The push for government support for newspaper continues and this week publishers and their supporters—including the Newspaper Association of America—went before the House Joint Economic Committee detailing how the current economic climate has harmed their finances and arguing for preferential changes to tax and pension laws. They asked to be allowed to extend application of the net operating loss provisions from 2 years to 5 years and for changes in laws to allow them to underfund pension funds for a greater period of time. Both would improve their operating performance and balance sheets.
This is a case of the newspaper industry seeking long-term business benefits to solve a short-term crisis caused by poor management decisions and the recession. The leading newspaper firms and their representatives are making concerted efforts to dupe legislators and the public into believing their troubles are part of the general trends in the industry, rather than the result of management decisions and the financial crisis that is diminishing. If the provisions are passed, the public treasury will be diminished for years to come and risks for employee pensions will be increased.
Newspaper executives and other witnesses were sympathetically treated at the hearing this week, but it is unclear whether they will be able to achieve the policies they advocated.
Another proposal that the commercial firms are uninterested in themselves, but expressed sympathy for, would broadening laws regarding charities to include not-for-profit newspapers. Their support was astute because the House Joint Economic Committee’s chair, Rep. Carolyn Maloney (D-NY), has introduced her own bill (H.R. 3602) to allow newspapers to become tax exempt under section 501(C)(3) of the tax code. Her bill somewhat mirror Senate bill 673 by Sen. Benjamin Cardin, D-Md., that was discussed earlier in this blog (Analysis of the Newspaper Revitalization Act, http://themediabusiness.blogspot.com/2009/03/analysis-of-newspaper-revitalization.html). There are some differences in Maloney’s bill that need to be highlighted.
Under Section (b) of H.R. 3602, companies would qualify for tax exempt status through a 3-part test.
First, companies would have to be “publishing on a regular basis a newspaper of general circulation” to qualify. This provision stipulates no periodicity so it does not limit qualification to dailies, which are experiencing the greatest economic and financial difficulties. This language provides the exemption only to established papers and would thus exclude startups until after they were regularly publishing, requiring startups to initially obtain financing through other than tax-deductible donations.
The language in this first test requires that publications be “a newspaper of general circulation” and this will lead to questions whether it applies to newspapers focused on specific audiences in a community—such as African Americans or senior citizens—or papers providing more focused content—such as news and information for a specific neighborhood or devoted solely to politics or crime. This ambiguity could be used by IRS examiners against some papers and could be used by some publishers to take advantage of a policy not intended for them.
The second provision requires that qualifying papers publish “local, national or international stories of interest to the general public and the distribution of such newspaper is necessary or valuable in achieving an educational purpose.” The provision regarding type of coverage is better than the Senate bill because it does not require publication of all 3 types of news—something not done in many local papers.
The third provision requires that content preparation “follows methods generally accepted as educational in character.” This provision is exceedingly vague and its application is unclear because it does not deal with the content of the paper, but with the preparation of the paper. How “the preparation of the material” follows accepted educational methods would seem to require that the papers be part of an educational activity, such as being linked to training in schools or universities. This would highly limit the applicability of the bill to existing newspaper operations.
Like the Senate bill, Section (c) permits papers to carry advertising “to the extent that such newspaper does not exceed the space allotted to fulfilling the educational purposes of such qualified newspaper corporation.” This would require papers to publish no more than an equal amount of editorial and advertising content. This is lower than the limit of postal service limit (75%) and would force most existing papers to drop about 1/3 of their existing advertising or incur damaging costs by printing more news pages than they do now. This would cripple the finances of any daily paper.
Finally, Section (d) of the legislation permits qualified companies to accept tax deductable charitable donations to support their operations.
This bill, like its Senate predecessor, is likely to have limited affects on the newspaper industry because it will not interest newspaper owners because most of their papers are producing profits and it will preclude their abilities to benefit from greater profits when the advertising recovery occurs.
There is a place for not-for-profit media and journalism, but H.R. 3602 S. 673 will not do much to improve coverage or the overall condition newspaper industry. It is likely to continue to gain support from the commercial newspaper industry, however, because it can be used to provide cover for government policies that they really want.
Saturday, September 26, 2009
Wednesday, September 2, 2009
RADIO STATIONS FACE SIGNIFICANT STRATEGIC CHALLENGES
Fundamental market changes are pushing radio stations towards an uncertain future and managers and owners need to begin developing strategic responses to developments in their industry.
The challenges are being caused by declining demand for radio offerings due to lifestyle changes, the wide availability of substitutable audio platforms, and the primary content currently being offered. Audience behavior toward radio is changing and many U.S. stations now only make money for 4 to 6 hours each day. Overall, audiences are spending less time with radio and exhibiting less station loyalty than they did in the past, and young audiences are particularly difficult to attract and serve.
