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The Internet and Business Lecture 9. Information Businesses; Industry Analysis Example: Newspapers Spring 2009. The Internet and Business Lecture 9. Information Businesses; Industry Analysis Example: Newspapers Spring 2009. Lecture 9 1 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Only three more lectures from me! • Today: Industry Analysis Example: Newspapers – Learn Only three more lectures from me! • Today: Industry Analysis Example: Newspapers – Learn about information goods – See an example of an industry analysis (for group projects) – Learn to analyze industry structure: Porter’s Five Forces • 4/13: Industry Analysis Example: Music – Another example of an information good – Also explain how startup ventures work (financing) • 4/20: The Internet and the Workplace – How the internet has changed the nature of work • 4/27 and 5/4: Group Presentations Spring 2009. Lecture 9 2 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Group Presentation Schedule • 4/27: Internet Banking, Movie Rentals, Social Networking • 5/4: Apparel, Group Presentation Schedule • 4/27: Internet Banking, Movie Rentals, Social Networking • 5/4: Apparel, Internet Gambling, Television • Group wiki due 5/4 for all groups Spring 2009. Lecture 9 3 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Information Businesses Introduction to Information Goods Spring 2009. Lecture 9 4 The Internet and Information Businesses Introduction to Information Goods Spring 2009. Lecture 9 4 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

An information good is anything that can be digitized • • Music Movies Newspapers An information good is anything that can be digitized • • Music Movies Newspapers Book content, encyclopedias Software Blueprints Address lists These lecture notes…. . Spring 2009. Lecture 9 5 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Information goods have a unique quality – they’re non-rivalrous • I can give my Information goods have a unique quality – they’re non-rivalrous • I can give my music to you and still keep it for myself! • But I can’t do that with my car; either I’m driving it or you are • Physical goods are rivalrous – only one person can get the benefit of it at a time (e. g. car, hamburger) • Information goods are non-rivalrous – many people can get the benefit of the same item at the same time Spring 2009. Lecture 9 6 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Information goods are also cheap to copy • The cost of producing the first Information goods are also cheap to copy • The cost of producing the first copy of the song may be high – Weeks or months of composition – Time and cost of musicians – Editing, mixing etc • But once you’ve produced a song, the cost of producing one more copy is essentially zero • Information goods have high fixed costs and near-zero marginal costs Spring 2009. Lecture 9 7 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Before the internet, information goods were distributed the same way as physical goods • Before the internet, information goods were distributed the same way as physical goods • Milk distribution: – Truck delivers milk to the store – You drive to the store and buy the milk – Sometimes milk is delivered to your door • Music distribution – Truck delivers CDs to the store (e. g. Tower Records) – You drive to the store and buy the CD • News distribution – Truck delivers heavy bundles of paper with information printed on it – You drive to the store and buy the newspaper – Sometimes the newspaper is delivered to your door Spring 2009. Lecture 9 8 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Because information was treated as a “physical” good, firms could make money in the Because information was treated as a “physical” good, firms could make money in the same way • Distribute it via retail stores • Charge per copy • Prevent theft Spring 2009. Lecture 9 9 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The internet has dramatically changed the economics of businesses that produce information goods • The internet has dramatically changed the economics of businesses that produce information goods • Lower production and distribution costs • Leads to much more competition lower profits – International news organizations can easily reach New York customers – Anyone can blog about sports or local news – Small independent music producers can distribute internationally • Competitors (legal and illegal) provide free goods – Why pay for the New York Times when you can go to CNN. com for free? – New York Times and other papers forced to provide free information over the internet – Free music downloads and illegal copying have hit revenues both for record companies and artists, who receive smaller royalties Spring 2009. Lecture 9 10 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The impact of the internet on an industry depends on the product or service The impact of the internet on an industry depends on the product or service Type of industry Examples Impact of Internet Physical goods Steel, fruit, clothing ? Information goods Music, newspapers, television ? Services Gardening, travel agents, gambling, banking, social networking, movie rental ? Spring 2009. Lecture 9 11 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Industry Research Sources Spring 2009. Lecture 9 12 The Internet and Business. R. David Industry Research Sources Spring 2009. Lecture 9 12 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Look at news and its sources, financial and business sites • Need to look Look at news and its sources, financial and business sites • Need to look at the news – www. nytimes. com and similar have good business info – Look at the dates • Google is a useful starting place, but to get up to date info you need to go to the source • Company and industry reports are a very valuable source of information – See financial sites such as www. bigcharts. com, www. yahoo. com/finance, www. finance. google. com – Industry reports such as Newspaper Association of America Spring 2009. Lecture 9 13 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Information sources • Industry associations – Newspaper Association of America – International Federation of Information sources • Industry associations – Newspaper Association of America – International Federation of the Phonographic Industry (IFPI) • Trade newspapers, magazines, web sites • Company annual reports • Market research organizations such as NPD, Nielsen and others • Use press and business magazines to find original sources – Occasionally can be original sources themselves Spring 2009. Lecture 9 14 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Research tips • Start “long lead time” data first – Company financials – Market Research tips • Start “long lead time” data first – Company financials – Market size numerical data • Make sure you get the most recent news – If you base your project on data from 2002 you may find that it is now totally wrong – Internet business moves fast! You need 2008 or 2009 data – You can sometimes use older data if you are confident that little has changed • Business news sites are a good place to start – News sites try hard to be up to date with technology news – That’s because internet users are big consumers of that news – Many consumers attracts advertisers! • Include links to sources Spring 2009. Lecture 9 15 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

