Digital First — What Then?

When John Paton was employed by hedge-fund investors to manage two large newspaper chains and to make sense of the combination’s costs, ownership structure, and strategy, he named the enterprise Digital First Media. Paton readily acknowledged that no truly modern media or technology company — no Google, Yahoo, Twitter, BuzzFeed, or Business Insider — would ever use such a phrase because they all were born digital. But his newspapers — making up the second largest newspaper group in America — weren’t digital. His task was to get them over what Guardian editor-in-chief Alan Rusbridger once called the big, green blob of economic uncertainty and on to the path to their digital futures.

Here’s how I translate the catchphrase “digital first” into a business strategy for legacy media proprietors: They must transform their companies into fully sustainable digital enterprises before the day when print becomes unsustainable. And for the most part, print will become unsustainable. I needn’t explore in depth the causes of death, as the essence of mass media’s plight is now apparent: Publishers as well as broadcasters controlled scarcities — limited space in print and time on the air, each in a closed distribution channel — which afforded them enviable pricing power. The net creates abundance — no shortage of content and no end of advertising availabilities, not to mention the opportunity for brands and merchants to bypass media altogether and build direct relationships with customers. That abundance drives the value of content and advertising toward zero.

Google, by contrast, has built its empire not on controlling scarcity but instead on creating and exploiting abundance. If Google had structured its business model the way legacy media companies did, it would have taken a scarcity — say, the number of people who search for “smartphones” each day — and charged what the market would bear for access to them. Instead, Google offered advertisers a better deal, charging them on performance — that is, only when a user clicked on an ad. Google built an auction to determine the market price for any search term. Google also prioritized ads on a page not on the basis of premium payment but instead on performance — the more times an ad is clicked in a given search, Google assumed, the more relevant and useful and thus productive the ad would be. Thus Google aligned its interests with those of the advertiser (and to some extent the user) and assumed the risk in the transaction — no click, no money for Google. Instead of controlling its scarcity, Google was motivated to create an abundance with its AdSense program, placing ads on any site anywhere on the net. Google analyzed the content of the site where its ads appeared, vastly improving the relevance of those ads and thus increasing the clickthrough and the revenue. And importantly, Google shared revenue with these sites, motivating them to take the ads and exploding Google’s distribution at essentially no risk. The net commodified media companies’ one key asset, content. Google commodified the other, distribution. Google offered media companies’ advertising customers a better, safer deal, and on that foundation, Google built the behemoth that now controls more than 40 percent of digital advertising.

Meanwhile, back at the ranch, publishers not only tried to protect their old-media properties, they tried to carry their old business models, assumptions, and metrics to the new, digital world. They still made content. They still sold space next to it, charging what the market would bear, which turned out to be less and less every day. When that digital advertising revenue proved insufficient to replace lost print revenue and support even a shrinking cost structure, publishers resorted to trying to charge for access to their content — and for most, that turned out not to be their salvation. Publishers tried to create and control scarcities where scarcities no longer existed. When they did try to act expansively and exploit abundance — by gathering new and larger-than-ever audiences online — they were accused of committing the “original sin” of giving away their content, their scarce commodity, for free. I’ll explore the arguments about paywalls below. In any case, preservation and protection turned out to be no strategy for the Google age.

The solutions for media companies may not be obvious, but the arithmetic of sustainability is: Start by reducing costs to their most essential and efficient level — assuredly a fraction of what they were for an old, vertically integrated monopoly. Then maximize digital revenue — advertising volume, yes, but I will also argue for building greater advertising value through deeper, richer relationships with consumers. Build new products and services appropriate to the new opportunities that technology presents: digital services for advertisers, mobile applications, newsletters, and so on. And explore additional revenue streams, including events, direct commerce, and consumer revenue via patronage or paywalls. Digital revenue surely will not cover the legacy costs of a deposed monopoly, but one had better see a path to digital profitability. The alternative is just to milk the old print cow until she keels over.

