Reading time: 6 – 10 minutes

The big discussion in media for a while has been the growth of smaller media companies (especially those that are web based) and the failure (or imminent failure) of large media companies. While some of the larger media companies still do very well (i.e. The Economist) others, like the Tribune and the Boston Globe, are falling on tough times. Of course part of the problem for larger media companies (really, all media companies) is the current state of the economy but there are more systematic reasons for the failings of larger media businesses.

To understand why large media companies are failing we need to look back into the past and utilize an economics lens when we do so. Let’s think about how the large media companies we know today got to where they were at their height.

Barriers to Entry

As media businesses were beginning to grow they established some solid barriers to entry. The two clear barriers to entry were:

• Printing Presses (i.e. expensive capital equipment)
• Distribution Channels (i.e. very expensive/hard to establish logistics)

Printing presses were expensive and therefore hard for new entrants to acquire. Distributions channels were also expensive (trucks, people, etc.) and hard to build (e.g. look at Amazon today – they have and extensive distribution channel and a slew of servers and they “rent” both to upstart businesses who can’t afford to, nor want to, build their own systems).

Supply and Demand

Barriers to entry led to a favorable supply and demand situation for publishers. They were able to gain a large audience since there were few suppliers and much demand. Publishers were also able to charge high ad rates since they were one of the few games in town. Publishers were also able to get away with not having very solid metrics to tie ad spending to ROI due to there being few media producers. These (potentially) inflated ad rates (relative to ROI – still need data on this) led to very large news organizations with sizable staffs that would not be able to be supported if a large premium could not be charged for advertising.

Where was this headed?

What Microeconomics would have said, if consulted, is that any time there are large economic profits being earned competitors will enter the market and eventually economic profits, on average, will be pulled down to zero. This situation manifests itself in what economists refer to as perfect competition – a situation in which many small firms produce a homogeneous product and choose their level of production based on a price set by the market. Perfect competition also entails low entry and exit barriers.

In reality the news business wasn’t perfectly competitive in its heyday. It had high barriers to entry which lead to a few large firms instead of many small firms. The news business also had differentiated products (as opposed to homogeneous products). Due to these factors publishing firms were able to earn large economic profits for a long time. However, microeconomics is also concerned with the role of technology in the economy and economists know that technology has the power to make things faster, better and cheaper and can therefore lead existing markets closer to being perfectly competitive.

Enter the Internet

As the internet began to come of age the newspapers and the publishing business a whole were not afraid. Why would they be? Internet speeds were too low and penetration amongst consumers was minuscule for a long time. However, as time moved forward more people started using the web and internet speeds became faster and faster. Those facts combined with the fact that the internet was originally conceived to share content, albeit scientific information, made it a perfect vehicle for media and a media revolution.

As the web became more prevalent digital media sites began to spring up at a more rapid pace. Now anyone* could publish. There was no need for an expensive printing press and distribution was digital. The costs (the large barriers to entry for publishing) were exponentially becoming smaller. Then came blog platforms that allowed anyone, and this time I really mean anyone (even people without any knowledge of code), to publish on the web. This lead to an explosion of content on the web that is continuing to this day.

As technology and ease of use increased the amount of content, and ad space, continued to rise at a rapid pace. In economic terms, we could say that the supply of ad space went up and demand did not keep pace driving ad prices lower. Combining that with technology that allowed advertising on the web to be tightly linked to an ROI (e.g. Google’s AdSense/AdWords business) left very little room in the business for advertising that was over priced and not easily measured. Now the print publishers were in trouble.

Today it seems like large print publishers still haven’t figured out that they can still exist but they need to be much smaller organizations since they can’t command the ad rates they once could. There is probably a role for the large players to become aggregators and editors of content from other sources and perhaps specialize in certain things (where they would have reporters producing original work). For example, the Tribune still has a differentiator and that is its brand. People trust the Tribune and a lot can be said for that. Perhaps the Tribune can use that trust to become an aggregator/curator/editor of the news while still producing local Chicago focused news since no one else can do that as well as the Tribune.

The bottom line is that publishing no longer has the barriers to entry it once did and advertising on the web is much more quantifiable and efficient when compared to print advertising. Economic profits have, with the help of technology, been whittled down in a manner that microeconomics essentially predicts. Now it is time to figure out the next model for publishing since news is incredibly important and producing and distributing news is something that needs to continue.

As I expressed above, I believe the new model may simply be smaller, leaner, more focused publishing businesses. However, there are other interesting models out there including Adrian Holovaty’s model. Adrian’s model focuses on parsing and visualizing data to some extent. Adrian can compile and visualize a large amount of local data efficiently (i.e. with few people) and he does so at EveryBlock. His team is lean and the information is very useful. He is clearly beginning to show all of us one way news can thrive inside of the new economic structure it resides in.

