Analyst Peter Krasilovsky, a senior partner at Borrell Associates, spoke last week to a group of Knight media fellows about how the "disruptive technology" we call the Internet is encroaching on newspapers' bottom line, and what media companies can do to protect their revenue turf -- and to cash in on new Web-based revenue streams.
According to Krasilovsky, "disruptive technologies" enter the market in three stages:
"Step 1 is the beginning part, the innocent part. Where you say 'well that's a new business, it?s a different type of business, it has no relationship what so ever with what we're doing.'
"Step 2 of the disruptive technology scale is where you're beginning to see the models becoming overlapping with each other, where you're not necessarily seeing direct competition but you're beginning to see a new type of business coming in and causing the existing business to sweat a little bit."
Step 3, he says, is crisis mode: When you realize this newfangled thing is stealing your business, and you aren't sure how to get it back.
Paid content is a great way to make more money, but the real money is in advertising and marketing, don't ever forget it.
"It's where you don't want to be, it's where we think the newspaper business is today in areas like recruitment. Monster.com has their fingernails in there and there's such price pressure newspapers may not be able to recover."
"I think the media business has been too complacent. We?re not really in step one; we're in step two for most of the different types of revenue that are out there. Step three is something that could occur (and) ? there is probably no return. So that's why we're excited by the chance, while we can, to reinvent the wheel here and perhaps enter new types of business, such as premium products that could allow them to re-steer themselves."
The following is an edited excerpt of Krasilovsky's Aug. 12 talk at the Western Knight Center for Specialized Journalism's Multimedia Reporting and Convergence Workshop:
The Online Publishers Association came out with some interesting research ?(showing that) 10 percent of online users are paying for some type of content. I've heard that has gone up since this was done, we might assume that?s higher -- 13 or 14 percent.
The types of content people are paying for -- well it's not just WSJ.com -- all my friends tend to pay for that. But you have personals, business investment and entertainment -- these are the predominant types of content that people are paying for. And it?s becoming a business although it doesn't compare with the billions of dollars that are made today across different media channels.
Audience Question: I've seen that (figure) before, I just feel like personals are in a whole different category than the rest of the content. Does that sort of skew that study, or do you really think that that is a legitimate look at people paying for content? I mean they?re paying to e-mail people matches that they find on match.com; can you compare that to (paying for access to) the Calendar section of the LA Times?
PK: I'm not totally comfortable with the way the OPA wrote this out either. I mean you can make an argument that content relates to all types of listings, and personals falls into that kind of category. I know you're shaking your head there, but that?s how they looked at it. Because the OPA is an association and they want to be as inclusive as they can.
I really think that what your questions asks is can we be inclusive, all the types of media and information that might be part of the future of newspaper and television industries. Because I think that we really have been too narrow in defining what we do for a living. ?
So there's our favorite rule of thumb, which makes life difficult, which is (newspapers make) $3 of advertising for every dollar you get of circulation. What that means is ... you have to take into account your existing revenues. ... You have to support those existing revenues or you're going to destroy the business model that's been built for so many years. ...
People were shocked that the elasticity was so high -- that people were willing to get their headlines from Yahoo News, even though it is not uniquely written, but that is the reality.
Paid content is a great way to make more money, but the real money is in advertising and marketing, don't ever forget it, and if you are a consultant you're made sure you don?t ever forget it. ...
So let's look at The New York Times, and how they do it at New York Times Digital, tremendous signs of success there. And they did something that people were afraid to do in the early days, they registered their users and people could be willing to register for the New York Times, because it was considered to be unique content that was very valuable.
The New York Times is very proud of having 11 million active registered users, but that is not where they make most of their money on New York Times Digital. The real money they make -- because they know whom you are, and they can sell your type of person to different types of advertisers on a targeted basis -- comes from the 1.5 million loyal users who come in several times a week. Those are the people that come in and will be exposed to their advertising and much higher cost per thousand rates then the daily e-mail sites and the 11 million active registered users -- the people that come in about once a month or more. This is their bread and butter.
They are excited about things like the 20,000 people that have registered for NewsTracker -- which is an e-mail alert service -- and they are paying $20 a year for that product. There is a lot potential for it.
