Business May 2014

A New Golden Age for Media?

An era of investment in the news business is upon us. Will it last?
Matt Chase

For the first time in a long while, people with money are excited about the news business. Some are investing in it—most bounteously, Amazon founder Jeff Bezos, who bought The Washington Post for $250 million, and eBay founder Pierre Omidyar, who has pledged the same amount to his new First Look Media; but also the executives at Disney-owned ESPN in Nate Silver’s FiveThirtyEight, those at Vox Media in Ezra Klein’s planned wonkipedia, a bunch of top-shelf Silicon Valley venture capitalists in the publishing platform Medium, and lots of others.

People with money are talking about the news business, too. The venture capitalist and Web pioneer Marc Andreessen (who has investments in three digital news operations) unleashed a spirited discussion on Twitter early this year with his visions of a bright digital future for news.

At one point Andreessen offered up the “most obvious 8 business models for news now & in the future.” After listing today’s staples, (1) advertising and (2) subscriptions, he continued with (3) premium content (that is, “a paid tier on top of a free, ad-supported one”); (4) conferences and events; (5) cross-media (meaning that your news operation also generates books, movies, and the like); (6) crowd-funding; (7) micropayments, using Bitcoin; and (8) philanthropy. Nicholas Thompson, the editor of The New Yorker’s Web site and a co-founder of the digital sort-of-magazine The Atavist, chimed in with two more: (9) “while building product you’re passionate about, create software you then license widely!”—The Atavist’s approach—and (10) “fund investigative business stories + then short stocks before publishing,” a reference to the billionaire Mark Cuban’s controversial relationship with Sharesleuth.

A few days later, I found myself reading about how Joseph Pulitzer, the onetime owner of the New York World, was accused in 1886 of doing something similar to what Cuban does. His accusers were congressmen unsettled by a World investigation into the well-connected Pan-Electric Telegraph Company, and James McGrath Morris’s biography gives the impression that Pulitzer was innocent. But some journalists in that rambunctious era almost surely did a little pre-publication buying and short-selling. In fact, pretty much every media business model offered up by Andreessen, Thompson, and others these days has a 19th- or early-20th-century analogue (well, maybe not micropayments via Bitcoin, although there were a lot of newspapers that sold for a penny).

The reason some of these moneymaking ideas seem fresh or strange or maybe even a little dodgy now is that we’ve just been through roughly half a century during which news organizations could fund themselves more than adequately with straightforward advertising, supplemented with a bit of subscription revenue. But it didn’t always work that way. And the immediate future of news media may end up looking a lot more like the pre-1950s landscape than what we’ve become accustomed to since.

What did that landscape look like, from a business perspective? Certainly not dismal—there were media fortunes made and empires built before 1950. But they tended to be fleeting. For most of the news business, for most of its history, just getting by was the norm. “News hasn’t been that lucrative for that long, and the post–World War II period has been very anomalous,” says Richard John, a historian at Columbia Journalism School. It has often taken subsidies, cartels, and other nonmarket means to pay for the news, something today’s enthusiasts and investors should bear in mind.

Journalism for a nonelite audience was an innovation of the American republic. The country’s great experiment in self-governance required that voters know what was at stake in Washington, so Congress did its best to ensure the flow of relevant information. The Post Office Act of 1792, for example, gave newspapers a sharp discount on mailing rates. By 1794, John reports in his book Spreading the News, newspapers were generating just 3 percent of postal revenue but accounting for 70 percent of postal matter by weight—a bit like Netflix’s and YouTube’s hogging of Internet bandwidth today.

In the early days, most of these newspapers were controlled by political factions and supported in large part by contracts to print government documents. But they contained more than just party propaganda, and were widely available to nonsubscribers—rural post offices allowed anyone who stopped by to peruse the newspapers that had arrived. The result was that, as Alexis de Tocqueville noted in 1831, even backwoods Americans seemed to know a lot more about what was going on in the world than inhabitants of the French provinces did.

By then, a new kind of journalism was springing up in the nation’s growing cities, where editor-entrepreneurs launched “penny papers” for the masses that were supposed to pay their own way, without a boost from political patrons. The most successful and influential of these pioneers was James Gordon Bennett, who launched The New York Herald in 1835 with $500 and a conviction that newspapers could attract a much bigger audience if they were fun to read.

