On-demand Media

Publishing, aggregation and “The Innovator’s Dilemma”

In recent weeks I've written a number of posts on online publishing and aggregation. In different ways and from different angles, what I've tried to say boils down to this:

News consumers are mainly interested in news coverage, not content. Coverage is a service that promises to keep its users "in the loop" about what is relevant to them and their peer groups. It is delivered by selecting content on readers' behalf – i.e. through aggregation and curation – and while it relies on content it is more than that. Because it is an ongoing, day-to-day service, coverage is all about loyalty: once consumers find a provider they like, they come back to it. And because of hyperlinks, in the web coverage providers need not be content providers (and vice-versa). This means that media brands' power – including their pricing power – will increasingly be a matter of how well they aggregate content – whatever its source – and not just how good their content is.

Note one more thing about this. As the split between publishing and aggregating gathers force, the focus moves from those whose craft is to make the core product (content), and towards those who can understand their audiences exquisitely and bring them exactly what is right for them, wherever it may come from (think the Drudge Report). By analogy with other industries, this is the classic move from an engineering/product focus towards a marketing/customer focus.

This analogy goes a long way. In his seminal study of disruption in technology industries (see the books The Innovator's Dilemma and The Innovator's Solution), Clayton Christensen asked whether firms should integrate vertically and own the entire value chain involved in a product, or just concentrate on what they do best and let others build the final thing that consumers pay for. The answer depends on how evolved a given industry is.

In the early days of car manufacturing, car makers made most of their core components – the engines, the radiators, etc. But as the industry matured, firms emerged that specialized in making these components and sold them to a variety of car makers. Eventually, success in the car business became a matter not of technical performance (since any manufacturer could buy the same components at the same price) but of how well car makers could respond to their consumers' changing demands – in terms of lifestyle-fit, look-and-feel, brand associations, values, distribution, etc. According to Christensen, the catalyst for this shift is always the emergence of industry standards for the interfaces between components and finished products. Today, any car maker can say that it wants a radiator of X and Y characteristics (where X and Y are specified in a standard way) and find a variety of suppliers ready to sell it exactly what it needs.

If you were an integrated car manufacturer when the industry was going through this change, you had to tread carefully. If you chose to stay in the car business you needed to make sure you had what it takes to succeed there – and your prowess in making engines may not be an advantage anymore. Rather, you needed marketing excellence – a good brand, a good understanding of your customers, a good distribution network, etc. If your strengths were in engine-making and not in marketing, you would have struggled to create value and make any money as a car maker: your competitors would make cars that consumers prefer over yours, with lower costs and without the distractions of running an engine operation. So a better option could be to leave the car business altogether and become an engine supplier to car makers. The moral: concentrate on the area where you have a unique competitive strength and leave the rest to others.

Now back to publishing. Here the engine is the content, the car the aggregation, and the engineer the journalist. Tim Berners Lee's invention of the hyperlink created the perfect frictionless interface between two formerly integrated industries: publishing and aggregation. It does not matter that this did not come about in the gradual way that Christensen describes (i.e. through a slow process of industry evolution) but as a quantum leap, before the industry was ready. The fact is that the interface is here, with all the consequences that Christensen studied. Suddenly, being in publishing and aggregation at the same time looks dubious.

It is telling that in this new ecosystem, while integrated publisher-aggregators (i.e. newspapers) are struggling, pure-play content (e.g. Reuters) and aggregation (i.e. Drudge) players are thriving. The key question is how can the old integrated players survive – what I have called the publisher's dilemma. Murdoch seems to be trying to stop the clock, choosing to focus on loyal customers who get their content and their aggregation in the same place and refusing to accept readers who use other aggregations. But if the industries that Christensen studied are a guide, this effort may be doomed.

The challenge is clear, even if the solution is not. And as they look for answers, publishers would be well advised to listen to Judy Sims' advice on where to look (hint: it's not content):

It's time to break the cult of the editor and publisher and bring in product development expertise. Not just someone from advertising or editorial or a committee of cross-departmental managers, but honest to goodness professional product people. Product people who will examine the market data, study the demographics, lifestyles, challenges and habits of potential readers and then bring together editorial, advertising, technology and marketing to create digital products that serve users and advertisers and do so profitably.

