European Media Management Association Summer School


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Ricardo Leiva presentation at the European Media Management Association Summer School 2010

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European Media Management Association Summer School

  1. 1. The Value of Economic Information: Profitable Business Models to Sell Online News Ricardo Leiva University of Navarra Pamplona, Spain
  2. 2. 1. The crisis of the traditional press by the internet 2. Emerging technologies vs. sustaining technologies 3. Two successful brands with profitable business models: The Wall Street Journal and The Financial Times 4. The economic nature of information 5. The experience of a Spanish reader
  3. 3. <ul><li>The traditional business model of newspapers, based on subscriptions and especially on advertising, works badly today. </li></ul><ul><li>Between 70 and 80% of newspapers’ incomes came from these two sources (Mings & White, 2000). </li></ul>
  4. 4. <ul><li>The press was one the most successful industries in the developed countries in the second half of the 20th century (Picard, 2003). </li></ul><ul><li>Editors of newspapers: profit margins of 12% on average. Editors of magazines: profits margins of 10% on average. They were ‘cash cows’ (Picard, 2003). </li></ul>
  5. 5. <ul><li>Internet accelerated the decline of an industry that had reached its full maturity. </li></ul><ul><li>Impact of global recession on the newspapers’ market will be long and significant (PriceWaterhouseCoopers, 2009). </li></ul><ul><li>Ad expenditures in American newspapers dropped 29% between 2000 and 2008. Estimate 2009: -20 or -30% (NAA, 2010). </li></ul>
  6. 6. <ul><li>Classified ads have descended to a half in 9 years in US: 19.808 billions in 2000 vs. 9.975 billions in 2008 (Jones, 2009). Estimate 2009: 6 billions (-70%). </li></ul><ul><li>Classified ads used to be the third or fourth of newspapers’ incomes. In some cases, they were 60% of profits (Gilbert & Bower, 2002). </li></ul>
  7. 8. <ul><li>‘ Chaos scenario’: new media are not ready for big advertisers and these are not ready for new media. Media companies shrink and money disappears (Garfield, 2005). </li></ul><ul><li>Internet produced what Porter called a ‘strategic uncertainty’: no right strategy is clear, poor information and no one knows who all the competitors are (1995). </li></ul>
  8. 9. <ul><li>No ‘lifeboat’ at all (Keller, 2009). Online ads only are 9% of print ads and they are also dropping (NAA, 2010). </li></ul><ul><li>10 American newspapers closed per month by the crisis and 23.000 journalists lost their jobs (Ramírez, 2009). </li></ul><ul><li>1940: 1,878 newspapers in US. Estimate 2009: -1,300. </li></ul>
  9. 11. <ul><li>Newspapers began to look for alternative business models. </li></ul><ul><li>Executives want to charge for free online news (Associated Press Managing Editors, 2009). </li></ul><ul><li>Willingness to pay for online news is small: between 5 or 20% (Borrell & Associates, 2001; Chyi, 2005; EuropeMedia, 2002; New Media Age; 2009; Pew Project, 2010). </li></ul><ul><li>Newspapers have been rocked by an emerging technology. </li></ul>
  10. 12. <ul><li>Emerging, or discontinuous, or disruptive technologies have the potential to create a new industry or a new market (Day & Schoemaker, 2004). </li></ul><ul><li>They are a ‘different game’ from sustaining technologies that are innovations that make a product or service better in a way that it is valued by customers of mainstream market (Christensen & Overdorf, 2000). </li></ul><ul><li>Sustaining technologies or innovations are developed and introduced by established industry leaders to gain an edge over its competitors (Christensen & Overdorf, 2000). </li></ul>
  11. 13. <ul><li>They almost never introduce discontinuous innovations, because of switching costs. </li></ul><ul><li>One of the most consistent patterns in business is the failure of leading companies to stay at the top of their industries when technologies or markets change (Bower & Christensen, 1995) </li></ul><ul><li>Companies have to deal with emerging technologies in an environment of high uncertainty and complexity, rapid change and shifting competencies (Day & Schoemaker, 2004). </li></ul>