A major impetus of change is that audiences for music worldwide are progressively replacing radio listening with personalized playlists they have created on their computers, MP3 players, and mobile phones and by CDs on which they burned those favorites. They select music that suits their individual tastes and many have wider repositories of music in their own libraries than are offered on broadcaster playlists. Satellite and Internet radio are compounding the problem by offering hundreds of choices of highly focused music formats. These developments are increasingly making radio a less relevant platform for music entertainment delivery than it has been.
Concurrently, a wide variety of non-music programming is being offered by Satellite and Internet stations and audiences are increasingly using these services, as well as downloading podcasts on a variety of topics of individual interest from both broadcast and non-radio sources.
These problems are compounded in the U.S. because the rise of radio groups after deregulation in the mid 1990s led to national radio programmers making selections, reducing the range of genres of music and other content on radio stations. Overall, programming has become less local and less relevant as content decisions have been made elsewhere.
Advertisers sense the problem with audiences and the share of advertising expenditures going to radio is declining. Worldwide radio advertising expenditures are about 7 percent of total expenditures, down from a height of 9 percent in 1999. In the U.S. they peaked in 2002 at nearly 13 percent and are now down to about 10 percent. This downward trend is seen among most of the traditional leaders in radio advertising expenditures –Mexico, Japan, France, UK, Spain—and only in rapidly developing countries such as Brazil and China is the share spent on radio on a clear upward trajectory.
Another indicator of the problem is seen in the considerable weakening of sales prices for radio stations in recent years.
Radio station owners and managers need to start spending a good deal of time thinking about what is happening to their industry and how they will need to change their place in the media use mix. They need to seriously consider what business they are in and what unique value they produce so they can reposition their functions for audiences and advertisers.
The structure and offerings of the radio industry have been adjusted several times during its 9-decade history, but the last time the industry needed to recreate itself so dramatically occurred with the arrival of television. The arrival of television resulted in radio shifting from a general entertainment and information medium to a music entertainment platform in many nations. In the U.S., broadcasters on A.M. radio later shifted toward a talk and sports platform after F.M. developed and music migrated to that spectrum, creating new opportunities on both bands.
Repositioning radio again will not be a simple task, but it is one the industry needs to begin undertaking now. If radio managers do not start thinking ahead about the negative trends appearing in their industry, they will soon experience the alarm and fear that is pervasive in the newspaper industry. It is better for companies and industries to act before crises develop fully because they can respond to and help direct the course of change rather than merely experience its negative effects. Whether decisive action will emerge in the radio industry before we reach that point remains to be seen.
The challenges are being caused by declining demand for radio offerings due to lifestyle changes, the wide availability of substitutable audio platforms, and the primary content currently being offered. Audience behavior toward radio is changing and many U.S. stations now only make money for 4 to 6 hours each day. Overall, audiences are spending less time with radio and exhibiting less station loyalty than they did in the past, and young audiences are particularly difficult to attract and serve.
A major impetus of change is that audiences for music worldwide are progressively replacing radio listening with personalized playlists they have created on their computers, MP3 players, and mobile phones and by CDs on which they burned those favorites. They select music that suits their individual tastes and many have wider repositories of music in their own libraries than are offered on broadcaster playlists. Satellite and Internet radio are compounding the problem by offering hundreds of choices of highly focused music formats. These developments are increasingly making radio a less relevant platform for music entertainment delivery than it has been.
Concurrently, a wide variety of non-music programming is being offered by Satellite and Internet stations and audiences are increasingly using these services, as well as downloading podcasts on a variety of topics of individual interest from both broadcast and non-radio sources.
These problems are compounded in the U.S. because the rise of radio groups after deregulation in the mid 1990s led to national radio programmers making selections, reducing the range of genres of music and other content on radio stations. Overall, programming has become less local and less relevant as content decisions have been made elsewhere.
Advertisers sense the problem with audiences and the share of advertising expenditures going to radio is declining. Worldwide radio advertising expenditures are about 7 percent of total expenditures, down from a height of 9 percent in 1999. In the U.S. they peaked in 2002 at nearly 13 percent and are now down to about 10 percent. This downward trend is seen among most of the traditional leaders in radio advertising expenditures –Mexico, Japan, France, UK, Spain—and only in rapidly developing countries such as Brazil and China is the share spent on radio on a clear upward trajectory.
Another indicator of the problem is seen in the considerable weakening of sales prices for radio stations in recent years.
Radio station owners and managers need to start spending a good deal of time thinking about what is happening to their industry and how they will need to change their place in the media use mix. They need to seriously consider what business they are in and what unique value they produce so they can reposition their functions for audiences and advertisers.
