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It might seem counter-intuitive, but while this post is all about media and advertising, let’s start with technology and software.

There are now a lot of options for consumers in terms of free software. Google (NASDAQ:GOOG) has been coming on strong, and they’re not alone. Last week, Microsoft (NASDAQ:MSFT) announced a free, ad-supported of MSFT Works. Of course, giving away Works for free is just the beginning, some would argue. If it looks like it makes sense, then one day you can expect to see versions of MSFT Office available for free. Sure, corporations need 100% uptime and robust versions of the software and would pay for it regardless of the cost to avoid being targeted by ads, but it could be argued that many small businesses and consumers would opt for an ad-supported Office if it’s reliable and not ad-heavy.

Also last week, MSFT CEO Steve Ballmer said that his company was “hell-bent” on making more money from ads. As more and more consumers get online, are connected 24/7 and broadband continues to rise in adoption, it could be argued that online advertising will become far larger than we expect. But in 2006, online ads clocked in $16.9B in the US and $25B worldwide. In 2010, the global number is set to be in the vicinity of $60B, as high as $90B (I did see PriceWaterhouseCoopers peg the Asian ad market alone at $110B by 2010, but despite my attempts to get a clarification from them, I am not sure how reliable that figure is).

Point is: yes, online ads might be huge. As a web entrepreneur, I sure hope so. But, I fear we’re seeing some irrational management. It’s great for MSFT to get online, they’ve bought aQuantive for $6B, so they will have plenty of exposure to web advertising, but shifting sales of software to advertising seems unwise.

MSFT generates a large portion of its $51B per year from the sale of software, I touched on this in this post after seeing MSFT’s own Don Dodge comment on MSFT’s various revenue streams. Whether this Google-envy proves wise, time will tell.

But MSFT’s decision to put a relatively weak product (Works) instead of a lighter Office version is actually quite symbolic of the issues facing media- old media that is.

When a media company cuts outakes of the Sopranos and pimps it online, then calls it premium content, they are dreaming. That’s an ad. It’s not premium. A few years ago (a whole 2 years), iFilm would run movie trailers and call it premium, too. It was laughable. Viacom (NASDAQ:VIA) paid $49M for iFilm. Then, YouTube took its spot as where people went to see videos.

Last week, News Corp. (NASDAQ:NWS) made it official: it bought the parent of Wall Street Journal and Barron’s, Dow Jones (DJ). A lot of people came out and said News Corp. Chairman Rupert Murdoch should make the WSJ.com free. To put this into context, I asked if print should go free some time ago, but whether or not WSJ.com should be free - when it’s the most successful paid site on the Web- is not an easy question.

Fred Wilson is right pretty often, but his math is off and some of the figures are wrong in his post, though his heart is in the right place. Mainly, he got blinded by the major trendline in this graph:

Yes, the New York Times (NYSE:NYT) is larger than the WSJ, but guess what, they’re both trending downward. Why? Mainstream media just isn’t what it used to be. They’re slow to react. That statement could apply to business or editorial. Business-wise we’ve seen that: Print companies were slow to get online, and those who did, like the Chronicle, just killed their businesses faster.

Bottom line, the Web shrinks the media business by making it more effective for consumers and advertisers, but the result is a smaller advertising market.

Back to WSJ and News Corp.: the Globe and Mail's (Canada’s answer to the WSJ, basically) own Mathew Ingram refers to a story in WSJ that mentions Murdoch has looked into making the Journal’s website free:

To make a portal work, News Corp. may have to convert WSJ.com to a free site. Mr. Murdoch said yesterday he hadn’t made up his mind about the wisdom of such a move. In June, Mr. Murdoch noted that a study he commissioned concluded that “you’d have 10 times as many visitors and let’s say five times as much advertising” with a free site. The increased ad dollars were offset by loss of subscription revenue, making the move a wash, he added.

Let’s repeat: by going free, yes, more people would get the Journal, but it would make less money. To an old media company like News Corp. that just paid a 67% premium for DJ, that’s not a realistic thing to do then. I respect Murdoch’s business savvy, but it’s very odd how one Board’s reversal from “no” to “yes” made everyone suddenly come out post-deal announcement and love Murdoch.

Will Murdoch make DJ stronger? Probably. Without Murdoch, the NY Post might not exist today. Will he do everything he said before the deal? No. Example:

What if, at the Journal, we spent $100 million a year hiring all the best business journalists in the world? Say 200 of them. And spent some money on establishing the brand but went global — a great, great newspaper with big, iconic names, outstanding writers, reporters, experts. And then you make it free, online only. No printing plants, no paper, no trucks.

Yeah, guess what? $100M on 200 writers means $500,000 per writer. If that’s the case, I’ll sell Mojo Supreme tomorrow, cash out, then go sit on a beach and pump out business articles for Murdoch any day. The point I’m making is that there’s a good chance Murdoch won’t make WSJ look all that much different, apart from leveraging it to help make FOX Business Channel a worthy competitor to CNBC and Bloomberg TV.

Will Murdoch invest in the Web? Of course, he must. But he won’t forget that he needs to protect and strengthen TV, because that is where News Corp. makes its money:

In fact, it will need all of the help it can get. Last week, CBS’s stock got a dose of reality because, as Forbes puts it: Is Anybody Watching TV?

The Tiffany network told Wall Street that its second-quarter profit tumbled, as top-line growth was stung by the absence of UPN, the timing of the semifinals of the NCAA Men’s Basketball Tournament and the impact of radio and television station divestitures.

Television revenues for the second quarter of 2007 decreased 4.0% to $2.2 billion, stung by the timing of the semifinals of the NCAA Men’s Basketball Tournament, which aired in the first quarter in 2007 versus the second quarter in 2006. UPN had also stopped broadcasting in September 2006.

Advertising revenues fell 11.0% from the same prior-year period. Radio revenues for the quarter, CBS said, also dropped 11.0% to $463.4 million, reflecting the impact of radio station divestments in ten markets, as well as continued weakness in the radio advertising market. Adjusted to compare revenue of stations owned in both quarters, revenue decreased 5%.

Yikes.

Source: Old Media Struggles With New Media Demands