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.
- 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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