Sunday, December 21, 2008

Follow up on the "death of newspapers."

A great article today in the New Yorker by James Surowiecki discusses the "death of newspapers," which I addressed a few days ago. While we both agree that margins for newspapers are coming down (into the red for many for sure), he's a bit more pessimistic than I am about the final outcome: "Soon enough, we’re going to start getting what we pay for, and we may find out just how little that is."

That may be, although I think that we'll still get quality news, just via other media.

Here's the part, though, that I loved - I think he makes my point exactly (I am one of the "many" in the last sentence):

Papers now seem to be the equivalent of the railroads at the start of the twentieth century—a once-great business eclipsed by a new technology. In a famous 1960 article called “Marketing Myopia,” Theodore Levitt held up the railroads as a quintessential example of companies’ inability to adapt to changing circumstances. Levitt argued that a focus on products rather than on customers led the companies to misunderstand their core business. Had the bosses realized that they were in the transportation business, rather than the railroad business, they could have moved into trucking and air transport, rather than letting other companies dominate. By extension, many argue that if newspapers had understood they were in the information business, rather than the print business, they would have adapted more quickly and more successfully to the Net.

Friday, December 19, 2008

A small step in the right direction

This from the Wall St. Journal today: the RIAA is going to stop suing file sharers. Well, at least they'll be doing less of it and trying other things first.

I think that this is a sign that the RIAA is finally starting to realize that while they may be morally and legally justified in suing people who swap music files, there is a huge difference between what is justifiable and what is sensible.

I'm still not super happy with this because the RIAA is still using ISPs as their enforcement mechanism, but at least it is a lot less heavy handed and it seems to have an actual process around it, and one that protects privacy at least somewhat.

A journey of 1000 miles begins with a single step.

Thursday, December 18, 2008

A Music Tax?

Over the past few months there have been a number of proposals for ISPs to assess a fee from users to cover the cost of unauthorized music sharing. One such proposal is discussed here.

The theory behind the proposal sounds reasonable, at least at first blush: by collecting a fee, labels and artists would be compensated for their music and people would not have to worry about being sued. The recording industry and their artists are (arguably - more on this below) losing a lot of money to illegally shared music. This is no different from shoplifting. Retailers cover their shoplifting costs by raising the prices for everyone, so one can see the motivation here.

But this is a seriously flawed idea for a number of reasons. There is a great writeup of why it is a bad idea, but I'll weigh in with my argument.

The biggest problem with this model is that it rewards bad behavior on two levels. At the consumer level, it provides an actual disincentive to legal purchasing of music. After all, if I have to pay the fee, then why should I pay for music a second time? In fact, this model proposes to punish the very people who are the paying customers that the labels and artists should want to encourage while rewarding the very pirates who they have been vilifying and suing. There is only one word to describe this: "stupid."

But the perverse consequences are not limited to consumers: a music tax (and let's be clear, it is in fact a tax) would also reward record labels and musicians who are unskilled and who very rightly deserve to fail in the marketplace by providing them with a revenue stream that is disconnected to whatever value (artistic or otherwise) they provide. I'm hearing the word "stupid" pop into my head again, but this time with a new adjective: "insidious." This is because not only does this proposal reward entities that should rightly fail, but it's actually using independent 3rd party organizations (ISPs, college campuses, etc.) to collect these rewards.

There is a way to avoid this problem, of course. If one wants to ensure that only musicians (and their labels) whose music is being consumed get the rewards, then one simply needs to monitor what is being shared/played and assess fees based on that. But one need only think about this for a moment to realize that the privacy violations and bureaucracy requirements for such a system would make even the North Koreans blush.

All around, this proposal has good intentions but completely misses the mark in solving the "problem." Which brings me to my final point, the source of my quotes around "problem." Namely, I think the RIAA, labels, and many musicians (but not all!) are confusing "problem" with "opportunity." Let me be very clear on one point: illegal sharing of copyrighted material is theft, pure and simple. One can try to prosecute it, which has been the RIAA's favorite tactics to date (and which has not worked very well). One can try to turn illegal into quasi-legal, as this proposal tries to do. But I'd propose that the best solution is to make the illegal legal. That is, give the music away.

Obviously, this is a risky strategy, and it is something that individual musicians and labels must decide whether or not to do, rather than an industry-wide edict of some point. But it could be the most rational strategy for making money. There is a great post on this here, but my argument is quite simple: you can make more money by providing huge distribution for your music and treating it as a marketing tool to get people to attend concerts, buy merchandise, etc., than you can by limiting access to the music itself. This is a model that was not possible in the days of vinyl or CDs because of the costs of producing and distributing plastic. But today digital distribution has driven these costs to zero, so it is for the first time possible to switch from the music being the product to the music being the promotional tool.

This is not just a theoretical argument. Many bands have demonstrated that it can work. Heck, even pre-digital bands like the Grateful Dead got it: they invited their fans to record their concerts and freely trade tapes of the concerts. The net result was an almost cult-like following, and the Grateful Dead was for many years one of the top grossing acts in the country. Phish followed the same model in the 90s and was also incredibly successful, giving their music away.

