Sorry, Rupert Murdoch…Content Will Remain Free. Here Are the Facts:

Rupert Murdoch, in a Wall Street Journal Op-Ed, once again proclaimed the advertising business model dead and the era of free content over.

There is no doubt that Murdoch is an astute business man.  He has made a fortune in media, much of it in tabloids and by cozying up to dictatorships in countries such as China and Russia.  He cynically titled the piece that he published in his own newspaper to further his business interests,  “Journalism and Freedom.”

Generally speaking, I’m a fan of Murdoch.  They say, “you can’t argue with success” and I usually don’t, nor do I want to.  However, in this latest episode his reasoning is so divorced from the facts that I have doubts as to whether he’s really serious.

I think his contention can be boiled down to this passage in the Op-Ed:

A business model that relies primarily on online advertising cannot sustain newspapers over the long term. The reason is simple arithmetic. Though online advertising is increasing, that increase is only a fraction of what is being lost with print advertising.

Well, not exactly…

Here are the facts:

Fact: Print revenues have increased since the dawn of the internet. According to ZenithOptimedia, US Print ad revenues from 1996 to 2008 have increased by $18 billion  (from $50 Billion to $68 Billion) and globally they have increased by $50 Billion.  (from $131 Billion to $181 Billion)

Some markets, such as the UK, have fared worse but when corrected for differences in market composition the story holds (more on that later)

Fact:  Print’s loss in market share has been less than Digital’s gain. During the same 1996-2008 period, US Internet ad share has gone from 0% to 10% while Print ad share has dropped from 44% to 32%.  By “simple arithmetic,” that’s a gain of 10% for Internet and a loss of 8% for Print which means the decline in print share has been less, not more, than the gain for Internet.

To be fair, globally Print shares have decreased slightly more than Internet has increased (12% vs 10%).  Still, to say that the the increase has only been a “fraction” of the Print loss is way off base.

Moreover, it’s important where the losses have come from.  Magazines have actually increased their shares, the loss has been completely restricted to newspapers.  This shouldn’t be surprising as the Internet has been very successful with classified advertising and not done so well with display advertising.

While it’s true that newspapers are in serious trouble, the problem for the industry has more to do with their historical reliance on classified advertising.  There are some fairly common sense ways to correct this and move toward display advertising, but newspapers have been slow to adopt them.

Fact: Much of the recent losses have been cyclical. The trends mentioned above are long term trends.  The short term trends since 2007 look much worse for Print.

This shouldn’t be surprising as magazine display advertising is highly dependent on durable goods, which drive the business cycle.  In a downturn, people put off long term purchases and so it’s inevitable that advertising expenditure in those categories falls off in a recession more than in the general market.

Furthermore, recessions create bloated inventories.  Companies that need to empty their warehouses will focus more on direct response sales promotions and less on the display advertising that is Print’s forte.  In a recovery, this trend is reversed. (and Magazines did gain share during the last recovery).

Fact: People don’t actually pay for print content. While there are exceptions, for the most part publishers don’t make money on distribution and in many cases actually lose money.  This is especially true with US magazines, in which roughly 85% of circulation is sold through highly subsidized subscriptions.

In effect, we’re usually paid (albeit in paper, ink, gas, etc.) to read print content.

Fact: The Internet Makes things cheaper. On the web, anybody can publish (even me!).  The notion that an increase in competition will not decrease prices fails to recognize a simple rule of economics.  To believe that consumers will start paying for content assumes that the increase in demand will exceed the avalanche of supply.

Fact: Consumers show no aversion to ads. My wife complains about me all the time (with good reason), but I know she really loves me (at least she hasn’t divorced me yet).  Consumers have a similar relationship with ads.  They complain and watch, complain and watch.

Although counter-intuitive, the evidence with DVR’s shows that even when people have the capability to skip ads, they watch them to a much greater extent than anybody expected.

While this seems incredible, it starts to make sense when you imagine a world without ads.  Actually, in some places in the world, they don’t have to imagine it.  They actually experienced it and, as this Polish ad shows, the picture wasn’t pretty.

Without ads? We already know

If consumers show no inclination to avoid ads, why would they agree to pay for content?  Unless the content is highly specialized, experience shows that they won’t.  Moreover, to attract ad money, most content creators are zealous in their pursuit of traffic from content aggregators.

Fact: He’s Hedging. If anybody wants to read Murdoch’s piece for themselves but don’t want to pay for it, no problem!  Just go to this page on the site “All Things Digital” and you’ll find a preview and a link to the Op-Ed on the Wall Street Journal. Don’t worry, Rupert won’t mind.  He owns “All Things Digital” and the site is completely free!

The Way Forward

The truth is that there is nothing wrong with the advertising model.  Yahoo!, which is largely free content ad model as you can get,  generated nearly $2 billion in free cash flow even during the crisis year of 2008.  Facebook also looks poised to become profitable (although Murdoch owned MySpace does not).

The problem isn’t with the model, but the way in which many media moguls of the past run it.  As I wrote previously in How Great Media Companies Fail on the Internet, traditional media companies will need to change the way they operate their companies if they are to be successful in the new, digital world.  (Hint: overpaying for digital properties and running them into the ground is not a recipe for success).

There is no doubt that Digital Media poses a great challenge to incumbent media companies.  As Murdoch himself said in the same piece, “Some newspapers and news organizations will not adapt to the digital realities of our day—and they will fail.”

So, Rupert, take your own advice:  Stop whining and start adapting.

(btw. Thanks for The Simpsons.)

– Greg