Next in the Google assessment is the emphasis on “unbundling” as an insurmountable business problem for journalism. “Bundling” was the idea that all parts of the paper came literally in one wrapper—news, sports, comics, grocery-store coupons—and that people who bought the paper for one part implicitly subsidized all the rest. This was important not just because it boosted overall revenue but because it kept publishers from having to figure out whether enough people were reading stories from the statehouse or Mexico City to pay the costs of reporters there.
“Newspapers never made money on ‘news,’” Hal Varian said. “Serious reporting, say from Afghanistan, has simply never paid its way. What paid for newspapers were the automotive sections, real-estate, home-and-garden, travel, or technology, where advertisers could target their ads.” The Internet has been one giant system for stripping away such cross-subsidies. Why look to the newspaper real-estate listings when you can get more up-to-date, searchable info on Zillow—or better travel deals on Orbitz, or a broader range of movie showtimes on Yahoo? Google has been the most powerful unbundling agent of all. It lets users find the one article they are looking for, rather than making them buy the entire paper that paid the reporter. It lets advertisers reach the one customer who is searching for their product, rather than making them advertise to an entire class of readers.
Next, and significantly for the company’s vision of the future, nearly everyone at Google emphasized that prospects look bleak for the printed versions of newspapers—but could be bright for the news industry as a whole, including newspaper publishers. This could seem an artificial distinction, but it is fundamental to the company’s view of how news organizations will support themselves.
“If you were starting from scratch, you could never possibly justify this business model,” Hal Varian said, in a variation on a familiar tech-world riff about the print-journalism business. “Grow trees—then grind them up, and truck big rolls of paper down from Canada? Then run them through enormously expensive machinery, hand-deliver them overnight to thousands of doorsteps, and leave more on newsstands, where the surplus is out of date immediately and must be thrown away? Who would say that made sense?” The old-tech wastefulness of the process is obvious, but Varian added a less familiar point. Burdened as they are with these “legacy” print costs, newspapers typically spend about 15 percent of their revenue on what, to the Internet world, are their only valuable assets: the people who report, analyze, and edit the news. Varian cited a study by the industry analyst Harold Vogel showing that the figure might reach 35 percent if you included all administrative, promotional, and other “brand”-related expenses. But most of the money a typical newspaper spends is for the old-tech physical work of hauling paper around. Buying raw newsprint and using it costs more than the typical newspaper’s entire editorial staff. (The pattern is different at the two elite national papers, The New York Times and The Wall Street Journal. They each spend more on edit staff than on newsprint, which is part of the reason their brands are among the most likely to survive the current hard times.)
Publishers would be overjoyed to stop buying newsprint—if the new readers they are gaining for their online editions were worth as much to advertisers as the previous ones they are losing in print. Here is a crucial part of the Google analysis: they certainly will be. The news business, in this view, is passing through an agonizing transition—bad enough, but different from dying. The difference lies in the assumption that soon readers will again pay for subscriptions, and online display ads will become valuable.
“Nothing that I see suggests the ‘death of newspapers,’” Eric Schmidt told me. The problem was the high cost and plummeting popularity of their print versions. “Today you have a subscription to a print newspaper,” he said. “In the future model, you’ll have subscriptions to information sources that will have advertisements embedded in them, like a newspaper. You’ll just leave out the print part. I am quite sure that this will happen.” We’ll get to the details in a moment, but the analytical point behind his conviction bears emphasis. “I observe that as print circulation falls, the growth of the online audience is dramatic,” Schmidt said. “Newspapers don’t have a demand problem; they have a business-model problem.” Many of his company’s efforts are attempts to solve this, so that newspaper companies can survive, as printed circulation withers away.
Finally, and to me most surprisingly, the Google analysis reveals something about journalism that people inside the business can’t easily see about themselves. This involves a kind of inefficiency that a hard-pressed journalistic establishment may no longer be able to afford.