Is this a threat to the traditional recording label business model? Sure it is. And it frankly shifts even more power to the musicians. The market can adapt by trying to prop-up an inefficient dying model (as the music tax proposal attempts to do), or it can adapt by switching over time to one that better serves musicians and their fans. It's clear to me which is the right model.

Monday, December 15, 2008

The death of newspapers

With the bankruptcy filing of the Tribune company last week I'm hearing a lot of talk about the "death of newspapers" again. The newspaper business has of course been declining for years now, but I think this particular phrase muddies the issue.

In particular, I think we frequently confuse the three things that comprise "the newspaper business":
  • Professional journalism (as opposed, for example, to the largely amateur blogosphere) with a set of fairly widely understood principles regarding objectivity, sources, etc.
  • A business model built around advertising, the two biggest components of which are ads placed by businesses to attract consumers, and consumer-to-consumer ads (the classifieds).
  • A distribution model based on paper, ink, and gasoline.
I think that of these, only the first (professional journalism) is core. It is the only true value that a newspaper company brings to its readers. The advertising-based business model is simply a means to monetize that value, and paper is nothing more than a distribution mechanism. Either of these can (and indeed must!) change for newspapers to survive. But any newspaper company that hopes to survive must recognize that they are not in the "news-paper" business, but rather that they are in the news business.

I suspect that one might argue that I am mistaken, that newspapers are in the advertising business, and one might even go so far as to say that the news is a way of aggregating eyeballs for advertisers. This argument is a valid way to describe how newspapers made money once upon a time, but it is problematic for two reasons.

The first problem is that it puts advertising ahead of news as a core competency. But at the end of the day, newspapers attract readers primarily on the quality of the news (and to a lesser extent the classifieds, which I will come to shortly); they can still be a newspaper if they can monetize the news in alternative ways from advertising, but if they were to jettison the news in favor of other formats to attract eyeballs and advertisers, they would in all but the rarest cases fail because they would be competing with more pure-play advertising platforms and would be in an area outside of their competency.

But the second problem is a larger one: the very reason newspapers were able to make money - particularly in classifieds - is that they were a place of concentrated eyeballs. Once upon a time, huge portions of the population read newspapers regularly, and only had one or two major newspapers from which to choose. Advertising in a newspaper was a sure-fire way to reach a huge population, a one-stop shop. No more. TV and radio, of course, disaggregated a chunk of this a long time ago, but the Internet has disaggregated most of the rest. People get their news from a wide variety of sources, many national. Where people once relied on local broadcasters and local newspapers for all of their news, they now can get much of this from national news providers. This reduces the value to advertisers greatly. And squeezing from the other side are services like Craigslist, which I believe are the biggest threat to the classified advertising model, and which are frankly far more efficient and less expensive than the traditional advertising model.

The net of these trends is that I believe that the traditional advertising model for newspapers is essentially dead, and at the very least cannot support nearly the current number of newspapers. There is a lot of consolidation which must occur, and more companies will need to go out of business.

Ideally, these companies would be able to identify more sustainable business models to support the delivery of news; sadly, this has proven difficult: readers have not been anxious to pay for subscriptions, and few papers have found alternative advertising models that work as well as the old models once did. If I had a brilliant insight for new business models, I'd offer it here. (No, wait - I'd go off and make a mint by implementing it.)

As for the paper-based distribution mechanism, this is simply not core to a newspaper. Some news organizations are reducing or eliminating their print operations in favor of going on-line. My personal prediction is that paper will not go away until there exists low cost, high-resolution durable (i.e., capable of withstanding spilled coffee) screens that people can read at the breakfast table or on the train. (The New York Times on my iPhone actually is starting to come close to this. It's surprisingly legible, well formatted for the screen, and I can read it in all of the traditional newspaper-reading places.) Nevertheless, my point here is that paper and ink are nothing more than a slow and expensive delivery mechanism, and one which will become increasingly irrelevant; nobody should mourn this shrinkage, least of all the smart newspaper companies because printing and delivering all of that paper is a huge expense, and that expense is going down. This actually creates an opportunity to become something that it never really has been previously: a pure-play news delivery business, free to try a wide variety of models for making money. The lowering of capital costs (printing presses, delivery trucks, etc.) should enable many more niche publications to provide more variety of news at lower cost. Yes, it means employing fewer people in the industry as a whole, but there is today a lot of redundancy in this business due to its antiquated models. Just look at a press conference during the presidential race: you'd see dozens of reporters, yet there were not dozens of significantly different stories written.

But none of this means that newspapers as such are dead. Or, more importantly, that professional journalism is dying (another claim I hear all too frequently). It is certainly transforming, and yes, it is also shrinking in the process. But through all of this, I believe that the average person has more professionally reported news available to them now than at any other time in history. That doesn't seem like death to me.