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How the coming newspaper industry collapse
will reinvigorate journalism, part 2

By Paul Gillin

Outsourcing everything
None of these sites is making piles of money yet, but that’s only a matter of time. Michael Arrington is pulling in $60,000 a month writing TechCrunch. BoingBoing.net is on target to gross more than $1 million. Fark.com founder Drew Curtis says he’s on track to soon log sales of $600,000 to $800,000 per month.

Companies like John Battelle’s Federated Media and Nick Denton’s Gawker Media are figuring out the business side. And it’s not like these blogs have to make a lot of money to keep going. Adrants.com generates over $100,000 a year in advertising and that’s plenty to keep Steve Hall plugging away at his one-man operation. He’s got almost no costs and he’s getting paid to do something he's passionate about.

How do these keep their overhead so low? They outsource everything.

  • Editorial content is outsourced to an army of individual enthusiasts and bloggers who find interesting information on the Web and feed it to the site operators. Editorial expenses, which account for about a third of the operating costs of a daily newspaper, are practically zero.
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  • Circulation is outsourced to Google and links from other sites. In fact, there really is no concept of circulation in these new media because there’s no way to “own” the reader. This is a very different model from conventional publishing, which relies heavily on subscriber lists to validate advertising rates. The Web approach is much less controllable but also much cheaper.
  •  
  • Production is outsourced to Typepad, Blogger or any number of other hosted services at minimal cost. There’s no need for designers because everything is templated. Some sites practically run themselves. Bandwidth costs can be steep for popular properties, but that’s true for newspaper Web sites as well.
  •  
  • Sales is outsourced to Google Adwords, Federated Media or other sales agents. This may change in time, but for now, most Web 2.0 companies can’t be bothered with a captive sales force.

Marketing and promotion aren’t even done. In the new Web, your marketing is your content. People either link to you or they don’t. This creates a lot of pressure on the site operators to be fresh and innovative, but that’s not a bad thing.

This model is so compelling that it will almost completely upend the existing mainstream media model.

Newspaper death spiral
New competition from Web 2.0 companies along with continuing demographic shifts are about to send metropolitan daily newspapers into a spiral of decline from which few will emerge intact. Why now? People have been wrongly forecasting the death of newspapers for years. Why is this time different?
The first decade of the consumer Internet was very different from that which we're now entering. Web 1.0 was the display Internet. It was a decade when organizations put their brochures online and users got comfortable with the idea of a global network. Search tools were rudimentary, Web content was difficult to create and interactivity was limited. The brands that dominated the pre-Web days were able to extend their brands online. While a few important new sources of information did emerge, media giants like CNN, The New York Times, The Washington Post and the Associated Press continued to dominate online media. There was little threat to their underlying businesses.

That's all changed. It's now easy for individuals to create Web content. Computing power, storage and bandwidth costs are declining rapidly. The open-source software movement has dropped the price of software to near zero. Search engines have become a more effective marketing channel than e-mail. Google AdSense and affiliate marketing networks can generate income for Web site operators, even at low traffic levels. Today, a small group of people with a few thousand dollars and a good idea can build a self-sustaining Web franchise in a matter of months. You couldn't have done that five years ago.

Layered on top of that is a demographic shift that is about to move a large new group of Web-savvy consumers into the economic mainstream. This new generation simply doesn't have the loyalty to established media that their parents do. And they don't read newspapers at all.

The spiral begins

So here's where the spiral begins. Newspapers' profitable classified advertising business will be all but gone in 10 years, a victim of the vastly superior results and economics of search-driven online advertising. Display advertising will be under intense pressure from alternative media, including not just Web sites but an emerging class of small print publications and supermarket advertisers that serve local audiences (print publishing is getting cheaper, too). The department stores and cell phone companies that sustain newspapers' display advertising business will apply intense pressure on papers to bring down their prices

Newspapers will be forced to lay off staff in order to maintain margins. Cuts in services will lead to cuts in editorial coverage, making papers less relevant to subscribers. As circulation declines, advertising rates will have to come down to remain competitive. This will put more pressure on margins, leading to more layoffs, more cost cuts, more circulation declines and more pressure on margins. Once this spiral begins, it will accelerate with breathtaking speed. And it has already begun.

Experience has shown us again and again that business models based on vertically integrated, proprietary products quickly collapse when confronted with competition that is open, standardized and much less expensive. It's happened in consumer electronics, telecommunications, computers and household appliances and there's no reason it won't happen in media. Advertisers will rebel at having to pay newspapers' high fixed costs when they can get the same audience through other channels at a fraction of the cost.

History has also demonstrated that business models based on scarcity collapse in the face of abundance. The whole newspaper model is predicated on the idea that timely, local information is hard to come by. Newspapers built very expensive infrastructures to deliver that information in the days of print. But information is now cheap and abundant. As the body of information grows and people become more comfortable with the tools to access it, the newspaper value proposition withers away.

The sole advantage that newspapers still have is their reach in local markets. Small businesses that sell aluminum siding, flowers and cleaning services have few alternatives to newspapers for their ad dollars. But that, too, is changing. The declining cost of electronic composition and offset printing is leading to a resurgence of local newspapers, and Web 2.0 technology is making it cheap for citizens to launch their own community Web sites. Search engine makers are figuring out how to provide value in local search. These forces are converging to attack newspapers' last refuge.

In 10 years, probably a third of metropolitan daily print newspapers will be gone. Some will go entirely online, while others will merge with regional competitors. What will replace them? And what will the new journalism look like?


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