 

Publisher bites aggregator?

Fascinating post today by Mark Cuban on the Murdoch/Bing rumours. By Mark's account, in the future we might see aggregators (or at least search engines) paying news publishers for exclusive rights to link to their content. I have to say, I had missed the exclusivity angle in my own analysis of the issues, where I predicted that payments would flow the other way around.

But I'm still not convinced. To lure a publisher, Bing would have to offer payments in excess of the ad money the publisher gets from Google traffic (ad money from Bing traffic would count towards this, but at least for now that would be negligible). But I've argued that this money (what the publisher gets thanks for Google) is far more than what Google would lose from having a publisher sign an exclusive with Bing. If this is right, it follows that Bing would need to pay more than Google would lose. And because Bing gets less money from each publisher than Google does (because it has less traffic), this means that Bing would incur a loss each time it signs an exclusive. By Alan Mutter's estimation,

If a newspaper were generating revenues as low as $1 per thousand for banner advertising on the traffic steered to it by search engines, then Microsoft would have to pay the paper more than $10 per thousand to make it worthwhile for the paper to forsake traffic from Google.

Assuming all of this is right, what is Bing's game? Possibly this: if Bing manages to sign enough publishers, and if as a result it increases its traffic significantly, Bing could start luring publishers for less money. If one day Bing and Google have comparable market shares and there are no other big players around, then Bing could lure publishers with just a tiny bit of money. To prevent this, Google might then respond by paying for exclusive rights too, and the whole game would be very different from today.

But those are big ifs. It's hard to imagine enough publishers going exclusive with Bing for this to happen. And then there's the problem of the wires. As Mark Cuban notes in a different connection, much of news publishers' content is just reversioned stories from Reuters, Bloomberg, AP and others. The wires don't have strong consumer brands, so every link they get from Google is manna for them. One day they will need to ask themselves whether they prefer to help their publisher-clients or deal with aggregators directly. If aggregators can just link to the wires for free bypassing publishers, the latter could become irrelevant. The AP probably won't go for this but Reuters and others might.

Still, I'm puzzled. Bing's gambit might work, but it sounds very risky. As Wired's Eliot Van Buskirk said, "the road between point A (forcing Google users to ignore News Corp articles) and point B (forcing Google and other search engines to pay for the right to excerpt from and link to news stories) is rocky or perhaps even nonexistent."

Ps: Compare and contrast: aggregator bites publisher

Ps 2: Robert Andrews explores another possibility: Microsoft might be hoping that copyright law would change in its favour, making it illegal for Google to index content without publishers' permission. But in my analysis that's irrelevant: publishers are in Google because they want to.

Survey time!

Dear readers

This blog receives around 500 visits per month and has around 290 RSS  and email subscribers. Although these number are low, they are good, as they suggest that a sizeable percentage of you are engaged, loyal readers.

And yet, I know very little about you. Do we know each other? What do you do? What brings you here?

Please help me answer these and other pressing questions by answering a short questionnaire I've prepared at this link. It should only take a couple of minutes.

Thank you!

Want loyal readers? Then aggregate

From an interview with Josh Cohen, Google News' product man:

My value is my editorial filtering. I recognize that if I send you off [my site], and I just put a link to an update, if I'm the New York Times, and the Wall Street Journal has a good update, I'm going to link off to it, so that I know that this is a good source that tells me what I should be reading, even if it's not on their own site.

That's what's going to set me coming back. Not because I'm trapped into their web site, and I have to know that all the information is coming from there. There's a comfort level, there needs to be a comfort level, to send people out.

There's so much truth in this that it's worth putting it more explicitly: in news, people never go back to content they've read before. They go back to places where they've had a good content experience, precisely because they don't know what they'll find when they go back – otherwise it's not news. What is this place? It's a page that

• Has a fixed, short URL, so people can remember it
• Has a series of links to content, not content
• Is frequently updated

In other words, an aggregation. Nothing in this list says that the aggregation and the content it links to need to be owned by the same people.

As with all products, what drives loyalty to a brand is the reliable, repeated satisfaction of a key consumer need. The main need in news is coverage. And that need is addressed by the aggregation of content, not content itself.