The structure and offerings of the radio industry have been adjusted several times during its 9-decade history, but the last time the industry needed to recreate itself so dramatically occurred with the arrival of television. The arrival of television resulted in radio shifting from a general entertainment and information medium to a music entertainment platform in many nations. In the U.S., broadcasters on A.M. radio later shifted toward a talk and sports platform after F.M. developed and music migrated to that spectrum, creating new opportunities on both bands.
Repositioning radio again will not be a simple task, but it is one the industry needs to begin undertaking now. If radio managers do not start thinking ahead about the negative trends appearing in their industry, they will soon experience the alarm and fear that is pervasive in the newspaper industry. It is better for companies and industries to act before crises develop fully because they can respond to and help direct the course of change rather than merely experience its negative effects. Whether decisive action will emerge in the radio industry before we reach that point remains to be seen.
Friday, August 21, 2009
THE TRANSACTION COST PROBLEM OF NEWSPAPER MICROPAYMENTS
The desire to monetize online news is leading some to enthusiastically promote micropayment systems. A number of the leading newspaper sites are leaning toward a cooperative payment system that will allow readers to use a single account to access material at the leading papers. Such a system will not be technically difficult to implement, but getting the price right will be a significant challenge because of transaction costs and significant differences in the economic value of articles.
To create the best industry wide effects, a micropayment payment system would need to include as many papers as possible (see "The Challenges of Online News Micropayments and Subscriptions" http://themediabusiness.blogspot.com/2009/05/challenges-of-online-news-micropayments.html). The fact that a consortium is currently being sought only among the major players illustrates, however, that such a system would be cost inefficient because content from smaller papers would attract fewer transactions and be more expensive to service.
A widely inclusive system would encounter the problems of small payouts that have plagued collecting rights societies for authors, composers, and performers. Those systems have found that the costs of managing transactions, accounting and auditing, and conveying funds to rights holders incur higher expenses than the payments due many rights holders and that such a system is possible only when the rights holders and content that generate the most transactions subsidize those that generate the least.
This occurs because each right must have a separate account, uses of all rights must be monitored and recorded, funds must be collected, expenses for accounting, auditing and other administrative costs paid, and funds must be transferred to recipients. These activities incur significant transaction costs.
Even a cooperative system limited to newspapers that attract the largest number of customers will encounter transaction cost challenges.
In single content sales systems, for example, the cost of making transactions takes up the bulk of the price. In the sale of mobile telephone ringtones, for example, the composer, arranger, and performer get only about 20% of the price. For digital song downloads everyone associated with the content--songwriter, arranger performers, and record company--receive less than half. This occurs because merchant and financial transaction costs are very high. The cost for using a credit card adds 5 to 7 percent to merchant costs and the expense for bank processing of each transaction is a minimum of about 25 cents. Even electronic fund transfers between bank accounts incurs about 30 cents in transaction costs.
These realities will affect the structure and pricing of newspaper article micropayment purchases. The most efficient system for users and firms will require the use of prepaid customer accounts to reduce the number of bank system transactions. This will allow users to transfer funds to their accounts and then purchase articles at pennies a piece. Funds collected would be then periodically transferred to papers. Such a system could also include the option for occasional users to make credit cards purchases of articles, but the price would have to be $2 to $10 per article to make it worth the effort.
The biggest pricing challenge, however, is that some articles will be more valuable than others and will be most sought after by consumers. This means newspapers will have to figure out BEFOREHAND which stories fall into those categories and they will have to decide what prices to charge for them. Papers will have to hire personnel to try to figure out before publication which are the most economically valuable stories--something that will be extremely hard to do--or they will have to set prices based on the costs invested in creating each story (something current newspaper accounting systems do not support). In either case, increased costs will result. The only other reasonable option is to set prices per article based on the overall average cost of producing an article or a column inch of editorial copy. This, of course, over and under prices content simultaneously.
Moving to a micropayment system is not merely a matter of starting to charge for content online, but involves changing the fundamental business model of papers. Newspapers have historically bundled all content into one product available at a single price. In retailing, bundling has always worked best for getting consumers to buy more of the product at a lower price than if bought individually. With this tactic the producer gains profit because the costs of distribution and sales are collectively lower. A second tactic involves bundling products of unequal or uneven value that are sold together to achieve a joint price that is higher than would have been obtained individually.
Newspapers have historically benefited from such bundling by filling pages with relatively inexpensive news agency and syndicated content and by including huge amounts of information culled from public sources that did not require significant investment of resources or added value. Unbundling and selling individual articles with a micropayment system will produce little consumer willingness to pay for this type of content--a significant problem because it is the bulk of editorial content in most newspapers today. Unbundling will also increase transaction costs, thus reducing profitability. This will force higher prices on consumers that will affect demand.