Print is a seductive if geriatric mistress. As I hear over and over, print still brings in the lion’s share of revenue for newspaper and magazine companies. That’s because advertisers and their agencies are slow to change and publishers have not been eager to educate the people who hold the checkbooks. But we must get ahead of the inevitable, which means driving the remaining advertisers to digital before they are gone. Paton started to do that by changing the bonus structure for his sales staffs — if they didn’t make their digital goals, they didn’t earn their print bonuses — and by getting into new advertising businesses like digital marketplaces in the belief that it is better to cannibalize thyself.

Print advertising in newspapers imploded from $65.8 billion to $17.3 billion in inflation-adjusted dollars from 2000 to 2013, with digital adding back in only $6.3 billion. Classifieds are long gone. Retail continues to consolidate and in some categories collapse, a process begun well before the internet when department stores fell into each other and big-box chains replaced the local merchants that had been loyal if imprisoned customers of newspapers. Of course, the collapse of retail is only accelerating thanks to Amazon and online commerce. The result thus far: Print newspapers across America are so thin you could shave with them. The last, best economic reason to continue printing and distributing newspapers in America is to carry coupons and circulars, called free-standing inserts (FSIs) in the trade. This is precisely why you see some newspapers reducing their print frequency to the three or four days a week when they distribute FSIs. But this, too, may soon pass into oblivion. Retailers want their circulars to continue, for they can be a profit center: an opportunity to charge manufacturer brands for promotion as well as a way to sell consumers merchandise. But many of these chains are suffering because Amazon and the web have siphoned off customers, killed their pricing power, and sliced into their already-thin profit margins. Customers treat stores as showrooms and buy online. Mobile makes the situation only worse, as a potential buyer can easily comparison-shop and then order from a competitor even while standing in the store; that scenario is the raison d’être for Amazon’s Fire phone. Consumers are also getting more accustomed to using coupons on their phones rather than clipping them — giving stores or brands more data about their customers and an opportunity to target pitches and build a stronger relationship while also saving money on printing and distributing fliers. All the while, newspaper circulation keeps falling, from a high of 124 percent penetration when Americans bought multiple papers in a still-competitive market in 1950 to 37 percent penetration in 2013. I asked executives at one big retail chain when newspaper distribution would drop below the point of critical mass that makes it worthwhile to continue using FSIs. They gave me a timetable that is now ticking near midnight. The real question is what will go first: the circulars or the retailers themselves.

Just to add one more kick to the kidneys for papers: Legal ads — the dense, unreadable, but highly profitable public notices many governments are required to publish in publications of general circulation — are also sure to go away even over the lamentations and lobbying of newspaper publishers, as the open-data movement demands transparency of government information online. Besides, with only a third or less of Americans still reading newspapers, it is no longer possible to argue that papers are the largest distribution channel for these notices. It will soon be worth asking whether newspapers still qualify as mass media.

Magazines and television face similar pressures as newspapers, though, of course, in different circumstances. As discussed in Part 1, magazines might have squandered their opportunity to become platforms for their already-gathered communities of specific interest. General-interest magazines are suffering — what would you do if you were in charge of Time or the latest iteration of Newsweek? — while the more specialized and high-gloss magazines are being kept afloat for a while longer because they are a medium for brand advertising rather than retail or performance-based advertising. Brands and their agencies traffic in smoke, mirrors, and masses. Luxury brands particularly — inflated with marketing mystique as they are and thus cautious and slow to change — still support some magazines. But how long will that last, especially as magazines’ circulation, like newspapers’, is caught in a downward spiral, particularly on newsstands.

On television, even as broadcast network audience shrinks like a cheap sweater and local TV news audiences follow, advertising rates increase because, oddly, mass is the last scarcity in media. That is, there’s nowhere else for unambitious ad agencies to get their clients’ messages in front of millions of eyeballs at once — even if it is now possible with additional effort online to more precisely target advertising with greater relevance for consumers and more demonstrable return on investment for brands. It’s still true that nobody ever got fired for buying Thursday night on NBC. Well, so far; upfront ad buys on TV are starting to decline. Television has other artificial means of life support: mandatory retransmission fees from cable companies. Nevermind that we, the people, gave networks our broadcast spectrum in return for free and public-service programming. And nevermind that cable companies have us imprisoned with their bundles, forcing us to subsidize channels that could never make it on their own in the market. These legacy forces — brands’ cognitive dissonance, ad agencies’ caution, cable’s monopolies, nonmarket regulation — will carry on as long their beneficiaries can squeeze another breath out of them and until new competitors like Netflix and YouTube reinvent the form and retrain the audience to be more than just an audience.