A+ (h op efu lly !) Newspaper Industry See class wiki Video See New A+ (h op efu lly !) Newspaper Industry See class wiki Video See New York Times web site Note: newspapers are an information good, so we expect the internet will have a big impact on the business Spring 2009. Lecture 9 16 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Executive Summary (put links to sections) • • • • • There are more Executive Summary (put links to sections) • • • • • There are more than 1, 400 newspapers in the US with total annual revenues of $55 B Advertising represents about 75% of revenue Circulation has fallen about 15% in the last five years ; advertising revenue fell over 16% in 2008; newspaper stocks are underperforming the market This was a fragmented industry with local monopolies (usually one paper town) Free news via the internet is a substitute for newspapers Web sites have also siphoned off advertising revenue, especially classified ads Newspapers have responded by setting up their own web sites, cannibalizing subscription revenue while trying to compete for advertising revenue. They are using more multimedia content. However, top news sites are portals and blogs, not newspaper sites Newspaper online ad revenue is not growing fast enough to offset falling newspaper ad revenue Profits are falling across the industry Newspapers are forming alliances with web sites to share local advertising revenue and to provide local content Papers with strong brands – like the New York Times – are trying to use their brand to create partnerships e. g. with Monster. com Some papers are advertising heavily to try to retain subscribers Expect continued consolidation among smaller papers Newspapers continuing to close, downsize or move to internet-only publication Spring 2009. Lecture 9 The 17 Unlikely that newspaper companies in their current form will survive Internet and Business. R. David Seabrook. Purchase College, SUNY. Expect newspapers will not disappear – some advertising segments still strong

Elements of industry analysis • Size – Revenues and profits – Trends – growing? Elements of industry analysis • Size – Revenues and profits – Trends – growing? Contracting? • Structure – Who are the players? Are there a few big companies or many small ones? – What do they do? • Economics of industry participants – – – Who is making the money (profitability)? Costs and cost “drivers” – what determines costs? Revenue and revenue “drivers” – what affects revenue? Impact of the internet – how does it affect cost and revenue? Determinants of industry structure – what determines the amount of competition? • Business models – Who buys the product and why? How do the businesses make money? – Impact of the internet on business models – Examples of companies with different business models • Competitive strategy • Marketing strategy • Future developments – What’s happening now? To existing companies? To new companies? – What emerging new ways are there to use the internet in this industry? Spring 2009. Lecture 9 18 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspaper Industry Size Spring 2009. Lecture 9 19 The Internet and Business. R. David Newspaper Industry Size Spring 2009. Lecture 9 19 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Ge The first thing to do in industry ts co analysis is to get Ge The first thing to do in industry ts co analysis is to get the scope right (this pe rig can be tricky!) h t Newspaper Industry Scope Questions • • • Are weekly papers included? Are free newspapers? What about news web sites like CNN. com? What about news magazines? What geographical scope? – International? – National? – Regional? Spring 2009. Lecture 9 20 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Here’s a working definition of an industry: • Group of firms • Serving the Here’s a working definition of an industry: • Group of firms • Serving the same customer needs • Using essentially the same technology Spring 2009. Lecture 9 21 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

I’m choosing to use the definition used by the Newspaper Association of America • I’m choosing to use the definition used by the Newspaper Association of America • Paid circulation – Excludes free circulation • Daily and Sunday circulation • Printed on newsprint – tabloid or broadsheet – Excludes magazines – Excludes news web sites (in my definition news web sites are a substitute for newspapers) • United States – National, regional and local papers included Spring 2009. Lecture 9 22 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