Disaggregating the newspaper and making more money off some individual articles will also create pressure for additional payments from journalists who write the most valuable articles. This will also increase costs of the micropayment system.
Making money from online journalism is, thus, not just a matter of saying "Let's all start charging." It will require fundamental rethinking of the value chain, what content is offered, and how it is produced. It will also require significant thought about what's in it for consumers--something that is glaringly missing from current discussions of starting online payments. The consumer challenge is especially salient because most online news readers do not currently buy newspapers. If they are not willing to pay for news in print, why will they suddenly be willing to pay for that same news online? If papers can't figure that out, no decision to implement micropayments will end happily.
To create the best industry wide effects, a micropayment payment system would need to include as many papers as possible (see "The Challenges of Online News Micropayments and Subscriptions" http://themediabusiness.blogspot.com/2009/05/challenges-of-online-news-micropayments.html). The fact that a consortium is currently being sought only among the major players illustrates, however, that such a system would be cost inefficient because content from smaller papers would attract fewer transactions and be more expensive to service.
A widely inclusive system would encounter the problems of small payouts that have plagued collecting rights societies for authors, composers, and performers. Those systems have found that the costs of managing transactions, accounting and auditing, and conveying funds to rights holders incur higher expenses than the payments due many rights holders and that such a system is possible only when the rights holders and content that generate the most transactions subsidize those that generate the least.
This occurs because each right must have a separate account, uses of all rights must be monitored and recorded, funds must be collected, expenses for accounting, auditing and other administrative costs paid, and funds must be transferred to recipients. These activities incur significant transaction costs.
Even a cooperative system limited to newspapers that attract the largest number of customers will encounter transaction cost challenges.
In single content sales systems, for example, the cost of making transactions takes up the bulk of the price. In the sale of mobile telephone ringtones, for example, the composer, arranger, and performer get only about 20% of the price. For digital song downloads everyone associated with the content--songwriter, arranger performers, and record company--receive less than half. This occurs because merchant and financial transaction costs are very high. The cost for using a credit card adds 5 to 7 percent to merchant costs and the expense for bank processing of each transaction is a minimum of about 25 cents. Even electronic fund transfers between bank accounts incurs about 30 cents in transaction costs.
These realities will affect the structure and pricing of newspaper article micropayment purchases. The most efficient system for users and firms will require the use of prepaid customer accounts to reduce the number of bank system transactions. This will allow users to transfer funds to their accounts and then purchase articles at pennies a piece. Funds collected would be then periodically transferred to papers. Such a system could also include the option for occasional users to make credit cards purchases of articles, but the price would have to be $2 to $10 per article to make it worth the effort.
The biggest pricing challenge, however, is that some articles will be more valuable than others and will be most sought after by consumers. This means newspapers will have to figure out BEFOREHAND which stories fall into those categories and they will have to decide what prices to charge for them. Papers will have to hire personnel to try to figure out before publication which are the most economically valuable stories--something that will be extremely hard to do--or they will have to set prices based on the costs invested in creating each story (something current newspaper accounting systems do not support). In either case, increased costs will result. The only other reasonable option is to set prices per article based on the overall average cost of producing an article or a column inch of editorial copy. This, of course, over and under prices content simultaneously.
Moving to a micropayment system is not merely a matter of starting to charge for content online, but involves changing the fundamental business model of papers. Newspapers have historically bundled all content into one product available at a single price. In retailing, bundling has always worked best for getting consumers to buy more of the product at a lower price than if bought individually. With this tactic the producer gains profit because the costs of distribution and sales are collectively lower. A second tactic involves bundling products of unequal or uneven value that are sold together to achieve a joint price that is higher than would have been obtained individually.
Newspapers have historically benefited from such bundling by filling pages with relatively inexpensive news agency and syndicated content and by including huge amounts of information culled from public sources that did not require significant investment of resources or added value. Unbundling and selling individual articles with a micropayment system will produce little consumer willingness to pay for this type of content--a significant problem because it is the bulk of editorial content in most newspapers today. Unbundling will also increase transaction costs, thus reducing profitability. This will force higher prices on consumers that will affect demand.
Disaggregating the newspaper and making more money off some individual articles will also create pressure for additional payments from journalists who write the most valuable articles. This will also increase costs of the micropayment system.
Making money from online journalism is, thus, not just a matter of saying "Let's all start charging." It will require fundamental rethinking of the value chain, what content is offered, and how it is produced. It will also require significant thought about what's in it for consumers--something that is glaringly missing from current discussions of starting online payments. The consumer challenge is especially salient because most online news readers do not currently buy newspapers. If they are not willing to pay for news in print, why will they suddenly be willing to pay for that same news online? If papers can't figure that out, no decision to implement micropayments will end happily.
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