Wednesday, December 22, 2004

Newspapers' innovation problem

Tim Porter at First Draft often speaks wisdom to power as he urges the newspaper industry to innovate and bemoans the glacial pace at which it does. Yet as I was reading his recent post reviewing at year's end some of the doomsday prophecies that have come along recently, the mind started flapping and out came this thought: Those of us who beat the drum for innovation do not acknowledge enough the severe financial disincentives to doing so.

In many respects the lack of innovation is a cultural quagmire of the industry. But there are serious short-term financial consequences that I think are just as important to acknowledge.

Newspapering is still (as of right this minute) a manufacturing industry. Yes, it needs to change. Yes, the feds have finally reclassified it out of manufacturing. But the reality is that the billions of dollars invested in plant and equipment make it a manufacturing industry. The glacial pace of innovation will continue until some major player fairly values those assets -- and decides to take a mega-million-dollar writedown on its books. Eventually, the industry will be forced to do that, but for now, what incentive is there for managers to take that bullet? Wall Street isn't crying for it. The stockholders certainly aren't crying for it.

It's as if you owned an electric utility and suddenly everyone could generate electricity and send it through the air. Those billions and billions of dollars of plant you own suddenly might be worth only millions. Now, you might well be able to reinvent yourself and convince all those individual generators to send their power to you and you could use your mega-transmitter to broadcast that power over the air so that they would not have to individually invest, even marginally, in their own transmitter. And maybe you throw in some enhancements, too, such as Internet access, a guarantee of stable voltage, etc. But until you can innovate to that point, what do you do with your tremendous fixed costs? You eat it big time, possibly so big that your company is at risk of going under. So your initial reaction would probably be one of denial, then one of fighting back (maybe you beseech regulators to step in and keep the individual generators at bay -- after all, their power quality can't be as good as yours, the big Utility, right?) while also scrambling to transform your company. The name of the game is preservation of assets for as long as you can so that the eventual hit does not leave the company foundering.

The utility metaphor is apt. Most news media operations, whether they want to acknowledge it, operate in a commodity/utility industry, at least in the eyes of their consumers. An additional unit of news has very little additional marginal value to the customer, and what it does have is fleeting. Like electricity, it is consumed and then discarded, perhaps doing work in the sense of bulking up a person's knowledge, but generally only so much as is absolutely needed to do the task at hand (surveillance to make sure the world has not crumbled being the most common). Were electricity available over the air, and with low costs to entry, then we could well see a situation where customers flitted from one provider to the next. In fact, one of the whole points of utility regulation was the recognition that the costs to entry are so high that society cannot afford to have its utlities fail and so regulation protects those assets. (The First Amendment, of course, provides a sticking point for the parallel argument that the "N"ews "M"edia's contribution to democracy is so vital that it, too, cannot afford to fail -- a debatable point, anyhow.)

Look at telecommunications. It is about halfway through the cycle, with massive writedowns already taken and more likely. We've already been through the "you won't have reliable service" (akin to "how can bloggers be reliable news sources") arguments and have gotten over that. Slowly, innovation is taking hold, and I see few people particularly concerned that Comcast might be providing their phone service rather than AT&T.

Telecommunications is becoming a service industry, with more and more niche players handing the actual "production" (Comcast, for instance, is leasing much of its fiber from Level 3 Communcations), and so it will be in the media business, especially newspapering.

This is the challenge to innovation that has befuddled manufacturing industries for time immemorial; when technology changes, those with the new technology can afford to be nimble and quick because they do not have the embedded costs. Some old-line companies have pulled it off, but most have at best struggled, and some have come close to failing without outside intervention (the domestic auto industry comes to mind, which in the face of more nimble foreign competition with newer plants has been shedding assets and people as fast as it can and yet has come close to failing several times).

So when we talk about innovation in the newspaper business (and broadcasting, which faces similar problems, though of lesser magnitude) and of changing the actual form of the paper , let's not just bemoan the culture, lousy as it can be and important as it is.

Let's also take a more critical look at where newspapering is along the financial curve. Many of the industry's investments were made in the late '80s and into the '90s, with color printing, computerization and the like. Many of those assets still have a potential financial life of 10 to 20 years. I think that by the end of this decade, media companies are going to start writing down heavily their existing assets to free up the resources needed to reinvent their businesses (let's hope it's not too late). The pace of innovation already is picking up a bit with some predictions that 2005 will be the year that video explodes on news media Web sites, but until the big financial hits come, we are unlikely to see innovation at the pace we would like.


At 12/24/04, 9:27 AM, Blogger Jay Rosen said...

Thank you, Doug. I learned from this one. It's not totally analagous but Editor and Publisher, a print weekly, was stuck in a similar rut. Then they decided to go monthly in print and daily on the Web and they're doing better than ever. I guess the difference is they never owned the presses.

Keep writing on the mystery of why newspapers don't innovate, please.

At 12/26/04, 1:36 PM, Blogger David said...

Good post. For all the tons of commentary on media changes one finds on the web, precious little of it takes into account financial realities. Glad to see that you did.


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