  12. 14. <ul><li>They face emerging technologies with routines, skills, and processes for sustaining technologies. </li></ul><ul><li>Low capacity of adaptation of many companies to act quickly, according with the rules of a new technological paradigm (Day & Schoemaker, 2004). </li></ul><ul><li>Big mistake: to listen to customers (Bower & Christensen, 1995). </li></ul><ul><li>‘ Innovator’s dilemma’: “Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake” (Christensen, 1997). </li></ul>
  13. 15. <ul><li>Good management is probably the most powerful reason some companies fail to stay atop of their industries. </li></ul><ul><li>To listen to customers, to invest in new technologies that would provide them more and better products of the sort they want, and to allocate investment capital to innovations that promise the best returns, may also lead to lose the leadership (Christensen, 1997). </li></ul><ul><li>Theory of resource dependence: managers think they control the flow of resources in the firms. The reality is probably the opposite: customers and investors make that decision (Christensen, 1997). </li></ul>
  14. 16. <ul><li>Good companies kill ideas that customers don’t want. They don’t invest in disruptive technologies because their customers don’t want them and they promise lower-margins. When customers also want the emerging technology it’s too late. </li></ul><ul><li>Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use (Christensen, 1997). </li></ul><ul><li>New customers of MP3’s sacrificed sound quality for convenience (Anthony & Gilbert, 2006). </li></ul>
  15. 17. <ul><li>One of the biggest mistakes of leading companies is to force the disruptive technology into the existing business model and product concept: Eastman Kodak case (Anthony & Gilbert, 2006). </li></ul><ul><li>When companies face an emerging technology may act proactively, using the threat as a catalyst of improvements, or they may suffer of inertia (Gilbert, 2005). </li></ul><ul><li>Companies often react proactively when the stress organizational is moderate, but react with inertia when the stress is extreme (Gilbert, 2005). </li></ul>
  16. 18. <ul><li>Inflexibility of resources and inflexibility of routines: Being flexible with resources without changing its routines is a big mistake (Gilbert, 2005). </li></ul><ul><li>Newspapers multiplied by four its investments in online projects, but they didn’t change its practices. Results were poor (Gilbert, 2005). </li></ul><ul><li>‘ Active inertia’: to invest aggressively without changing routines (Gilbert, 2005). </li></ul>
  17. 19. <ul><li>Rigidity of routines of newspapers: senior managers centralized decisions, didn’t experiment, and wanted to protect the print product (Gilbert, 2005). </li></ul><ul><li>Online newspapers: “unsystematic”; little research to develop sites before they were launched (Adams, 2008). </li></ul><ul><li>Aimless and erratic, low-levels of research & resource commitment, involvement by the editorial department (Saksena & Hollifield, 2002). </li></ul>
  18. 20. <ul><li>First step toward dealing with emerging technologies is to recognize the different game: “Understanding a problem is the most crucial step in solving it.” (Christensen & Overdorf, 2000). </li></ul><ul><li>Companies should have two separated teams (Gilbert, 2005). </li></ul><ul><li>Companies need to be ambidextrous: to run traditional business with right hand and emerging technology with left (Day & Schoemaker, 2004). </li></ul>
  19. 21. <ul><li>Managers need freedom to realize the technology's full potential. They must be willing to kill their own business units (Bower, Christensen, 1995). </li></ul><ul><li>Companies shouldn’t replicate their business models: they need new clients in new markets (Gilbert, 2005). </li></ul><ul><li>Companies shouldn’t increase their resources with conservative mind-frames (Gilbert, 2005). </li></ul>
