The Murdoch Effect

People have gotten used to free news online. They boot up their PC, or flip open their lap top, or even just scroll down their iPhone, and there it all is: www.guardian.co.uk; www.nytimes.com, www.zeitonline.de, www.lemonde.fr, even www.viennareview.net. There it all is. At your finger tips.

Which helps explain reader astonishment May 7 to read in the Guardian that Rupert Murdoch has decided this was all a mistake: New Corp, he announced, was planning to charge for all of its newspaper websites.

"Having free newspaper websites is a flawed business model," Murdoch told Andrew Singer of the Guardian in a conference call following the company’s report of  a 47% decline in operating profit for the first quarter. Murdoch said he envisaged website fees for all of his properties, including the (London) Times, the Sunday Times, the Sun and the News of the World, moves that could begin "within the next 12 months."

"The current days of the internet will soon be over," Murdoch said.

How does he know? Because he also owns the Wall Street Journal, whose websites is one of the few that has charged from the beginning and makes money.

This makes perfect sense to Austrian media executives.

"I can only agree," said Siegmar Schlager, CEO of the Falter Verlag in Vienna. "The creating of content costs a great deal of money and someone has to pay for it. That publishers give away their content on the Internet will not work any more – in fact, it never did."

Murdoch’s announcement comes in the wake of torrential waves of bad news in the industry. The worst is in the US, where the print media is literally cracking apart. Bankruptcies are epidemic. Returning from a sales trip, a supplier of press equipment to US newspapers recently told a friend that all but one of the 90 papers he services have filed for Chapter 11 protection.

The news of impending disaster is particularly grim for newspapers, where advertising revenues had fallen 23 per cent over the last two years, according to the 2009 State of the Media Report by the Project for Excellence in Journalism (PEJ), and more in some sectors. The Gannett chain, the U.S. largest newspaper publisher, reported a fourth-quarter profit down 36 per cent on faltering advertising sales and expenses to cut jobs, sending the company’s stock down over 8 per cent overnight.  PEJ has calculated that nearly one out of every five journalists working for U.S. newspapers in 2001 has now left the profession, and 2009 may be the worst yet.

Investor Warren Buffett told CNBC in May that he would not buy most U.S. newspapers "at any price." The current environment means newspapers "have the possibility of unending losses," Buffet said, and he does not "see anything on the horizon that causes that erosion to end."

So media professionals in Europe today are frightened: They see what is happening in the United States and fear that, as with so many other trends, it is just a matter of time before the same thing happens to them. In some countries it already has: U.K. publisher Trinity Mirror, for example, reported its ad revenues fell 30 per cent in the first 17 weeks of this year.

In Austria, unpublished estimates from an industry insider report advertising revenue for newspapers down nearly 20 per cent, about 35 per cent for magazines and as much as 50 per cent for business magazines. This is not true across the board and some divisions are even growing, but the pressure is very real.

Not everyone agrees with these dire predictions. A recent study from the Niemann Journalism Lab at Harvard University’s Kennedy Center suggests that the readership data for on-line news may be very misleading. Clicks are not reading, the study points out, and the style of engagement with a computer screen or Blackberry far less involved.

"All generally accepted truths notwithstanding, more than 96 per cent of newspaper reading is still done in the print editions," writes analyst Martin Langeveld, "and the online share of the newspaper audience is only a bit more than three per cent."

And others, like analyst Steven S. Ross, think the real culprit is the financial crisis. "Blame the economy, not the web," he says in a study published in the Columbia Journalism Review in April. Newspapers revenues were just fine through 2007, and ad spending up overall – until the recession hit.

However, in a period of tumultuous change, myths abound, and the perception of the rise in this new on-line news audience, even when the web sites of traditional news organizations still dominate, has only added to the economic crisis facing the media.

So back to Rupert Murdoch.  Even colleagues were surprised by the change of heart. "He was all committed to the ‘free is the way to go’ model," said Rick Zednik, circulation director for the Wall Street Journal Europe at the time Murdoch bought the paper. "The flip-flop is amazing."

But when the chief executive of News Corp. says things have got to change, there is a good chance they will. Declaring he would end the free online newspaper he may have opened up the flood gates for a decade of pent up frustrations in the industry. Other publishers, including The Guardian Media Group in Britain and The New York Times Co., which owns the International Herald Tribune, said they were examining ways to get readers to pay for digital news.

At the same time, the French parliament has initiated the strongest measures yet to fight the unauthorized sharing of digital music and movies, passing a law that threatens copyright pirates with the loss of their Internet access. Many in the content industries would like other countries to do the same.

Finally, Craigslist, the online classified advertising site, said it would start to screen its "adult services" ads.

For newspapers, the case for charging online readers seems clear, and they have little to lose. Few newspapers generate even ten percent of their revenue on the Internet, even after years of double-digit growth in advertising – and some suspect even that number is exaggerated.  And in 2008, the growth trend in online advertising has reversed.

"Pay walls" may well be an important part of the solution: For leading publications such as The New Yorker, the New York Review of Books, and the Atlantic Monthly, access to the only content is either included with, or an add-on to a print subscription, which has protected the print franchise – and advertiser loyalty – while offering the convenience of on-line to subscribers. Others – Spiegel On-Line and Tribune Media Services, for example – are creating additional revenue streams through syndication.

Even The Financial Times and the Wall Street Journal, whose Web sites are perhaps the best examples of paid-for digital news, generate only small fractions of their budgets from Internet subscriptions.

For general publications – which, according to surveys, will have a harder time getting online readers to pay – pay walls may just be a transitional step. To develop more viable online business models they will have to take a broader look at where money is actually made on the Internet. Other than on-line shops like Amazon or auction sites like e-bay, there are two main sources: Search engines, which sell billions of dollars’ worth of advertising, and Internet service providers.

Like the music industry – which has given up trying to get people to pay for music online newspapers could package with broadband subscriptions or mobile phone purchases, with or without advertising.

The French law may help stem music piracy, although without widespread cooperation from the rest of Europe or even the U.S., few analysts expect it to result in more music purchases, or to result in large-scale disconnections of Internet users.

What it could do is encourage Internet service providers and media companies to sit down together and come up with legitimate offerings that consumers actually want to use.

Similarly, newspapers could gain some leverage by erecting pay walls. Even Eric E. Schmidt, the chief executive of Google, has admitted that the Internet wouldn’t be worth much if there were no quality content for search engines to scour through.

But pay walls are not enough. Few people will individually subscribe to dozens of different newspapers online. But what about a general media subscription model – a kind of package membership to the world of media, giving you online offering access to dozens of publications — as well as, perhaps, films, music, games, social networking and other things that people want from the Internet?

If all of this were bundled into a contract with an Internet service provider or subsidized by Google’s search ads, it would be even more attractive. This Internet of the future would look a lot like the free Internet of today – except with a redistribution of the wealth back into the hands of the journalists, photographers and filmmakers, musicians, artists and writers who are creating the content to begin with.