Robert G. Picard

Shorenstein Center, Harvard University

Media Management and Transformation Centre

Jönköping International Business School

Jönköping University, Sweden

Cash Cows or Entrecôte:The Influence of Interdependency on

Physical and Virtual Newspapers

A Bit of Context

Percentages of Total Global Value Created by Various Media

Internet Service20%

Cable Subscription

19%

Motion Pictures15%

Newspapers10%

Books10%

Television7%

Radio2%

Videogames5%Audio

Recordings5%

Magazines7%

PricewaterhouseCoopers, 2005

Newspapers are a mature industry

• characterised by stagnant markets and cost concerns

• newspaper markets are being disrupted by electronic media and new digital media– audience and advertiser behaviors toward

these media are the driving forces of change in the newspaper industries

• environment requires thought about how newspaper companies will survive and grow in the future

5 most important trends/issues

• erosion of the audience base• erosion of the advertising base• online and broadband capabilities (fixed and

mobile) and digital television are creating changes in information and advertising choices

• employee morale has eroded and stress is rising• owners of capital see more opportunities for

asset growth and sustained profits in other industries

Factors Affecting Sustainability

Production Forcesavailability of raw materials

capital costslabour costsenergy costs

taxestransportation/distribution

costs

Social Forcesenvironmental demandspolitical/legal demandscultural/social demands

Market Forcesconsumer demandadvertiser demand

total revenue availabledemographic and

psychographic changescompetition

Technological Forcesavailability of technology

user adoption of technology

Sustainability

Managerial Forcesorganizational effectiveness

productivityfinancial control

innovationresponsiveness to change

labour relationsreinvestment

Protectionist Forcesproblems with substitutability

customer resistance to changestructural control of resources

• audiences are at the heart of change in print media

• audiences for print media are growing older

• readers are reading fewer publications

• readers are spending less time reading

• income and education levels of print audiences are rising

Biggest challenges come from newspaper audiences

Increasing choices and use patterns reduce time spent with newspapers

• newspapers are just one of many choices for news/information and diversion/entertainment available

• audiences increasingly view all media as having same functions

• increased competition for audience attention

• younger people use media differently than older persons

Readership used to be a function of age, now it is a function of generation

0 10 20 30 40 50

GenerationalReading Gap

% reading

Newspaper readership over time

1700 1800 1900 2000 2100

industrial revolution

urbanisation literacy

television

How must the

business model

change to permit

survival?

?

• newspapers have one of the largest shares of advertising expenditures – In many developed nations it is still number one

• newspaper share of total advertising is declining– real expenditures for newspapers are rising but have slow growth rates

• the primary sources of newspaper advertising revenue are shifting--retail advertising is not as important as in the past

--classified advertising is driving growth

Advertiser choices are critical to newspaper industry developments

Changes in Global Ad Expenditures 1995 and 2004

0

10

20

30

40

50

60

Print TV Radio Cinema Outdoor Internet

1995 2004

Global Online Advertising

• About 3 percent of total advertising expenditures• Limited use by most traditional advertisers

– 10 companies provide 74% of global Internet advertising– 50 companies provide 97% of global Internet advertising

• Biggest use by computer and software firms, financial services firms, and direct mail retailers

• Biggest users are not direct competitors to newspaper advertising

• Migration of classified advertising is removing the source of growth for newspaper advertising– Especially employment, real estate, and automobile advertising

majority ofnewspapers

Declining Market Share

Increasing Market Share

High Market Growth

Low or Negative Market Growth

growth management

service quality management

innovation

strategic planning

diversification

increased marketing

product development

innovation/new product development

diversification

planning for market exit or capital withdrawal

somenewspapers

Strategic Choices in Changing Market Conditions

Product Development Activities• improvement of existing products/services

– redesigns, content changes

• reposition existing products and services– brand development, features contrasted to television,

online

• additions to existing product/service lines– online newspapers, mobile services, cross media

• establishment of new product/ service lines– free newspapers, speciality newspapers

• market introduction of completely new product/service– syndication, advertising services, new distribution services

Protection Core Newspaper Readers are Not

Migrating to Other Media

• TV network news viewing is half what it was 20 years ago

• Cable TV

• Less than 10 percent of Internet use involves news and most news use involves reading headlines on portals

• Core readers are supplementing print with online

Protection Primary Source of Advertising is Dependent Upon Newspapers

• Retail advertising is the most important category of advertising

• Retail advertising is linked to specific localities

• Retail advertising messages require types of content not easily conveyed by other types of media

Protection News Production Globally is Dependent Upon Newspapers

• Physical newspapers are the base of the business model for all news agencies

• Newspapers are the primary provider of news and information for news agencies

• Internet and mobile news is dependent on agency or newspaper provided news

New Understanding of Online, Mobile and Other Opportunities

• Not longer seen as freestanding, competing news operations

• Not seen as necessarily requiring profitability in short term– Not product extension as in creating a separate free standing

product– Potential for new revenue stream

• Limited, some advertising but not with potential of print, cross subsidized and consumer funded

• Consumer funding requires more than mere mirroring of print content; requires some uniqueness and exclusivity

• Trend toward blending of print and online newsroom operations

• Creation of additional new online and mobile services not linked to the newspaper core– Usually not co-branded with the newspaper

Newspaper advertising shares are declining in developed nations

• but the advertising pie is growing larger• patterns in nations with multiple commercial media

indicate that average newspaper share of advertising will be less than 20 percent share in 20-25 years

• current lack of additional television frequencies limits significant growth of TV advertising

• growth of interactive advertising media– special threats from searchable online classifieds and

notification services

New technologies are all threats to the newspaper industry

• CD-ROMs• web publishing• information services• wireless applications• interactive television

all provide substitutes for some communication functions of newspapers

all are nibbling away at the reader and advertising bases

How soon will new media seriously harm the newspaper industry?

• as soon as readers and advertisers switch in large numbers– numbers are not too damaging now but are

increasing steadily

• incremental changes in use and funding can be expected– no “sudden” shift

• will require changes to newspaper company business models and strategies– changes need to begin now

Consumers are being asked to make new expenditures for media and ICT• hardware: DVD players, computers,

Internet access, widescreen TVs, interactive digital television, digital audio broadcasting, mobile Internet, etc.

• software: DVDs, software, ISP payments, pay-per-view, phone charges

• to purchase the range of options currently available will require at least tripling household expenditures for media and ICT

Newspaper firms cannot “grow” out of the situation and must find transition strategies

• need to adjust to the new environment

• continuing defence of strong position as advertising providers

• transition strategies– defensive movement into new media to keep others from

dominating

– offensive movement to seek new media business opportunities built upon the print core

– gradual erosion of newspaper financial base can be replaced by growth in new media and ICT operations

• transition time will be shorter for national and metropolitan newspapers than for smaller local newspapers

The key question for publishers

How does one keep from sacrificing a firm that will produce revenue for many years

by changing too rapidly into a firm that will produce limited results for many years

Calling in the butchera financial model

costs from combined operations

revenue from new media operations

costs of the print operations

revenue from combined operations

revenue from print operations

Conventional point for taking the cow to

the abattoir

robert.picard@ihh.hj.se