  20. 22. <ul><li>The Wall Street Journal and The Financial Times have developed two profitable business models to sell their online news: freemium and metered. </li></ul><ul><li>They are the most trusted newspapers for the American and British executives (PSNA, 2000; y Global Capital Markets, 2009). </li></ul>
  21. 23. <ul><li>54% of readers of WSJ are top managers; almost 90% has a university degree or postgraduate. Their incomes exceed 210.000 and they have a personal net worth of almost 2.5 millions on average (The Wall Street Journal, 2009). </li></ul><ul><li>Audience of the FT: incomes exceed 250.000 and personal net worth closes to 1 million on average (Eriksson, 2009). </li></ul>
  22. 24. <ul><li>Freemium business model (free and premium content): Online adaptation of the ‘versioning strategy’. </li></ul><ul><li>One free version for 75% of news. One paid version for 100% of news: 103 dollars per year. </li></ul><ul><li>WSJ Web site continues visible and captures ads. It doesn’t canibalize the print product. </li></ul>
  23. 25. <ul><li>Content behind pay-wall: exclusive and specific financial and economic information to earn and save money. Valuable data for brokers, investors, executives and businessmen. </li></ul><ul><li>Breaking news, general news and public information is free. </li></ul><ul><li>WSJ is the most successful newspaper selling online news: 1.100.000 paid subscribers and 33 millions visit its Web site (Dow Jones, 2009). </li></ul>
  24. 26. <ul><li>Circulation of print product continues to growth: 13% in 4 years (Dow Jones, 2009). </li></ul><ul><li>The Journal is the most read newspaper in America (Dow Jones, 2009). </li></ul><ul><li>Metered model is popular in computing and telecommunications industries (Rappa, 2004). </li></ul><ul><li>The provider measures the consumption and charges a variable price. </li></ul>
  25. 27. <ul><li>Metered subscription: flat fee for fixed number of minutes and variable fee for additional time and international (mobile companies). </li></ul><ul><li>Financial Times offers five types of metered online subscription: </li></ul><ul><ul><li>Free content without registration: 3 articles per month and 3 years old archive. </li></ul></ul><ul><ul><li>Free content with registration: 10 articles per month and 5 years old archive. </li></ul></ul>
  26. 28. <ul><ul><li>Standard subscription: all articles (less Lex) and 5 years old archive by €3.49 per week </li></ul></ul><ul><ul><li>Premium subscription: all the articles (more Lex), 5 years old archive and news in PDA by €6.3 per week. </li></ul></ul><ul><ul><li>Online-print subscription: Print and online editions by €13.71 per week. </li></ul></ul><ul><ul><li>110,000 online subscribers and 435,000 print subscribers. Online subscribers increased 9% in 2008. The FT has doubled the price. </li></ul></ul>
  27. 29. <ul><ul><li>FT publishes 5 thousands news per month. 60 articles per month about Spain. 10 free articles per month are insignificant. </li></ul></ul><ul><ul><li>If you want to read the rest you have to pay. Why should you? </li></ul></ul>
  28. 30. <ul><ul><li>Should information be free or charged? </li></ul></ul><ul><ul><li>Samuelson and Stiglitz considered information a public good (but an impure one). Arrow and Lamberton considered it an appropriable commodity (but a very particular one). </li></ul></ul><ul><ul><li>Samuelson said that broadcasting might be considered a public good. TV programs could be limited to some particular subscribers, but they were public goods anyway: “Being able to limit a public good’s consumption does not make it a true-blue private good” (1958: 335). </li></ul></ul>
  29. 31. <ul><ul><li>To exclude people from knowledge or information by the use of devices or prices was costly and inefficient, but in some cases that could be tolerable: “Depending upon institutions and cases” (Samuelson, 1967: 203). </li></ul></ul><ul><ul><li>Stigler: “Information is a valuable resource”, “knowledge is power”, “price dispersion is a manifestation—and, indeed, it is the measure—of ignorance in the market”, and “it would be wholly uneconomic entirely to eliminate all its effects (ignorance in market)” (1961: 213). </li></ul></ul>
