It’s Them, Not You

James Suroweicki has a column in the New Yorker analyzing the slow demise of the newspaper industry. I think a lot of his assessments make sense, but I think is wrong.

Usually, when an industry runs into the kind of trouble that Levitt was talking about, it’s because people are abandoning its products. But people don’t use the Times less than they did a decade ago. They use it more. The difference is that today they don’t have to pay for it. The real problem for newspapers, in other words, isn’t the Internet; it’s us. We want access to everything, we want it now, and we want it for free. That’s a consumer’s dream, but eventually it’s going to collide with reality: if newspapers’ profits vanish, so will their product.

Now, there’s no denying there’s some truth to this; the internet’s low costs of entry facilitate cheap exchange of information, and consumers have come to feel a sense of entitlement to free or cheap information. But that doesn’t mean consumers won’t pony up. After all, iTunes is a distribution powerhouse, but this is because it’s pricing scheme (offering the same product, sans packaging, for less money) seems to make sense. There’s no need to pay for cases, printed labels, machine plants for assembly, or shipping and stocking costs, but the demand for music can still support some level of voluntary payment. The same calculus applies to online news outlets, but the variables change the outcome of the equation. That is,  the costs per article are so much lower than the cost per song, and the supply of articles from competing outlets is so much higher than the supply of programs that easily sync with your iPod, that charging a market rate for an “online subscription” simply won’t increase revenue (vis-a-vis declining ad revenue due to lower traffic).  But why is this?

As Suroweicki points out earlier in the article, online ad space is considerably less valuable than its print counterpart, but the absolute value of the revenue is not the problem. Rather, the problem is that online ad revenues currently fail to cover the costs of running a brick and mortar business, but a la the iTunes calculus, this makes complete sense: supply is higher, and operating costs are lower. It’s like trying run a bar in downtown New York while pricing drinks like a liquor wholesaler.

But fear not, as more and more print newspapers fail, the relative value of online ad space will increase, and it’s possible we’ll reach some sort of equilibrium where brick and mortar outlets like the New York Times can operate both online and in print (albeit with a subsequent reduction in print edition production). Of course, it’s also possible this equilibrium will not exist, and the New York Times will be forced to abandon its print enterprises entirely and technology will fill the void (think Kindle with WiFi), but either way, I don’t think it’s going to be consumers that wind up holding the bag.

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