The legacy media in general are threatened by audience loss to the Internet and citizens' media, and Rathergate is merely the latest example of a credibility apparently sinking by the day,
There's been ample analysis from the perspectives of professional media, journalism, and politics. But from an investor's perspective, there's the possibility that one of the major value chains in modern society - media and advertising - will be rearranged, at least in part. That makes an economic analysis of the issue rather interesting.
I'll start from the perspective of transaction cost economics as originally invented by Ronald Coase. If you haven't encountered it, go read a bit. Trust me, this is one of the master ideas for understanding the evolution of the Internet.
In the venture capital trade, transactions costs usually turn up in a pitch from a company proposing a better scheme of microtransactions or other technology so that readers can pay for bits of content on the net, a few pennies at a time. While this notion has been kicking around almost as long as the commercial Internet, none of these schemes have been successful, and no investors have cashed out, though they keep trying.
Why not? There's more to transaction costs than the mechanistic elements of the payment mechanism. There are also what are called search costs, the time and effort expended in finding the right thing to buy. And there's that little frisson, wondering if what you've bought will be worth the expense - direct and indirect. This element turns out to be significant. In fact, American slang has an expression for it: "Being nickeled and dimed to death." This is not a positive sentiment, and this visceral embodiment of an economic theory has been sufficient to keep microtransactions a dead letter. (If there are equivalent expressions in other cultures, I'd be interested in hearing about them.)
You may visit Andrew Odlyzko (PDF file) or Clay Shirky for a further dissection of micropayments, but I will pass on to strategies for overcoming these problems. A common way around the nickels and dimes is 'bundling', which is simply selling a number of related items together. Here a real world example may help:
Suppose you'd like a few dozen packets of instant oatmeal in various flavors to feed your child. You don't have shelf space to keep full boxes of all of the flavors, so more than likely you buy two or three cartons of assorted flavors. Each of those cartons is a bundle. You give up the flexibility of picking each packet separately, but also lose the time and minor effort involved in making the selection. The manufacturer and retailer gain the benefits of scale economies in manufacturing and simplicity in stocking. This strategy is so stable that single packets of oatmeal are almost unobtainable.
Note there's a modicum of trust involved in creating this bundle. You may be willing to take the chance that a few packets will be a flavor that will draw a 'yech' from the kid, and you'll end up eating them. But if you ended with an 'assorted' carton that had been half-filled with a dud, you probably wouldn't buy that brand again. Note the brand as a source of trust, and as damaged if the trust is removed by experience.
(Let me acknowledge right here that I'm doing a lot of simplifying to get to the meat of the argument. Bundling can be beneficial to both producer and consumer, but it can also be used strategically as an anti-competitive weapon. I will acknowledge the legal and regulatory side of the issue and move onward.)
Getting on to the media, we can note compact discs, and magazines and newspapers bought off the rack as bundles of content in the real world. Many such bundles have been driven by the physicality of the medium, and the economics of creation and distribution. In days past, I might cheerfully pay a quarter for a copy of the Chron, only to read the sports, one column of classified ads, a few local stories and throw the remainder away unread. All of that wastage was acceptable to both buyer and seller, given the scale economies of printing. Note again a modest element of trust: If tomorrow I buy the same paper, but my interests have changed from sports to movie reviews, I should believe that information will be there and be useful and credible.
These bundling strategies are not stable of themselves, they exist only within the context of technology, distribution and transaction costs surrounding them. When these change, bundles may collapse. The CD is the obvious example. With individual digitized songs now easier to duplicate and distribute than the physical bundle, the albums raison d'etre has disappeared. As the simple playlist replaces the album's remaining value of simplifying choice, CDs commence a slow glide to oblivion, moderated only by the installed base of equipment and consumer habit.
The newspaper bundle, with over 350 years of market experience behind it, is a tougher nut, but it is also starting to crack. Your average newspaper takes over 2/3 of its revenue in the form of advertising, and it's there the damage is deepest, particularly in the classified section. Between eBay, Autotrader, friendster, match.com, monster.com and their competitors, the competition is already large and continues to grow. And it's also obviously growing on the content aggregation side, with services like My Yahoo and Google News, and all the myriad of blogs and other citizens' media. If these choices were only the equal of those available in the fish wrapper, the bundling argument - "we simplify things" - might still hold. But each of those services has advantages in scope and personalization that the newspaper cannot match. I start to become less happy about the quarter for the Chron when I know I can scratch today's information itch online faster, better and often for free.
But wait, it's actually worse than this. Newspaper and other periodicals would prefer to have a subscription relationship with their readers, rather than rely on newsstand sales. It makes the circulation more predictable for the advertisers, and smoothes out the reader payments, which would otherwise peak around major events and fall off dramatically during slow times like the proverbial August 'silly season'.