Bennett was right, and for the next century, the nation’s big cities, and in particular its media capital, witnessed wave after wave of such journalistic innovation. Joseph Pulitzer, a Hungarian immigrant, came to New York in 1883 from St. Louis to buy the struggling World and transform it into the tribune of the city’s new immigrant majority. With its unprecedented mix of sensational crime stories, journalistic crusades, and a bold new reporting technique called the interview, the World quickly grew to be the country’s largest-circulation newspaper—making Pulitzer one of the nation’s richest men. In 1895, though, a young admirer of the World, William Randolph Hearst, bought The New York Journal and launched a hugely expensive and, at least for a time, successful campaign to surpass it. Then, in 1919, Joseph Medill Patterson, the grandson of the founder of the Chicago Tribune, took New York by storm with the Daily News, a photo-filled tabloid that eventually prevailed in the circulation wars.

These high-profile triumphs weren’t always as economically significant as they seemed. Hearst, for instance, built the country’s first real media empire, but it was mostly a vanity project, funded first by his father’s mining and real-estate riches, and then by a succession of bank loans and bond issues, and finally a partial IPO in 1930, before the banks effectively seized control in 1937. (The Hearst Corporation remains a media power today because its founder happened to pick up, during his acquisition sprees, a few iconic magazines.)

Advertising had supplanted circulation as newspapers’ and other periodicals’ main source of revenue in the 1890s. Abetting its rise was a lot of behavior that would meet with tut-tutting today. What has recently come to be called “native advertising” was a staple then: Advertisers paid for “reading notices,” which were more or less indistinguishable from the articles alongside them. Reporters were often expected to provide “puffs” in the news pages for favored advertisers, and it was not uncommon for advertisers to give cash directly to ill-paid reporters and editors.

In the 20th century, this free-for-all finally began to settle down. The number of daily newspapers peaked around 1915, and has been declining ever since. Circulation kept rising through the 1960s, but it became harder and harder for the third or fourth daily in a city to prosper, in part because readers migrated to the suburbs and got their papers delivered at home rather than selecting from among the offerings at newsstands. And in the 1930s, radio took off and quickly established itself as a great way to sell consumer products.

Thus was the stage set for the era of national media oligopolies and local monopolies. As radio stations and their TV successors turned readers into listeners and watchers, they paradoxically enabled bigger newspaper profits, as weaker papers went under and left most cities with one dominant carrier of the ads (classifieds, department-store spreads) that couldn’t be delivered on air. “The newspaper business was as easy a way to make huge returns as existed in America,” the investor Warren Buffett recalled a few years ago. “No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits.”

Until that gusher suddenly went dry, of course. In the early 2000s, advertisers discovered that the likes of Monster.com, Cars.com, Craigslist, and Google gave them far more efficient ways to reach consumers than the newspapers ever could. The business of regional and local newspapers fell into a downward spiral, from which it has not emerged.

Which brings us to now. On the national level, at least, there are all manner of experiments and signs of success. The New York Times has, thanks partly to the success of its metered paywall, returned to a 19th-century model whereby circulation brings in more money than advertising. Buzzfeed has, by astutely catering to the massive new distribution network that is Facebook, built a huge audience at relatively low cost, while bringing in revenue with clever (and clearly labeled) modern equivalents of the “reading notice.”

The role of Facebook is worth dwelling on. The site competes with media companies in that, like them, it makes money by delivering audiences to advertisers. So does Google. These two are also possibly the most successful such enterprises ever. “They’ve become the mass media, and traditional news organizations have become the niche,” says Ken Doctor, a former executive with the now-defunct Knight Ridder newspaper chain, who writes the influential Newsonomics blog. The returns to scale and the monopoly or oligopoly profits that once accrued to news companies are going somewhere else now. The recent spate of innovative media organizations does not change that.

There are still ways to make money in news. But only in rare cases will the news business be a path to sustained riches. Doctor estimates that it takes just $5 million to $25 million to a launch a digital news operation with national impact. Yet that also may mean that it only costs the next person that much to steal your business away.

Justin Fox is an executive editor of the Harvard Business Review.
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Justin Fox is the editorial director of the Harvard Business Review.

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