Google Chief Economist on Newspapers' Future: Honesty, Obfuscation or Machiavellian?

by: Nadav Manham

Hal Varian, former economics professor and current chief economist at Google (NASDAQ:GOOG), visited the Berkeley journalism school to discuss the future of the news business. And by extension, to discuss the job prospects of journalism students.

On balance Varian was optimistic. Here he is on Apple's (NASDAQ:AAPL) iPad:

The future of news may lie in harnessing these kinds of devices. . . Users will likely engage with the tablet during peak leisure hours, and you would imagine that's very attractive to publishers.

On digital distribution of news and the opportunities to strip out costs:

Mr. Varian said he has been studying data on news publishing, ad revenue and circulation figures from the Newspaper Association of America, the Pew Research Center and other sources. His conclusion: Digital distribution will be a boon to newspaper publishers if they can also radically redefine their product and means of reaching consumers.

Typically, 53% of newspaper spending goes to traditional printing for distribution -- costs eliminated through digital distribution -- compared with 35% on what the Google exec called the "core" functions of news gathering, editorial and administration.

On what newspapers need to do:

Google wants to help publishers use web technology to grow, Mr. Varian said. "I think papers could better exploit the data they have. They need better contextual targeting and ad-effectiveness measurement."

. . . Instead, publishers should be looking at platforms such as the iPad to lure in readers during non-work hours, when they could presumably spend more time on individual news sites if they wanted to. "The challenge is, how can we make newspaper reading a leisure-time activity again? We know reading the news is valuable to our customers, but they don't spend much time doing it."

"Very attractive to publishers . . . a boon to newspaper publishers . . . Google wants to help publishers . . . the challenge is . . ." A young journalism student could be forgiven for coming out of the talk with some confidence that, if only these challenges are successfully met, the future of the journalism business looks bright.

I'm not sure I agree. Morever, I'm not sure Hal Varian agrees either. First of all, there is a difference between saying the future of publishing is bright and saying the future of the publishing business is bright. Everyone agrees the future of publishing is bright, if by "publishing" you just mean the amount of news that will be published in the future: that will explode. The real question, for both journalists and investors, is whether anyone will make any money from all this publishing that everyone knows will happen. That is, how many full-time journalists will the industry support? None of Varian's "optimistic" suggestions address this.

Maybe Varian is just being nice, trying to put the best face on what is at best a very uncertain situation, and at worst a looming disaster for the once-middle class occupation of journalism. Or maybe, just maybe . . . he's a Machiavellian genius! Here's the evidence for the latter:

Exhibit A: Varian has a history. In February 2008 he participated in an online Q&A with readers of the New York Times' (NYSE:NYT) Freakonomics blog. Here is one question, followed by Varian's answer:

Q: How can we explain the fairly entrenched position of Google, even though the differences in search algorithms are now only recognizable at the margins? Is there some hidden network effect that makes it better for all of us to use the same search engine?

A: The traditional forces that support market entrenchment, such as network effects, scale economies, and switching costs, don’t really apply to Google. To explain Google’s success, you have to go back to a much older economics concept: learning by doing. Google has been doing Web search for nearly 10 years, so it’s not surprising that we do it better than our competitors. And we’re working very hard to keep it that way!

That's . . . hard to believe. I hope to tackle the question of Google's moat more fully in a future post, but for now I'll just say that Google did not get to 70+% market share in search just from "learning by doing."

Exhibit B: It's one thing for a media mogul to be overly optimistic; that's in their blood. But Varian is a microeconomist (and a really good one) who should know better. He knows full well that the recent decimation in the newspaper industry is not because readers refuse to read papers during their peak leisure hours. He also knows that it's not enough to say that the costs of digital distribution of news will be much less than paper distribution--you must also look at who will capture that reduction in costs: consumers, employees, or shareholders. And he similarly knows that any improvements in "contextual targeting and ad-effectiveness measurement" won't necessarily be shared with employees.

Exhibit C: Varian is a fox in a henhouse. Back in the Golden Age of Hollywood, the major studios (Warner Brothers, Paramount, Fox, Columbia, and MGM) used to love it when another wide-eyed starlet would get off the bus next to Schwab's drugstore with dreams of becoming a star. Similarly, back when oil was discovered in Texas "the Majors"--those companies that refined, marketed and transported oil--encouraged the myth of the wildcatter, the independent oilman who could strike it rich at any time. Why? Because both the studios and the Majors saw improved economics to the extent the supply of their "raw material" increased.

Varian and Google are in the same position. As far as they are concerned, the more web content the better. Web content is the raw material of search. To the extent the supply of this raw material increases, that improves Google's economics. As far as I can tell, Varian never actually defined what he meant by "publisher." When you and I think of a "publisher" we think of an important person who influences elections and so forth, and who can pay journalists a real salary. Google thinks of a publisher as anyone who produces web content. I am a publisher to Google. Google wants 310 million publishers in this country. If some of them happen to be indebted former journalism students, so much the better--they're more productive, like hamsters running on a wheel.

I don't really think Hal Varian is an evil Machiavellian genius. But note that he used to be a columnist for the New York Times. Now he's Google's chief economist. He's not the New York Times chief economist, mind you. So he voted with his feet.

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