A subscription is a bundle of a different sort. It combines multiple transactions into one by collapsing them in time. It therefore adds a futures element to the transaction. More so than the spot transaction of buying a single item, trust becomes an issue. The purchaser is betting that the supplier will be reliable in the future and, in the case of a media periodical, continue to deliver a collection of content of value. Working out the mathematics that express this choice in a given situation can be pretty darn complex. But it's certainly possible to make some obvious qualitative deductions:
If the subscriber observes that the value of the content delivered is decaying over time, either absolutely or compared to competitive sources, then a renewal becomes less likely - the futures bargain no longer works. If this is widely true of a subscriber base, then churn (lost subscribers) will be increasing over time. To keep the revenue line stable, the subscribers must be replaced, incurring subscriber acquisition costs. Since every new subscriber's choice is made in the context of competitive options, including spot purchase as an alternative, the per-subscriber acquisition costs may be rising at the same time. At the point where discounted future value of a subscriber, given churn, becomes less than acquisition costs, the business model that looked like a reliable cash spinner is suddenly upside down. All that is left is to milk the existing subscriber base as it decays.
Up to now I've tacitly assumed that content may be more or less interesting or relevant, but has no valency. Now let's drop that assumption. Suppose the reader discovers through independent means that at least part of the content being purchased is inaccurate, either in fact or through unrepresentative sampling of the reality. And further, let's assume the reader is convinced that the basis for this is not incompetence - which would simply lower the value - but is intent. In short, the buyer has been sold propaganda. If the buyer is in search of objectivity, the value of the bundle decays. In the case where the ideology of the bias is inimical there will now be a negative value assigned to that part of the bundle. Only in the case where the buyer is aligned and not searching for ground truth will an increase in value result. This will cause a differential churn and subscriber acquisition cost depending on the beliefs of the buyers, and discovering this bias in one element of the bundle is likely to tarnish the reputation and brand of the whole in the eyes of those not in concert. We have just reinvented the party organ newspaper. We might also have invented a way to salvage a decaying legacy business by guiding it into a stable, but ideologically defined niche. I leave the search for examples as an exercise for the reader.
I've simplified this by focusing on the readers' decisions and on newspapers as a physical bundle. Of course, the actual situation is more complex. Newspapers and networks are also ways in which viewers are bundled for sale to advertisers, who hope for increased sales of their own goods and services. A churning subscriber base will decrease the certainty of this bundle, and send more advertisers to spot purchase vs. long term buys. Introducing ideological bias has the possibility of creating negative splash back on the advertisers - boycotts do work. With the advent of channel surfing, television networks have become bundlers less to consumers, and more to advertisers. The effects on advertising placed on network branded entertainment shows ,of perceived bias in news programming from the same source, is right now an unknown, but the experiment is underway.
The increasing competition from Internet information sources, and the exposure of incompetence and bias via citizens' media, will have a fragmenting effect on existing information bundles. The attempts of many legacy media sites to forbid 'deep linking' and/or set up registration walls is testimony that they are - whether analytically or viscerally - attempting to retain the illusion of bundle, rather than the reality of cherry picking by the audience.
But what of my original premise, that on the average the reader would prefer to avoid the granular choice or purchase of content? If the winds of change have blown apart the legacy media bundles, can the value of transaction cost reduction be recreated in another fashion, and revenue extracted for it? Now that's a question to get a venture capitalist's attention!
If the answer were obvious, we'd already be there. And if I had a lock on it, I'd darn sure get a few investments placed before blabbing around the blogosphere. But neither is true, so let me speculate a bit....
- Google's business model is provocative in partially reassembling the bundle from the advertisers' point of view. Through search related ads, bundling around declared interests rather than demographics can be achieved. Adsense goes further in attempting juxtaposition of ads with actual content on the same basis. I'm awaiting with interest the form that advertising will finally take on Google News. Google is leveraging cheap cycles and a lot of algorithms research against the bundling needs of advertisers, but largely leaving the readers to fend for themselves. But, it has the advantage of a clear business proposition.
- RSS aggregating software and services are a provocative attempt to let the readers build their own bundles. This is impossible in the legacy media, and creates a sharp differentiation from the old style of bundling. The juxtaposition of citizens' media (blog posts) with legacy media content ripped from its home site goes one step further in exploding the apparent value of the old bundle. Reader side aggregation can thus destroy old value, but hasn't so far shown an ability to extract serious revenue from readers.
- Technorati is another cut. It's not a bundling solution at all. Instead it seeks to reduce the 'search costs' associated with following threads of interesting discussion across the Web. If the transaction costs of retrieving individual information bits is reduced, the need and attraction of bundling is reduced. But, there's also the problem of a lacking business case. Perhaps that can be found from the advertisers' side. If promotion to demographic or general interest bundles is giving way to selling by influence, then tracking the conversation becomes of value. Technorati appears to be a radical unbundling hypothesis on both the reader and advertiser sides.
Some part of the media value chain is becoming collateral damage of the Internet, further accelerated by war and politics. Motivated by business opportunity, ideology, and just plain fun, the insurgents are gunning for the legacy media. The game is afoot!
Update: Jeff Jarvis comments and summarizes:
What's so fascinating about Tim's post is that he takes a social issue -- news and trust -- and measures it through a business perspective. I have always said that in the news business, our only asset is credibility. Tim is now measuring the declining value of that asset in the midst of scandal and in the face of new, trusted competition.
Yes, thank you. That's exactly what I was trying to say. One of the best things about this medium is you can get other bloggers to write your precis for you!