  30. 32. <ul><ul><li>Arrow: Information is a commodity desired and acquired like others, but only to a limited extent: ‘Information or signals have economic value and therefore are worth acquiring and transmitting even at some cost” (1973). </li></ul></ul><ul><ul><li>Information isn’t a full commodity for two reasons: a) the cost of information depends only on the item, not its use; b) it is very difficult to appropriate (Stigler, 1973). </li></ul></ul><ul><ul><li>With suitable legal actions, information may be an appropriable commodity (Stigler, 1962). </li></ul></ul>
  31. 33. <ul><ul><li>Property rights support inventive activity, but they lead to an underutilization of information: Whatever the price, the demand for information is suboptimal (Stigler, 1962). </li></ul></ul><ul><ul><li>Stiglitz: “Information is a public good and people shouldn’t be excluded. As knowledge can be appropriated, it is an impure public good (1999: 310). </li></ul></ul><ul><ul><li>Partial appropriability doesn’t affect the public good nature of knowledge. Knowledge should be free (Stiglitz, 1999). </li></ul></ul>
  32. 34. <ul><ul><li>Governments can subsidize the provision of knowledge or they can increase the degree of appropriability of knowledge with patents and copyright protection (Stiglitz, 1999). </li></ul></ul><ul><ul><li>Second approach: innovation generates a ‘gain in dynamic efficiency’ that balances ‘the static inefficiency’ (underutilization and underproduction of knowledge by the patent) (Stiglitz, 1999). </li></ul></ul><ul><ul><li>Enhancing intellectual property rights is preferable to government subsidization: risky innovations should be afforded by private sector (Stiglitz, 1999). </li></ul></ul>
  33. 35. <ul><ul><li>Decisions must be made “on a case-by-case approach”, not based on “a set of simply stated principles” (Stiglitz, 1999: 314). </li></ul></ul><ul><ul><li>Stiglitz proposes a change in the paradigm of economics: it is an error to consider the perfect-competition model, based on perfect information, as valid (2002). </li></ul></ul><ul><ul><li>News has instrumental, not intrinsic value. Instrumental value comes from things that facilitate action and achievement, including awareness, belonging, and understanding (Picard, 2009). </li></ul></ul>
  34. 36. <ul><ul><li>Online news are ‘inferior goods’. Print newspaper are normal (Chyi & Yang, 2009). </li></ul></ul><ul><ul><li>Online news are convenient, but “less satisfying, less likeable, and less enjoyable” than offline media (Chyi & Yang, 2009). </li></ul></ul><ul><ul><li>Compaine: Information could be considered a commodity, as cotton, paper or hamburgers, but it has particular characteristics: Typical commodities are tangibles, but information not. Commodities may be possessed exclusively, but information not (2000). </li></ul></ul>
  35. 37. <ul><ul><li>Information can be considered a public good, because there aren’t marginal costs associated with adding distribution. TV broadcast is an example: with sunk costs and the show is the air, there is no difference whether 1 household or 21 millions tune in (Compaine, 2000). </li></ul></ul><ul><ul><li>Information has characteristics of a commodity and of a public good: In print, the informational content is really the public good, and the physical product (paper and ink) is a private good (Compaine, 2000). </li></ul></ul>
  36. 38. <ul><ul><li>What about online news? “Information provided over the internet is a public good” (Compaine & Gomery, 2000) (p. 550). </li></ul></ul><ul><ul><li>Varian & Shapiro: “Information is costly to produce but cheap to reproduce” (1999: 3). Internet exacerbates this difference. </li></ul></ul><ul><ul><li>“ You must price your information goods according to consumer value, not according to your production cost” (Varian & Shapiro, 1999: 3) </li></ul></ul>