So how are people paying for paid content? Most of it is easy -- the simple model -- the annual model, Playboy.com. What we are talking about for the future is, perhaps, the model is going to be a tier for different types of aggregated content ... and people will pay on a regular basis, perhaps an annual basis, perhaps a monthly basis -- like we have the newspaper.
We are trying to see where are the a la carte products, and different types of archives, monthly products -- that is something that is very positive. But for right now, the simplest thing to do is you have somebody?s credit card -- you simply renew them, you hope that the credit card numbers are up to date, and it is good for things like AmericanGreetings.com. We?ll see whether that is the most compatible model and the most lucrative model for media going forward.
There is a new model being pushed by Louis Border, who created Borders bookstore ? now he is doing Keep Media, which he is providing a bunch of archives to 140 magazines and newspaper columnists, and he is charging $4.99/month.
Mr. Border's idea is the movie companies make all their money from archives and why can?t magazine publishers and newspapers do the same thing? Now this is an interesting debate; we don't really know the answers yet, but that is the shape of the debate that is emerging right now.
Well, a lot of newspapers, especially smaller ones, are very frustrated by the archive business because they have to pay such a large percentage of their archive revenue to the vendors -- the split can be 60/40. And, moreover, there is no great way to put together a nice package yet of different stories that are compelling, although lots of newspapers are experimenting with it, like day in history -- that type of feature that you will see and maybe have a hand in putting together.
But what Keep Media is doing, as far as newspapers are concerned, they are not trying to reinvent the wheel, they are using newspaper columnists for several newspapers. That is the only part of the newspaper that they are currently interested in. And they are kind of excited to have some of the key columnists like Dan Gillmor at the San Jose Mercury News and some others. They don't really know yet what role newspapers have in terms of being an interesting read, like magazines are.
But why can't The New York Times Magazine section or the L.A. Times Magazine section or some of the great features in business sections be part of what is considered current and worthwhile reading? The newspaper industry has been moving towards feature writing for a long time, as you all know.
So, lets talk about why paid services haven?t really taken off, and I have a few ideas of my own, but I stole this from Michael Rogers, who has been a visionary ? for many, many years.
Obviously if you don't get it from the newspaper or the TV station, you can get it somewhere else. And people were shocked that the elasticity was so high that people were willing to get their headlines from Yahoo News, even though it is not uniquely written, but that is the reality. So newspapers have had to deal with that.
The payment technology is too primitive for charging a la carte ... and that has held the industry back quite a bit. ... Perhaps you will have new types of wireless delivery service, as well. So this might not be new types of access, but it will be extra access and that will make it more valuable and help the premium value proposition as well. And this is the most important thing, I think we all can agree.
Right now the online product does not exist for itself, the online product is mostly there to help support the offline product, where most of the money is being made. As people like to point out, one or two days of revenue for Newsweek magazine ... will certainly take care of all the revenues they make for an entire year from Newsweek.com. So this is something that always needs to be considered, it is right up there with the 3-to-1 rule for advertising versus circulation. You can't be building unique new products for the online version if it doesn't help your overall corporate picture.
So there are different types of premium products, as I was hinting at before. And the order of this is something I like to play around with my friends in the consulting business because we are not really sure. But right now the No. 1 revenue source is probably putting your stuff behind a tollgate like wsj.com. No. 2: broadband products or aggregations. You know you have a million people right now paying $9.95 a month for RealMedia Super Pass. That is a lot of money. Wireless products, new types of delivery, Weather Channel, for instance, ... which has crazy weather fanatics determine when a hurricane is going to finally hit their house if they are at work. There are a lot of people who really like those things and they are willing to pay $9.99 a month for it. Archives -- some value, especially if they have interesting aggregations -- like cookbooks from food sections, things like that.
The New York Times has done well with their crossword puzzles ? and we will see other features like that being introduced. A lot of people have seen newspapers introduce pdf versions of their print newspaper. This is kind of interesting to me, as editorial people we tend to think we have to create new content all the time, but ? maybe this is more about technology, maybe it is really a matter of charging people for anytime-anywhere access to the different types of content that you want to provide. If that is what the business is all about, we need to do some new thinking.
So our No. 1 concern -- the terrible fad from 2002 was that newspapers have said, "We have had enough of putting our stuff on the Internet for free, and although we have no real proof that we are hurting our circulation, we think that just from anecdotal evidence--that we are."