There were more than 1, 400 daily newspapers in the USA in 2007 • There were more than 1, 400 daily newspapers in the USA in 2007 • • Qu an tita tiv ed ata 1, 437 daily newspapers A total daily circulation of 52. 3 million 907 Sunday newspapers A total Sunday circulation of 53. 2 million Source: Newspaper Association of America, http: //www. naa. org/Trendsand. Numbers/Total-Paid-Circulation. aspx, accessed 4/6/08 Spring 2009. Lecture 9 23 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspapers are a $55 billion industry in the US $d ata im po rta Newspapers are a $55 billion industry in the US $d ata im po rta nt! • Circulation expenditure $11 billion (2004) • Advertising revenue $45 billion (2007) • Totals a “$55 billion newspaper industry” Source: Newspaper Association of America http: //www. naa. org/Trendsand. Numbers/Advertising-Expenditures. aspx and http: //www. naa. org/Trendsand. Numbers/Circulation-Expenditures. aspx, accessed 4/7/08 Spring 2009. Lecture 9 24 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Circulation has fallen sharply in the last four years Spring 2009. Lecture 9 25 Circulation has fallen sharply in the last four years Spring 2009. Lecture 9 25 Sh ow tre nd so ve r ti me The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspaper ad revenue fell 16. 6% in 2008 – online ad revenue not enough Newspaper ad revenue fell 16. 6% in 2008 – online ad revenue not enough Spring 2009. Lecture 9 26 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspaper Industry Structure Spring 2009. Lecture 9 27 The Internet and Business. R. David Newspaper Industry Structure Spring 2009. Lecture 9 27 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Most cities and towns were served by a single local newspaper fragmented industry with Most cities and towns were served by a single local newspaper fragmented industry with limited local competition! • Very large cities may have several newspapers, but they usually target different market segments e. g. – New York Times (targets educated, more affluent) – New York Post (less educated, less affluent, but more numerous!) • There are few nationally-distributed newspapers – New York Times, Wall Street Journal, USA Today, Washington Post, Christian Science Monitor (Source: http: //www. abyznewslinks. com/unitena. htm ) • Most newspapers serve specific regions, cities, towns – e. g. Greenwich CT – Greenwich Time – paid circulation – Greenwich Citizen (Media News Group), Greenwich Post (Hersam Acorn)– free circulation • Industry is characterized by local markets with limited competition (Why is that? See economics) Spring 2009. Lecture 9 28 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Many newspapers are owned by Bus ine large publicly traded companies ss na me Many newspapers are owned by Bus ine large publicly traded companies ss na me s Publicly Traded Newspaper Publishers Ranked by Market Capitalization as of 4/6/08 Source: Google Finance, accessed 4/6/08 Spring 2009. Lecture 9 29 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

News Corp. is an integrated media company Sample of New Corp Media Assets Film News Corp. is an integrated media company Sample of New Corp Media Assets Film 20 th Century Fox, Fox Searchlight Pictures, … Television Fox Broadcasting Company, Fox Sports, Cable Fox Movie Channel, Fox Sports, … Newspapers The New York Post, The Wall Street Journal, Dow Jones, plus British papers like The Times, The Sun, …. Other My. Space, Rotten Tomatoes, Ask Men. . Source: www. newscorp. com, accessed 4/6/08 Spring 2009. Lecture 9 30 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The Media News Group is privately owned – it owns regional papers across the The Media News Group is privately owned – it owns regional papers across the country Alaska • KTVA Colorado • Brush News Tribune • Denver Post • Estes Park Trail • Fort Morgan Times • Journal Advocate • Lamar Daily News Connecticut • Connecticut Post • Danbury News. Times • Darien News • Fairfield Citizen • Greenwich Time • New Canaan News Review • Norwalk Citizen • The Advocate • The News Times • Westport News Massachusetts • Ayer Public Spirit • Berkshire Eagle • Devens Commerce • Groton Landmark • Harvard Hillside • Lowell Sun • North Adams Transcript • Pepperell Free Press • Sentinel & Enterprise • Shirley Oracle • Townsend Times • The Valley Dispatch Michigan • The Detroit News Minnesota • St Paul Pioneer Press New Mexico • Alamogordo Daily News • Carlsbad Current Argus • Deming Headlight • Farmington Daily Times • Four Corners Business Journal • Las Cruces Sun News • Ruidoso News • Silver City Sun News Vermont • Bennington Banner • Brattleboro Reformer • Manchester Journal Southern California • Daily Breeze • Impacto USA • Inland Valley Daily Bulletin • Grunion Gazette • LA. com • LA Daily News • Long Beach Press Telegram • Pasadena Star-News • Redlands Daily Facts • San Bernardino County Sun • San Gabriel Valley Tribune • U-Entertainment • Whittier Daily News Spring 2009. Lecture 9 Source: http: //www. medianewsgroup. com/home/ Northern California • Alameda Times-Star • Argus • Berryessa Sun • Chico Enterprise Record • Contra Costa Times • Daily Democrat • Daily Review • Eureka Times-Standard • Fremont Bulletin • Fort Bragg Advocate-News • Humboldt Beacon • Inside Bay Area • Lake County Record-Bee • Marin Independent Journal • Milpitas Post • Monterey County Herald • The Mendocino Beacon • The Oakland Tribune • Oroville Mercury Register • Pacifica Tribune • Paradise Post • Redwood Times • Red Bluff Daily News • San Jose Mercury News • San Mateo County Times • Santa Cruz Sentinel • Silicon Valley • Tri-Valley Herald • Ukiah Daily Journal • Vacaville Reporter • Vallejo Times-Herald • The Willits News Utah • Park Record • Salt Lake Tribune 31 Pennsylvannia • Evening Sun • In York • Lebanon Daily News • Public Opinion • Smartmagpa. com • York Daily Record • York Dispatch Texas • Breckenridge American • El Paso Times • Graham Leader • The Jack County Herald • Jacksboro Gazette-News • KLXK-FM • KROO-AM • KSWA-AM • KWQA-FM • Lake Country Senior Times • Lake Country Shopper • Lake Country Sun • The Olney Enterprise Verticals • Bay Home Site • Careersite • Flip Side PA • Great Escapes • Home Connection Plus • Motorway • SOCAL Home. Site • Southern CA Gaming West Virginia • Charleston Daily Mail The Internet and Business. R. David Seabrook. Purchase College, SUNY.

