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The Great Unbundling and Collapse of Local Newspapers

Damn it, stay on the page!Part 2 of 5:

This post builds on my summary of a recent report from the FCC entitled “The Information Needs of Communities: The Changing Media Landscape in a Broadband Age.” In this post I’m going to drill a little deeper on something that it mentions only briefly – the “unbundling” of the local newspaper business model.

This business model unbundling occurred over the course of approximately five years in a series of waves that didn’t actually reveal their true impact until after the year 2000. For it was in that year that newspaper revenues peaked at $48.6 billion. In the decade that followed, newspaper revenues collapsed to less than half that total, so that by 2010, its revenues were less than $23 billion.

If you detect a certain callousness in my tone, it is in no way directed at any of the tens of thousands of hardworking employees of local newspapers who lost their jobs in this wrenching industry collapse. My father and uncle ran a local paper in my home town when I was growing up and I have nothing but the utmost respect for journalists, especially those who work the tough beat of local news.

No, my critique here is aimed squarely at the profits-over-everything, extractive behavior of the newspaper chain management and their owners. There’s no question that the Internet dealt the final deathblow to the local newspaper industry we once knew. But technology was not the only culprit: greed also had much to do with it.

Trapped in a Web

The web’s unbundling of the local newspaper business model didn’t occur all at once, but rather as a series of successive smaller tears. Given my father’s work building a new local paper while I was growing up, it’s strange that I personally played some role in some of the web’s early waves of destruction. I didn’t fully understand the implications of what I was doing at the time, but looking back, it’s clear to me now that I played a part in the great unbundling of local news.

Before the web, local newspapers derived a large portion of their revenues from advertising by local automotive dealerships. In 1994, just a few years out of business school, I started an online car-buying service at Microsoft called CarPoint. The service quickly turned into the biggest online automotive buying service and was actually one of the world’s first large-scale e-commerce websites. At its peak, CarPoint was serving some seven million customers every month. The service still exists as MSN Autos, though after numerous iterations of Microsoft Internet strategies, it is a mere shadow of its former self.

Once we knew we had a hit on our hands, our CarPoint team tried, on several occasions, to partner with the large newspaper chains. But cultural differences, distrust of Microsoft, and the papers’ lack of understanding over just how much the Internet was changing their business, blocked any real chance of partnerships. Over time, the volume of automotive sales running through CarPoint (some $600 million – every month), when added to that of our competitors, began to seriously undermine the local papers’ value proposition to car dealers. Eventually, it became harder and harder for these dealers to justify big ad expenditures in their local paper on top of what they were spending with the online car buying services like us – especially when we could show them exactly how their payments to us translated into actual sales, something that was an ongoing problem for the papers.

Half the money I spend on advertising is wasted; the trouble is I don’t know which half.
– John Wanamaker (attributed)

Microsoft made several large bets in vertical markets like CarPoint in the 1990s. Investor was an investing website that, like CarPoint was extremely successful but was also eventually scaled back into a category within MSN. Expedia was another Microsoft vertical site that was so successful, it was spun out of Microsoft and eventually sold to Barry Diller. Microsoft invested heavily in a real estate service called Home Advisor, which though quite excellent, never reached the scale of these other services for reasons I’ll touch on below.

These online vertical markets were the first tugs that eventually unbundled the business model of the local newspaper. They succeeded precisely because the economic engines that drove these services were not actually local. CarPoint, Investor and Expedia each sucked varying amounts of advertising dollars out of the local paper, but all were able to draw on previously aggregated, centralized data on cars, stocks and flights to power their services. Expedia built a powerful booking engine that drew from an existing database of airline flights. CarPoint standardized automotive specifications across manufacturers and built backend connections to automotive dealerships through a partnership with automotive IT provider, Reynolds & Reynolds. Investor developed an extremely useful online portfolio manager for aggregating existing stock market data. None of these efforts entailed having to get Microsoft’s hands dirty, getting truly local in its offerings.

Platforms for Crowdsourcing Local Information

When Microsoft did try its hand at going really local, it got badly burned. Though I wasn’t personally involved, I was in the same division as its ill-fated, direct run at the newspaper business through a service called Sidewalk. The service sought to directly replicate much of the content and services of the newspapers, but in an online environment. It staffed editorial teams across several major US markets – and it flopped spectacularly after several years of heavy investment by the company. Microsoft eventually sold the service to CitySearch.

Like local news, the market for real estate is inherently fragmented. In real estate, Microsoft tried to collaborate with local Multiple Listings Services for home listings, but different cities used different systems, making the going slow and painful. These difficulties paled in comparison, however, to the company’s challenges in running local editorial services and building local ad sales teams.

In hindsight, the only way Microsoft could have profitably served these markets would have been to re-invent, rather than replicate, the existing business model of the local newspapers — and we did not. Right around this same time, however, the first signs of a re-invented model for decentralized markets were just starting to emerge in other places.

eBay and Craigslist were both early pioneers of what, at the time, we were calling “self-service” – but which now go by the name “crowd-sourcing.” Both services essentially re-invented the newspapers’ very lucrative classified advertising business – with a devastating impact on their financials. As newspaper revenues crested in 2000, classifieds accounted for 40% of newspapers’ total print advertising revenues, but by 2010 classifieds had fallen from $19.6 billion to $5.6 billion – just 25% of total print ad revenues. eBay disrupted the classifieds by radically expanding the market of buyers and sellers from a local to a national, and even international, scale. Craigslist’s social enterprise-inspired approach to free classifieds listings disrupted things even more for local papers, essentially dropping the value of classifieds to zero.