And so we had a situation in the newspaper industry where everybody was talking about putting their stuff behind a firewall. And I think the threat is pretty much over. We have seen fewer than 30 newspapers go up there and cut people off cold turkey ? because people who thought they could replicate the revenue that they were making from circulation by putting stuff up and charging people on the Web for it -- if they were not subscribers -- it has proved to be untrue.
Fewer than 3 percent of the print circulation base pays for Web access when they are not already print subscribers. So if you have this newspaper with a circulation of 300,000, we are talking about being able to attract 9,000 people at the most. And that is considered successful. ... So thankfully very few newspapers today are thinking about just throwing themselves behind a firewall.
Now there are niche areas they are willing to charge for but they are not going to be irresponsibly jeopardizing those big revenues. Generally we think it is a big mistake to put yourself behind a tollgate, but there are three big exceptions. If you are truly unique and highly valuable, like the Wall Street Journal, you probably can get away with it if you reach all your goals. Exception 2, we call it the Albuquerque remote places rule; yeah, they do have a few thousand subscribers and it doesn't hurt their circulation because they don't actually care about people outside their area. There is nobody providing that type of content within the Albuquerque area, or Winnipeg, or other small remote marketplace.
And this is what scared me; I spoke to a bunch of ethnic publishers last month, and one guy owned a Vietnamese paper in ? Orange County, Calif. And he said I want to put this paper behind the firewall, and I don't think it will hurt me because nobody else provides this type of information for Orange County Vietnamese speaking people.
I think he is limiting his potential to grow by putting it behind a firewall. But if he truly only wants to reach those people in Orange County, fine. If you put your newspaper behind a tollgate you are going to have to provide content people think is unique, worthwhile. You are going to have higher costs for things like site management, because people demand good quality customer service and they lose their passwords and everything else. So from a publisher's point of view it has been a nightmare in many smaller markets. You are going to have to have an expensive registration or payment system, and that increases your costs for hardware and software.
The only area publishers are very excited about -- and I think it is a cynical type of excitement -- people access your information less if you put it behind a firewall, so you don't have such expensive bandwidth cost. Now this is something that really impacted video providers very strongly. MSNBC put most of their video behind a paid firewall because during national tragedies like the Columbia blowing up, their bandwidth costs were huge and they had to lay off journalists. It is not really a big issue with most newspapers.
So we did a survey of consumers a couple years ago, and we found out that some of the theories that people were building their tollgate arguments about didn't make a lot of sense. People said, "If you put me behind a tollgate and force me to pay, it doesn?t make me feel like the print subscription is worth more." They didn't care that much.
We also found out that nonsubscribers were even less likely to subscribe to the newspapers. You're further alienating them, and jeopardizing the chance to ever attract these people to become subscribers. This is something that really blew us away.
And we found out that as Web sites improve -- and think about your TV station or newspaper and where it was last year and where it is today and think about how much improvement -- if it had been behind a firewall all this time would anybody have noticed the way that you've improved? Would you have been able to gain the loyalty of this audience, if you had chased them away two years ago, and never let them come back in? So that is the issue that I am most concerned with.
So with that said, I am against tollgates, but I am for the niche content that you can charge for. And differentiation is a key factor there, and as people start getting registered for Web sites, you are going to start seeing a lot of great new types of content being developed.
So just to quickly go over a couple things: We've seen some disastrous rollouts of different types of premium products and people having to go back on what their corporate policy was. Belo had almost 100,000 people for their Cowboy newsletter, when they imposed a fee it went down to 800. Imagine the 3-to-1 rule and how it impacted that, in terms of advertising circulation. Well, you may have noticed in yesterday's newspaper that Belo has reintroduced Cowboys, and they are doing it on the basis of what the Milwaukee Journal and several other newspapers have done with their football sites, not an e-mail site so much as it is just a unique, differentiated product that you can?t get anywhere else and you see some real successes.
Bottom line: Paid sites are at their infancy right now. It is very important that instead of focusing on charging for the short term, we find out who the users are. Most TV and newspaper stations certainly have no idea who their user base is or the demographics. It is better to register them and form a gateway into the paid content world that we know is emerging as technology improves.