Robert H. Heath

Memo to Newspapers: Content Doesn’t Matter Without the Package

"Newspapers’ inability to generate the same revenue online as in print has nothing to do with content. It’s because on the web they are no longer in the business of packaging content, and that’s what the newspaper business, like every other media business, has always been about."

Exactly right.

You might find the following interesting:

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The Unraveling of Newspaper Economics

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Thanks for your kind comments.

I wrestled with the issue of how to present cause-and-effect regarding bundling and monopoly.

It's certainly easier for bundling to work in the presence of a distribution monopoly and in the extreme case, bundling won't work in a purely competitive and transparent market in which the bundled goods are priced separately and more cheaply. But bundling doesn't require a monopoly to work as a pricing strategy.

As I recall it, bundling can be effective if consumers have heterogeneous demands (you prefer the business news, I like the comics and weekend section) and the firm cannot price discriminate.

In the newspaper industry, it's certainly true that newspapers bundled all manner of content back in the day when most cities had at least two major papers or more.

My diagram suggests a one-way causal relationship, which is a limit of a two-dimensional diagram and perhaps my creativity. In reality, I think all these factors reinforced each other in a "complex" and self-reinforcing relationship.

And yes, "surplus economics" is "profit". I chose the former term to emphasize my belief that even if newspapers could instantaneously transition their businesses to the web, eliminate their newsprint and physical distribution costs and successfully deploy micro-payment and subscription models, it still might not provide the same profit as their old business model because they can no longer expect the economic benefits of bundling third-party content that's readily available (often for free) elsewhere on the web.

Thanks again.

The Problem of Media Economics: Value Equations Have Radically Changed

* "To me, these two incidents represent media value equations
* that have radically changed. It seems that most media companies
* still haven’t figured out how to adapt to or even understand the
* changes to the fundamental exchange of value in media."

* "Some of that stems from a failure to understand legacy media
* economics."

I think media companies understand very well the "changes to the fundamental exchange of value in media." And they almost certainly understand their legacy economics. What is widely misunderstood (outside the large media companies) is that the legacy value of a particular unit of "content" -- "Becoming Jane", for example -- is largely determined by high tightly the content owner can control its distribution.

In all likelihood, your inability to rent "Becoming Jane" online is a result of Disney's agreement to provide DIsney/Buena Vista releases exclusively on Starz for a prescribed period of time. (For more information, although not much, since " the terms of the settlement preclude any public comment." see www.multichannel.com/a...)

This agreement supplies Starz with a steady stream of movie titles and Disney with the ability to pre-sell a multi-year release slate to a premium cable movie channel. Back in the day before Amazon, Netflix, Roku, Vudu, TiVo, etc. these exclusive deals served to create islands of value for Disney, Starz and your cable or satellite TV provider. Today, these exclusive deals largely serve to frustrate consumers who expect to find all content readily available on-demand for rent or purchase.

There is a lot of infrastructure being supported by legacy video distribution channels, including your local multiplex, local retailers who sell DVDs, your Blockbuster store and the premium movie channels to which you might subscribe. Hollywood will not (and in some cases cannot) unwind this thicket of distribution channels and release windows and their associated infrastructure overnight. There are legal, economic and infrastructural obstacles, but overall is the fear of exchanging "digital pennies for analog dollars" in Jeff Zucker's memorable phrase.

I think the folks at Disney understand that you can either watch "Becoming Jane" or something else or nothing at all on Saturday night. What keeps them up at night is the impact on all those other distribution channels when your expectation of going online and instantly renting the title from the cheapest provider becomes a reality.

Similarly, I think newspapers fully understand what online news and classifieds are doing to the newsPAPER business. But it's not as simple as saying "let's just reduce the cost of a subscription by the cost of the newsprint and supply the paper exclusively online." In the good old days, the only way to get your morning dose of in-depth international news was the newspaper. And it came bundled with local news, TV listings and classified ads, which you paid for even if you didn't care about the local news that day, or used TV guide to decide what to watch on TV, and weren't currently in the market for a used car or new job. Bundling content you really want with content you want less passionately is a time-honored way of optimizing revenue and allowed the newspaper to provide a paper product that satisfied the various and shifting needs of a large community of diverse readers. It also conveniently supports the press room, printing plant, truck-drivers, newsstands and paper-carriers who make up the distribution chain. Finally, the resource commitment and the attractive marginal economics led to oligopoly or monopoly market structures in many cities. For these reasons, I recall a time when Warren Buffet himself thought newspapers were one of the world's greatest businesses.

A consumer's ability to disaggregate news sources -- international news from nyt.com, local news on sfgate.com, classifieds on craig's list -- unravels the local newspaper's bundling strategy. And the shift to online consumption undermines the physical and human infrastructure involved in the delivery of the paper product, leaving the local newspaper with stranded costs.

Again, I think the newspaper companies understand this phenomenon all too well. The challenge is how to surrender the surplus economics associated with bundling content and physical delivery before an obvious economic model based on unbundled, digital delivery has emerged to cover the costs of newsgathering.

So while it's undoubtedly true that many major media companies are struggling to ADAPT to "new" media economics, I believe most of them fully understand the issues. And the fundamental issue is that much of "content" economics have historically been related to effective restrictions on the channels of distribution. "New" media economics may be simply be synonymous with "lower" media economics. Like most businesses, media companies and their shareholders will struggle to cope with lowered expectations.