Editors like to think that what brings people back to their sites is their content brands. I like what I read, I remember the brand, and then I come back for more. Maybe, to some extent. But that kind of loyalty is based on a need for something other than coverage—namely, the need for a certain writing style, a certain perspective, etc – i.e. for content. But, in news, the need for coverage is far stronger than the need for content. If this is right, then it's easier to charge for aggregation than it is for content.

So here's a prediction. Barring legal hurdles, one day we will see the likes of the Drudge go behind a pay-wall even if most of the content they link to is free.

If you are a publisher and you don't have enough good content to compete with the aggregators, you need to start linking out.

Genius

(Hat tip Jeff J)

Coverage not content

In earlier posts I have talked about the strategic challenge faced by print publishers as the action moves to the web. In the web, readers have too many choices and it's hard to get enough page-views to justify content costs unless your coverage is exceptional. So the answer, it would seem, is to "cover what you do best and link to the rest", as Jeff Jarvis preaches – i.e. publish a few unique things and link to other publishers for everything else. That way at least you can keep your audience loyal, even if you don't profit from everything they read. And with reduced content costs, it may even be profitable.

The problem is that this doesn't work when your content costs are fixed, as happens when you need to fill your print edition. I've called this "the publisher's dilemma". But what happens when your print edition runs to the ground and you have no choice but to end it?

This is what happened today to Mediaweek, which is shuttering its print edition and losing 18 of its 58 editorial posts. Freed of the shackles of fixed print costs, Mediaweek could now concentrate on linking to the best media-related content and covering only what it does best. Its brand and remaining editorial strengths would give it an edge.

But will it? We'll have to wait and see. The move may make sense financially, but organizationally it is a major challenge. For generations publishers have seen themselves as content providers. Any move away from this and towards aggregation could feel like a defeat and hurt an already low morale.

But desperate times call for desperate measures. Almost forty years ago, Theodore Levitt chastised the American railroad industry for being too wedded to its product (rail travel) and ignoring what its customers needed (transportation). Today, publishers risk being too wedded to content and not seeing that what their readers want is coverage. 

Through aggregation, publishers can deliver that at far lower costs. Yes, profits will be lower; but the alternative may be no profits at all.

Murdoch’s gambit

Rupert Murdoch's recent suggestion that News Corp might stop accepting links from Google has stirred things up. Cory Doctorow thinks Murdoch is bluffing. But as Silicon Alley Insider noted, this may not be such a big gambit for News Corp. According to SAI's estimates, the Wall Street Journal "depends on Google for about 10-15% of [its] site's revenue. This is a meaningful amount, but it's not an amount that couldn't be foregone for a while if Murdoch wanted to try boycotting Google."

This is plausible. A typical newspaper visitor who arrives via Google reads only a fraction of the pages that a loyal reader does. The WSJ also has significant subscription revenues, which would not be affected by a blockage. And for local papers, search-engine visitors are far likelier to be out-of-market, which means that the publisher gets less advertising money per page-view than from loyal, local readers.

So maybe Google's traffic is not worth all that much. But then that's not the point. Even 10% of a site's revenues is an important amount, and you don't throw that away without some thought. If Murdoch were to carry out his threat, few of Google's users would notice News Corp's absence in search results, and even fewer would be bothered enough to go to the missing sites directly. As I've argued in a recent post, this means that for every dollar that Google looses, News Corp would lose many more. And as a result, News Corp has little bargaining power here. In fact, a negotiation might backfire. If a recent report is to be believed, other content providers are actually paying aggregators to link to them.

But News Corp is a sophisticated operation, and you can assume they have gone over this thinking (and the same applies to Google). So what are they doing? It's easy to speculate – e.g. it could be a bid to get other publishers to follow – but I can't think of anything convincing. I'm puzzled.

Telegraph: Rupert Murdoch is a Marxist

From the Telegraph:

This argument, that it costs money to produce something, therefore it has value, was put forward by Karl Marx in Capital. The exchange value of goods is equivalent to the amount of labour required to turn base materials into products. [...] As a thoroughgoing Marxist, Murdoch believes that [his content] must now have financial value, calculated as the labour expended plus his surplus.

