable as a business, then it’s successful. If it doesn’t, then it fails. Everything else is noise. The problem is that the time to implement paywalls was 15 years earlier when newspapers were still worth paying for. The time to invest in editorial was also 15 years earlier when they should have been erecting paywalls.

There is a reason why the first paywalls appeared in the financial press — the Wall Street Journal (WSJ), the Financial Times (FT) and The Australian Financial Review (AFR). This content is valuable. It makes people money and it saves people money. And compared to just about any other product you care to imagine in the world of making money and saving money, it is relatively cheap. Each of these paywalls was successful in its own way, and each open to criticism. It all depends on your perspective.

The FT and the WSJ almost broke their businesses by forgetting the basic mathematics of average revenue per user (APRU) — the bedrock on which economics of news publishing is built. They didn’t charge a high enough subscription rate online to cover the advertising shortfall and their customers charged through the ARPU gap migrating to the Web at the expense of the vastly more profitable print channel. 

The AFR, which charged the same for an online subscription as for a print and online bundle, put ARPU at the centre of its strategy but compromised on rapid audience growth. The AFR at least could argue, as its former CEO did, that in the 15 years previous,  it maintained its profitability while its peers went into loss.

For the finance titles, there is also the added benefit that their audiences are difficult to reach and even harder to aggregate. This, married to the inventory scarcity created by a paywall, fueled higher advertising yields. Indeed the finance websites were typically getting 10 to 100 times the yield of general news websites. But there is of course a limit to the yield strategy and it’s this: You quickly run out of advertisers willing to wear the yield.

If you want to broaden your appeal beyond this core group of advertisers, you need a wider reach, less scarcity and lower yields. But it also means dropping the rates for your existing clients. You can’t get away with charging two different rates for the same product as publishers had already discovered in the world of advertising. And to create a broader reach, you need to relax the paywall, which of course impacts print circulation yields as more customers follow the rational path of free content. Every dollar of sacrificed circulation revenue needs to be offset with hundreds or thousands of extra page impressions, just to get square.

Overseas, paywalls began popping up everywhere. Locally, The Australian, despite a two-year jihad against the AFR’s paywall,  erected its own in response to the abject failure of its online advertising model. It is a general news website, unlike The Fin (AFR), although it invested significantly in business journalism in the prior years. But its initial paywall was extremely permeable, and less engaged readers simply used the Google search bypass to avoid any cost.

Once again those who are willing to pay were given a clear price signal to abandon print for online. In the case of The Australian, this may have been a better bet anyway for News Limited since the Monday to Friday edition reportedly lost $30M a year.  Murdoch may simply have decided that a smaller and slightly unprofitable website is more desirable than a very large and very unprofitable newspaper.

News Limited also announced plans to lock its other titles up behind paywalls. Given the demographic of its tabloids, it is fair to assume that the rationale for this change was to protect its profitable metropolitan print channels, rather than any desire to build a robust online presence. In the absence of viable online advertising models, it might actually be a very smart move. After all, there is no law that says you have to sell your product at a loss or give it away to people who have made it very clear they will never pay.

Maybe it’s all too late

The debate for the first 15 years of internet news publishing revolved around media websites, but the game is rapidly moving on.

Social media websites, and in particular Facebook, which can account for up to 25 per cent of all page impressions in the US in any given week, have displaced news outlets in the battle for desktop mind share. As Facebook and its peers learn and grow, who’s to say it won’t prove to be more responsive to environments for advertising. In other words, maybe free news websites will never really scale up as revenue engines again. Maybe their moment has passed. And now with the emergence of smartphones and tablets, consumers have found new ways to occupy their increasingly scarce free time.

Returning to the law of unintended consequences

When the iPad first arrived, media outlets grabbed at the straw. But, once again, they failed to pay due heed to the law of ‘unintended consequences’. The problem is not that you have to give 30 per cent of your money to Apple, or employ a small battery of technical managers just to navigate Apple’s Byzantine licensing regimes. The real problem is, if you’re the Daily Telegraph, you’re not just competing with other news outlets on the device, you’re competing with hundreds of thousands of other iPad apps. Your real enemy is Angry Birds.

The unpalatable truth is that audience scalability online doesn’t require journalism anymore. Social media websites built vast scalability rapidly, and are now increasingly profitable, without journalism. Yes, journalism built scalability on the Web, but without profitability, because journalism no longer mattered to the economics of publishing to the Web. 

That’s the other thing everybody hates to acknowledge. 

This doesn’t mean journalism doesn’t matter or isn’t important, or worthy. In a world where anybody can say anything instantly to everybody without regard to facts, calm and dispassionate reporting and intelligent analysis are more important than ever. Rather, we need to acknowledge a simple truth. 

Shareholders shouldn’t have to subsidise journalism at the risk of their wealth. Neither should taxpayers.

There is instead, a much harder path to tread. In the end, a product is worth what someone will pay for it. Find enough customers to pay and you have a viable business. As former AFR CEO, Michael Gill, recently wrote, “Anything else is tosh.”

This article first appeared on in November 2011. They didn’t pay for it and I didn’t ask them to since it was a labor of love. Now thanks to the wonders of residual copyright and the delights of the WaybackWhenMachine we republish it here . For what it’s worth the people running the major media companies have learned nothing in the decade since. 

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