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56. Learning To Love Lower Profits (1995)

56. Learning To Love Lower Profits (1995)

Many would have you believe that the newspaper’s problems sprung fully formed out of the Internet era, that up until the web was won, everything was fine for the papers and it was the Internet that drove the stake into the industries heart.

If you dig a bit, you’ll see that many people, including Philip Meyers, saw that newspapers were having problems well before the web even entered the picture. Back in the time of America Online, when profits were high and advertising was still king, he was writing about the underlying flaws with the newspaper system and how record setting profits could not last,

. . . today’s newspaper culture is the victim of that history of easy money. For perspective, consider the following comparison: In most lines of business there is a relationship between the size of the profit margin – the proportion of revenue that trickles to the bottom line – and the speed of product turnover. A business whose product has high turnover and consequently huge revenue can do nicely with a low margin. A low turnover product needs a high margin.

Supermarkets can prosper with a margin of 1 to 2 percent because their buyers consume the products continually and have to keep coming back. Sellers of diamonds or yachts or luxury sedans build much higher margins into their prices to compensate for low turnover. Across the whole range of retail products, the average profit margin is in the neighborhood of 6 to 7 percent.

In turnover, newspapers are more like supermarkets than yacht dealers. Their product has a one-day shelf life. Consumers and advertisers alike have to pay for a new version every day if they want to stay current. Absent a monopoly, newspaper margins would be at the low end. But because they own the bottleneck, the opposite is true. Before technology began to create alternate toll routes, a monopoly newspaper in a medium-size market could command a margin of 20 to 40 percent.

That easy-money culture has led to some bad habits that still haunt the industry. If the money is going to come in no matter what kind of product you turn out, you are motivated to turn it out as cheaply as possible. If newspapers are under pressure, you can cheapen the product and raise prices at the same time. And, most important, innovation is not rewarded.

There was a time when newspapers would turn away advertisers because the demand for space was so high.

They held a monopoly on the means of production and the channels of distribution. When you control the market for a product, there is very little motivation for quality and even less for innovation. Since they didn’t have to think far in advance, many newspapers simply held to the belief that their monopolies would never change. The result is that when the Internet began to cannibalize readers and draw ad dollars away, the newspapers were completely unprepared. They hadn’t, for years, thought about how to improve their product or change to face new challenges.

Combine that with the fact that their model has built into it some of the highest margins of any content-driven industry and you start to see that while the Internet may have been the straw that broke the camels back, the real problems with the industry had existed for far longer.

Listen to Gordon Crovitz, former publisher of the Wall Street Journal’s take on it.

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