Fast-forward nine years to 2004, as Yelp applies the crowd-sourcing model to build reviews of local restaurants and businesses, eroding the papers’ display advertising (and simultaneously decimating the local business of Yellow Page directories). As the market for smart phones took off with the iPhone in 2007, more and more services like Urban Spoon and foursquare emerged, further eroding the value of local newspaper ads.

Though different in many ways, what each of these companies understood was that there was tremendous value to be created by building platforms that enabled lots of ordinary people in local markets to serve themselves and others. Customers could easily serve themselves in uploading listings of stuff they wanted to sell on eBay and Craigslist. They could contribute reviews of restaurants on Yelp and movies on Yahoo, both of which were once the exclusive domain of professional staff writers at newspapers. Of course, not all of these amateur reviews were worth reading, so it was important for these crowdsourcing platforms to include filters that enabled us to tune in the good reviewers and tune out the bad ones – just as eBay’s reputation feedback systems helped us focus our energy on well-behaved buyers and sellers. Another essential aspect of these platforms was that they helped aggregate marketplaces. Readers needed reviewers, reviewers needed readers. Buyers needed sellers, sellers needed buyers. And when that happened, these web-based businesses blew their newspaper counterparts out of the water with their focus and technological sophistication.

The Great Unbundling

Prior to the web, the local newspaper was essentially a bundle of different editorial services, wrapped together each morning in ways that made readers read and advertisers buy ads. Here’s how the FCC describes this model in its report:

The great unbundling: During the news media’s most profitable days, in many towns, there was only one newspaper, leaving consumers with limited choice. And, though we may not have thought of it this way, purchasing a paper meant having to buy a bundle of goods, even readers only wanted certain parts. A cross-subsidy system had developed, in which a consumer who bought the paper for the box scores was helping to pay the salary of the city hall reporter.

The web essentially unbundled this local newspaper business model with a one-two punch of vertical marketplaces for easily aggregated data like car buying, and crowd-sourcing platforms to get at the fragmented, more difficult to aggregate information in local markets. In essence, what the Internet did was enable web-based businesses to cherry-pick the profitable pieces out of the local newspaper’s business model. When that happened, the flow of money for reporter salaries came under increased pressure and newsrooms across the US were slowly eviscerated.

I now think back on the work I did on CarPoint, trying to recall how cognizant I actually was of the impact my work would have on the local papers. I remember being frustrated at the management of the various newspaper chains with whom we were negotiating; frustrated that they could not see the significance of what we were building, and the effect these services would have on the market. So I’m sure that, at least at some level, I did understand what was likely to happen to these papers, but what I could not foresee, what I could not yet empathize with, was the impact our work would have on tens of thousands of local journalists and the communities that benefited from their reporting.

There is no stopping technological progress, but there are ways of harnessing it to minimize negative outcomes and maximize positive ones.

“Harvesting” the Papers

One of the things I most appreciate about the FCC’s report is its analysis of local monopolies and the wave of acquisitions in the eighties and nineties. The FCC report points out quite clearly something that many of us now fail to realize: that with all this consolidation, the newspaper business was extremely profitable at one point in time. So profitable, in fact, that it attracted a great deal of Wall Street investment from owners who cared quite a bit less about journalistic integrity than ensuring a hefty return on investment.

There’s a revealing quote on page thirty-eight of the report from John Carroll, former editor of the Lexington Herald-Leader, the Baltimore Sun, and the Los Angeles Times. Carroll talks about how the owners of the new news chains were sacrificing the long-term financial health of their newspapers for short-term gain through a process known as harvesting:

“Symptoms of harvest are staring us in the face. They include a low rate of investment, fewer employees, fewer readers, falling stock prices and, most especially, high profit margins.”

Might the local newspapers have fared better at adapting to the convulsions of change unleashed by the web had they not already become so depleted by this kind of financial harvesting by Wall Street? There’s no way of telling for sure at this point, but the fact remains that many of the effects of this profit extraction – such as the slow but steady decline in newspaper readership - were already well under way by 1986 – well before the rise of the web.

The lure of huge profits from the local news market is fading rapidly. The business model has been unbundled and no amount of wishful thinking in the world will put that genie back into the bottle. The question that now remains is whether, in losing its lucrative profits, journalism is now free to get on with the real business of reporting the news. Could there be another path to a vibrant local news business? The question is far from academic. As a society, we depend on journalism as fundamental source of our freedom and liberty.

This will be the focus of the next post in this series, and it’s something the FCC hints provocatively at in its report:

“Perhaps we have not gone from an era when newspapers could be profitable to one in which they cannot, but rather from an era when newspapers could be wildly profitable to one in which they can be merely moderately profitable or break even. It is an important distinction, because it means that certain public policy remedies—for instance, making it easier for newspapers to reestablish themselves as nonprofit entities—might be more fruitful than in the past. Or it may mean that wealthy individuals—entrepreneurs and philanthropists—will view newspaper ownership in a different light than most corporate leaders have: not as a profit making venture, but as a way to provide an important civic benefit that will help to sustain democracy.”


Up next… (July 14) Part 3 of 5 - Social Enterprise and the Renaissance of Local News

Part 1:   The Information Needs of Communities
Part 2:   The Great Unbundling and Collapse of Local Newspapers
Part 3:   Social Enterprise and the Renaissance of Local News (July 14)
Part 4:   Social Networks and the Renaissance of Local News (July 21)
Part 5:   Mobile Computing and the Renaissance of Local News (July  28)

Image modified from original by Puzzler4879.