Another option could be not-for-profit papers. Since news and good reporting are central to our society we may need to use this type of structure to keep them alive. For example, the St. Petersburg Times is a for-profit business but it is owned by the Poynter Institute, a non-profit organization. This frees the St. Petersburg times up and lets the focus on the news that people need rather than just focusing on the bottom line.

I am very interested in see where we end up when the dust settles. I am not sure where things will ultimately go but there are a couple things that are certain. News and its dissemination must continue for our society to function and microeconomics explains, in some sense, how the publishing industry got to where it. Perhaps some basic economic principles will also help news publishing survive in this new environment.

Related Articles:

• Who will pay for the news?: Olson’s Observations
• Olson’s Observations on Media
• Olson’s Observations on the Future of Content

* People who could do some coding at minimum.

Reading time: 2 – 2 minutes

I am happy to report that I am joining forces with fellow Chicago Booth guys Sean Harper and Joshua Krall to help build TransFS. TransFS is a comparison shopping engine for small business financial services that will help small businesses save a lot of money on things like credit card processing and health insurance. TransFS is currently focused on credit card processing but we plan to launch additional products in the coming months. I will be serving as Co-Founder and COO (i.e. leading marketing, operations and sales efforts).

I am very exciting about TransFS. I believe we are in a position to revolutionize some very inefficient processes and also save small businesses a lot of money in the process. Building a business to help small businesses is something I have had on my to do list for a while. Long time readers may assume that is because I have worked in the startup arena and as a VC along with building up TECH cocktail (TC, of course, has a large focus on helping small technology companies) but there is more to it.

I grew up in a household that was sustained, and prospered, due to a small business. A small business put me through college and gave me all of the opportunity in the world. Watching my parents grow their business also instilled in me the values and the drive needed to be an entrepreneur. TransFS is a way for me to both build a business with an incredible team while also helping small businesses succeed. Doing well by doing good. I really couldn’t ask for more.

This is going to be a wild ride but I believe that we are on to something and that we are going to be able to build an incredible company. Here’s to the roller coaster ride that is entrepreneurship. I am happy to be back on it.

Reading time: 3 – 5 minutes

I was reading The Economist a couple of weeks back and one article really struck me.  The article was entitled “Smooth Operators” and it started off talking about how the worlds poor (roughly speaking, those that live on less than $2 per day) save their money. You might think they simply use savings accounts like people in developed countries do but that isn’t fully correct.  Generally the worlds poor are “unbanked” meaning that they are ineligible for even the most basic financial services you and I take for granted (e.g. savings accounts, loans, etc.). This is exactly why Muhammad Yunus developed what we now know as microfinance.

Microfinance started off as a loan program where a microfinance institution (MFI) would disburse and administer very small loans to poor people who would then take those loans and build businesses that would sustain them and their families.  Microfinance has come a long way since then and now a lot of large MFIs provide many other services to their clients.

However, savings is still an issue.  This is especially true in places where microfinance (including the micro savings account piece of microfinance) has not been fully developed. This is where the innovation mentioned in The Economist article comes in.

It turns out that some poor people in the developing world actually pay someone to look after their deposits.  Yes, you read right.  They pay “interest” on their savings at rates that equate to roughly -30% (India) and -40% (West Africa) interest rates in some cases. While this may strike the developed world as very odd this system works much better than the alternative (i.e. no savings accounts).

One of the main issues the worlds poor face is that of uneven cash flow.  Since these people generally have incomes that are low while also being unpredictable and erratic they need to control their cash flows and smooth them out.  This is what economists call “consumption smoothing,” a term that refers to spreading spending out in such a way that what one consumes today isn’t determined by what they earned that day or the day before.

What is fascinating about all of this is that, of the poor people surveyed in the new book “Portfolios of the Poor,” hardly anyone lived “paycheck to paycheck” because of their use of a combination of savings and loans.  This is clearly evidence that poor people are fairly sophisticated financially.  They also appear to be very aware of common psychological issues that cause all of us, poor or rich, to run into financial issues.

The example the Economist article brings up relating to psychology is our tendency to do what our peer group does (i.e. peer pressure).  Knowing that peer pressure exists some people in developing nations (even those with bank accounts) have begun to form “savings clubs” where the combined peer pressure of the group keeps everyone honest about their savings.  This same principle is also something that Muhammad Yunus used when he started giving small loans to the poor in the 1970s. Yunus had lendees form groups so that peer pressure would keep everyone honest in terms of paying back their loans.  This system has worked incredibly well over the past 30 years as can be seen in the repayment rates of most MFIs.

The worlds poor have proven time and time again to be very creative in solving their financial problems even though they don’t have access to all of the sophisticated financial instruments and technologies the developed world has access to.  Sure, in some cases they use unorthodox methods like paying for things that people in developed countries get for free or get paid to use (e.g. savings accounts) but the flip side to that coin is that small businesses are created (e.g. the people who charge to safeguard the savings of others), which also help to boost the local economy. All in all, it appears that the poor are much more sophisticated than people in developing nations generally think.