  37. 39. <ul><ul><li>Varian and Shapiro consider information as an ‘experience good’: Consumers must experience it to value it. </li></ul></ul><ul><ul><li>Information is an experience good every time it’s consumed (Varian & Shapiro, 1999). </li></ul></ul><ul><ul><li>Branding and reputation: we read WSJ today because was useful in the past (Varian & Shapiro, 1999). </li></ul></ul>
  38. 40. <ul><ul><li>If information is considered a commodity that adds value to consumers, it should be priced, according with Porter (2001). </li></ul></ul><ul><ul><li>Technological change improve or worsen the industry structure (Porter, 1998). </li></ul></ul><ul><ul><li>“ By ignoring strategy, many companies have undermined the structure of their industries, hastened competitive convergence, and reduced the likelihood that they or anyone else will gain a competitive advantage” (Porter, 2001: 72). </li></ul></ul>
  39. 41. <ul><ul><li>WSJ and FT between October 1 and December 31, 2008. </li></ul></ul><ul><ul><li>Spain’s GDP fell 0.2% (Q3 2008) and the unemployment rate rose to 11.3%, but Rodriguez Zapatero denied the crisis. </li></ul></ul>
  40. 42. <ul><ul><li>“ The most positive image of our country is based on economic news, especially when they refer to Spanish companies and businessmen. Their successful management, dynamism, and entrepreneurship provide a positive image of Spain as a modern and dynamic country. With a robust economic growth, Spain seems to be a country that has left a delayed position quickly and that overcame its European neighbours” (Noya, Rodríguez & Ruiz Jimenez, 2008: 21). </li></ul></ul>
  41. 43. <ul><ul><li>Permanent Observatory of Spain’s Image Abroad in the International Press (Q1 2008): foreign press interested in political campaign and general election, and some concern about a possible housing bubble. </li></ul></ul><ul><ul><li>“ Positive orientation”: opportunities or strengths. “Negative orientation”: problems or threats. “Mixed orientation”: both problems and opportunities or threats and strengths). “Neutral”: no clear orientation. </li></ul></ul><ul><ul><li>182 articles of FT (78%), 51 of WSJ (22%). </li></ul></ul>
  42. 48. <ul><ul><li>The Financial Crisis: After Years of Heavy Borrowing, Spain Is Poised for a Slump </li></ul></ul><ul><ul><li>HOUSE, J.: “The Financial Crisis: After Years of Heavy Borrowing, Spain Is Poised for a Slump”, The Wall Street Journal, October 9, 2008, p. A4. </li></ul></ul><ul><ul><li>First and most important, the home construction industry has collapsed now that the housing bubble has burst. Second, Spaniards who previously shunned farm jobs are beginning to accept any work they can get and are sometimes given preference by Spanish employers. </li></ul></ul><ul><ul><li>MALLET, V.: “African workers reap bitter harvest on Spanish farms”, Financial Times, December 24, 2008, p. 2. </li></ul></ul>
  43. 56. <ul><ul><li>Tycoon's Fall Is a Warning for Europe: Sanahuja Patriarch Loses Control of Metrovacesa; the Perils of Heavy Debt </li></ul></ul><ul><ul><li>BOSTON, W.: “Tycoon's Fall Is a Warning for Europe: Sanahuja Patriarch Loses Control of Metrovacesa; the Perils of Heavy Debt”, The Wall Street Journal, December 10, 2008, p. C12. </li></ul></ul><ul><ul><li>It's a white from Spain, which, as we've often said, is among the most dynamic wine producers in the world right now. </li></ul></ul><ul><ul><li>GAITER, D. y BRECHER, J.: “Wine Notes: Going for Godello”, The Wall Street Journal, 4 de octubre de 2008, p. W6. </li></ul></ul>
  44. 57. <ul><ul><li>The excellent economic image of Spain collapsed during 2008. </li></ul></ul><ul><ul><li>Four out of 10 pieces of news about Spain were negative. </li></ul></ul><ul><ul><li>The change of orientation is strongly marked in the Q4 vs. Q1 2008. </li></ul></ul><ul><ul><li>Culture, tourism and gastronomy became the ambassadors of Spain. </li></ul></ul><ul><ul><li>Metrovacesa became symbols of the economic problems of Spain. They were treated badly. </li></ul></ul><ul><ul><li>FT published 3 times more news than the WSJ. </li></ul></ul>