Aggregator bites publisher

In an earlier post I argued that in the relationship between online aggregators and publishers, aggregators have the upper hand strategically. In a nutshell, the reason for this was that if an aggregator were to stop linking to a publisher, traffic to its site would drop only by a fraction of the corresponding drop in the publisher's traffic – if it drops at all. As I said then, this means that aggregators have all the bargaining power, and publishers have no hope of extracting payments from them (barring legal options, which may or may not exist).

As a corollary, I could have added that publishers should not push their luck trying to get payments from aggregators. Taking a leaf from the Godfather, aggregators could reply by not only refusing, but demanding that publishers pay them for their links instead.

Well, today I read this fascinating interview of Andrew Breitbart, second-in-command at the Drudge Report and the man behind Breitbart.com. According to the interviewer Greg Beato, Brietbart gets Reuters to pay him for linking to Reuters stories from Breitbart.com, and possibly from the Drudge Report too. The key bit (my emphasis):

In the early days of Breitbart.com, Breitbart licensed content from the Associated Press and Reuters, as this archived page shows. But according to documents generated in a 2005 legal dispute between Breitbart and two other parties, Reuters terminated its contract with Breitbart.com in late September.

In October 2005, however, Reuters approached Breitbart with the kind of offer that generally occurs only in the less believable tales in Penthouse Forum or when a Nigerian vicar is planning to rip you off. To wit, Reuters wanted to pay Breitbart "a fee for traffic to driven to Reuters [sic] own website."

Typically, newspaper sites pay newswires to license their content, and that's what Breitbart was doing until Reuters cancelled its original contract with him. Now, it wanted to switch things up.

Compare and contrast this with the ongoing saga in the UK around aggregator newsnow.co.uk which is being sued by several papers for linking to their websites. Discuss.

Are pay-walls anti-competitive?

In an article published today, the Guardian wonders if Rupert Murdoch's announcement (a few months back) that News Corp will introduce pay-walls across its online portfolio amounts to collusion. The key bit:

When Murdoch announced that he intended to introduce charges for access to all his news websites, he said that he believed other publishers would follow suit. [Alan Davis of legal firm Pinsent Masons] said that a pattern of such statements, in effect a signal to rivals to do the same, can be interpreted as a "tacit cartel", even if no meeting or explicit deal has taken place.

I am not a lawyer, so I won't comment on the legality of this. But I'll make two related comments.

First, Murdoch's move can be seen as a textbook case of strategic commitment. Suppose that you and your competitors would all like to do something that nobody wants to do on his own. So you announce that you intend to make the risky move even if nobody follows you, and you do it in such a way that your announcement is public, credible and irreversible (you are 'committed'). If you succeed in being credible, now a competitor – without ever talking to you – would feel reassured that if it also makes its move, it won't stand to lose as much as it might if it had moved on its own. If you are big enough, the change in your competitor's strategic calculation may be big enough to compel it to move as well. And since you know this from the beginning, your initial move was not as rash as it seemed. Granted, Murdoch's move was hardly irreversible – all he did was make an announcement in an earnings call. But he would lose a lot of credibility if he were to back down, and in this sense he is committed. Presumably this is what the Guardian has in mind. But note that – as I've hypothesised it – this move doesn't involve any talking behind closed doors.

Second, all of this may be a moot point. Talk of anti-competitive coordination presupposes that erecting a pay-wall is a profitable move only if your competitors do the same. But that is far from clear. To be sure, if you just slam a big all-or-nothing wall that refuses to serve any free content to anyone then you might lose most of your readers to your competitors and end up worse-off – unless your competitors erect walls too, and hence the coordination point.

But such 'hard' walls are out of fashion. What is in fashion is 'smart' pay-walls that only affect a small percentage of your readers (see my previous post on this). The thinking is that – if done right – this should result in a net increase in profits regardless of what your competitors do, essentially because you are only charging those readers who are loyal enough not to go to the competition.

This is not to say that with 'smart' pay-walls competitors' actions are irrelevant, or that there would be no point in price-fixing. If your 'smart' wall can make you some money even if your competitors don't follow suit, it can make you even more if they do (because you could then cast your net wider and charge more people, or charge a higher price). But that's another discussion – it's about refinements to the walls and not about whether to erect them in the first place.