Why do newspapers get dearer ads? Maybe because people pay for them? by mattsteinglass
December 16, 2008, 10:14 am
Filed under: Internet, Media

With the Tribune corporation filing for bankruptcy and the Detroit News and Free Press announcing they will only deliver papers 3 days a week, it appears the end of the industry I freely chose to work in 10 years ago is almost upon us. Newspapers are dying because no one will buy papers when they can get the news free on the internet. Meanwhile, internet-based news sources can’t generate nearly enough ad revenue to maintain the kinds of reporting operations newspapers do, because advertisers won’t pay nearly as much to advertise on the internet as they once did to advertise in newspapers. Megan McArdle notes that early TV advertising was lousy, too, and rather forlornly says “We may just be waiting for our advertising revolutionary who can show us how to make webvertising work,” but if so we’ve been waiting  a long time — brilliant people have been discussing how to make webvertising pay since I got my Interactive Telecom degree in 1996. TV advertising, in contrast, after getting started in the late ’40s, was generating spectacular revenues by 1960.

Why won’t advertisers pay as much for webvertising as they do for newspaper and magazine ads? Others have focused on the fact that internet ads are annoying. I think a different reason has been overlooked. Development agencies have known for over a decade that if you want to distribute condoms or anti-malaria bednets effectively, you don’t hand them out for free — you make people pay a small amount for them, because once they cost something, they start moving through the economy towards the people who need them. The initial cost gives them velocity, as people have to either use them or sell them to recoup their investment.

One thing about advertising in a newspaper is that you know the reader wants to read the newspaper because the newspaper reader paid money for it. On the free internet, the advertiser has little idea how much interest the customer really has in that page. The fact that newspaper readers pay money for the thing the advertiser buys space on makes that space intrinsically more valuable to the advertiser. This is in large measure why ads in the New York Times cost more than ads in the free New York Press, even though the Press probably prints as many copies every day as the Times does.

Making customers pay also makes the ads more valuable in another way: it limits supply. Newspapers cost money to produce, and the fact that customers must pay for them means only a limited number will be printed. Hence, only a certain total quantity of Detroit News advertising space will go out every day, and if you buy some of that space, that’s space your competitors didn’t buy. Taking up space and denying it to your competitors is valuable. But space on the internet is much less constrained: there may be limited space on screen X of Website Z, but while any one city only has one to three daily newspapers, there are essentially an infinite number of websites floating around all over the place. And the number of times screen X can appear is completely unconstrained, rising with the number of page hits — you can buy 100,000 impressions for your banner, but if the site’s viewership goes up, your competition may buy 100,000 impressions too. (This could be averted by selling banners as a percentage of total views rather than number of impressions, but I don’t know whether webvertising is sold this way — if not, maybe it should be.) In any case, advertisers have very little sense that when they buy space on a website, they are consuming a scarce resource. Scarcity generates value. The internet has little scarcity — it has infinite space. So its space has little value. (Good domain names, obviously, are more clearly limited, and have been highly valuable for over a decade.)

I am not sure this problem has a solution. What we are facing in the news business is a situation where overabundance of a resource leads to underinvestment and poverty. It is in part a tragedy of the commons (no one will invest in reporting because no one can own or sell reporting), and in part more like the chronic poverty of indigenous tribes with abundant land who practice swidden agriculture (no one will invest in efficient farming because land is infinite). It could be effective to generate scarcity by altering copyright law to create a short-term monopoly on news — perhaps a 24-hour copyright. But even with compulsory licensing at very low costs per page hit, this seems unworkable, running right up against the right to free speech. And so far, attempts to create scarcity through subscriber fees, like the NY Times’ and Salon’s premium-user models, have mostly failed due to the internet’s tendency to route around obstructions of any kind.

The final option to consider is public or not-for-profit funding. And in fact that is increasingly how things are working, as James Surowiecki and Matthew Yglesias note. People like Yglesias and Ezra Klein have their journalism basically funded by think tanks with ideological leanings (and hence partisan political contributions). Meanwhile, Britain, France and Germany will continue to have extensive reporting organizations: they call them the BBC, AFP and DPA (my employer). I hesitate to recommend that model to the US — we’re already nationalizing our banking and auto industries, and at some point the whole thing starts to seem ridiculous. But here’s a little known fact. The Associated Press is essentially becoming a reporting quasi-monopoly in the US, right? Guess who the AP’s biggest single customer is? The US government. The estimate I’ve heard is that Uncle Sam accounts for one third of the AP’s revenues.


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