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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.