Digital will out. That reality is being exploited by no end of digital — not digital-first — competitors that can (a) start and operate at much lower cost and risk than their forebears and (b) nimbly steal away consumers and advertisers with better deals at lower cost. It’s not my job here or in my university role to favor one over the other: legacy vs. startup, old vs. new. Nor is it my job to protect or fix the incumbents. It would be hubristic of me to think that I could. Still, I have my suggestions.

I will argue that publishers must set a date sooner than later when they project that print will be unsustainable or at least optional. That is, they might not dismantle their presses (unless they already, wisely, pay somebody else to do that dirty work). They could continue printing products that still bring in profit. But they must acknowledge that print will neither drive nor sustain the company past that date. And so they must push every sector of the enterprise — staff, audience, advertisers — to the digital future. As long as print survives, it should become a byproduct — not the core of the business model, not the center of the operation, not the focus of its culture. Imagine it this way: The entire staff is devoted to creating the best digital service it can. A few people in a basement room take the best of that service and repackage it, freeze-drying it for print. Print becomes a promotional vehicle for the brand’s online services and a supplier of cash flow to subsidize research and development. That has been happening at some newspaper companies, including two I’ve worked with, Advance and Digital First, as well as some in Europe, including Axel Springer at Die Welt. The New York Times, too, is saluting the digital-first flag. Its leaked, 97-page report by a newsroom innovation committee in 2014 got the definition of digital-first almost exactly right:

Around the newsroom, this phrase often is used to refer to publishing articles on the web before putting them in print. But outside our walls, digital-first is an all-encompassing strategy.
Digital-first means the top priority is producing the best possible digital report, free from the constraints of the newspaper. The last step is repackaging the best of that digital report for the next day’s paper.
This transition requires rethinking staffing, structure and work processes from top to bottom.
Companies with no legacy platform have the advantage of being able to focus entirely on creating the best digital reports. For newspaper companies, making this transition can be so challenging that several of our competitors have handed responsibility for the daily paper to small, stand-alone teams so that everyone else can focus on digital.

I might quibble with still focusing on a “report,” which itself carries a number of legacy assumptions about product over service: news as content. Still, it is impressive to see the young turks behind the innovation report call upon their elders to recognize the assumptions that rule the institution. “The newsroom is unanimous,” the report said. “We are focusing too much time and energy on Page One. This concern — which we heard in virtually every interview we conducted, including reporters, desk heads, and masthead editors — has long been a concern for the leadership. And yet it persists. Page One sets the daily rhythms, consumes our focus, and provides the newsroom’s defining metric for success.” Not just at The Times but across the industry, publications online continue to be recognizable as publications: They still make content. They still want to attract audience to that content. They still sell advertising around that content. That’s less digital-first than digital-last: We will take what we know, what we have always done, and then make it as digital as we can.

Back to John Paton: I remember the day in 2012 when he charted for his advisory board — at the time, Jay Rosen, Emily Bell, and me; Clay Shirky joined later — his path to fixing Digital First’s corporate structure, reducing costs to the minimum (selling every printing press, fleet of trucks, and office building that was not profitable on its own), and driving maximum revenue to digital. He explained the dynamics of working with hedge funds — a crucial factor to keep in mind when we see later how his story ends. Paton drew his projections on the whiteboard and said: OK, let’s imagine that at a date only a couple of years out, we get there — the company will be substantially sustainable as a digital enterprise. Then what? he asked. What are we then?

That question inspired this essay. Trying to answer Paton’s question forced me to reexamine my own thinking about the future of news, to identify and push harder against my own assumptions that sprang from my experience in legacy media: the Gutenberg context, or pressthink, as Jay Rosen would call it. Paton was asking what news could be, what news should be. What is the strategy that takes us past mere survival to reinvention? Can we get there? I realized that until we reimagined our destination, we would be stuck recycling the past. What’s required to get to that goal is considerable imagination, experimentation, risk, failure, courage, and urgency — as well as patience.

You can buy the book or the Kindle at Amazon or buy it directly from OR Books.