According to Mondo. Newspapers. com, the top 100 US newspapers are owned by 40 According to Mondo. Newspapers. com, the top 100 US newspapers are owned by 40 different companies Company Gannett Company Inc. Sample of Papers Owned USA Today White Plains Journal News Mc. Clatchy Company Miami Herald Sacramento Bee Kansas City Star Media. News Group Inc. The New York Times Company Denver Post Los Angeles Daily News The New York Times Boston Globe Source: Mondo Newspapers http: //www. mondonewspapers. com/usa/owners. html, accessed The Internet and Business. 32 4/7/08 Spring 2009. Lecture 9 R. David Seabrook. Purchase College, SUNY.

Membership of a recently-formed consortium indicates the fragmented nature of the newspaper industry • Membership of a recently-formed consortium indicates the fragmented nature of the newspaper industry • • • Belo Corp. Calkins Media Cox Newspapers (also owns Valpak) The E. W. Scripps Company Hearst Newspapers – division of Hearst Corporation Journal Register Company Lee Enterprises Mc. Clatchy Media General, Inc. Media. News Inc. Morris Communications LLC – privately held Paddock Publications Inc. – privately held Source: Media News Group press release 4/17/2007, Spring 2009. Lecture 9 The Internet and Business. 33 http: //www. medianewsgroup. com/Press/Releases/2007/NPC_Yahoo_Release_FINALfor 41607. pdf R. David Seabrook. Purchase College, SUNY. ? source=rv

There is almost always an economic reason for industry structure • Little local competition There is almost always an economic reason for industry structure • Little local competition – why? – economies of scale – Cost of printing and distribution of paper means its rarely viable to have two printing plants in one place – Printing press is a fixed cost, so more circulation lower unit cost – Time sensitive material and transportation cost makes it hard to truck in newspapers from (say) another state – Advertisers prefer the largest circulation, so bigger paper gets bigger (positive feedback), what Warren Buffett calls “survival of the fattest” • Companies own multiple newspapers in a region – why? – economies of scale again – 80% of news the same, just change front page and a few others – Advertisers like to reach everyone across a certain region Spring 2009. Lecture 9 34 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Economies of scale example – one newspaper E in a town make a profit Economies of scale example – one newspaper E in a town make a profit because it can spread xplai ne fixed costs over many papers (see also next co no mi page) cs One newspaper company, fixed costs of $1 million per year, market of 2 million papers per year Fixed cost $1 million/year to run Printing press 2 million papers/year Production cost per newspaper: 50 c • Reporters • Editors If newspaper price is 60 c 10 c profit! With only one company the cost per paper is low as the fixed cost is spread out over 2 million papers. That’s economies of scale. The company makes a profit. Spring 2009. Lecture 9 35 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

With two companies they both make a loss, so one goes out of business With two companies they both make a loss, so one goes out of business and you end up with one newspaper and a monopoly in the town! Two newspaper companies, split the market between them Fixed cost $1 million/year to run Printing press 1 million papers/year Production cost per newspaper: $1 • Reporters • Editors Fixed cost $1 million/year to run Printing press Newspaper price of 60 c 40 c loss! Production cost per 1 million newspaper: $1 papers/year • Reporters • Editors Newspaper price of 60 c 40 c loss! Spring 2009. Lecture 9 36 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The internet has radically altered the industry structure Ex pla in int imp ern The internet has radically altered the industry structure Ex pla in int imp ern ac et t of • Consumers now have many free substitutes – Portals: AOL, Yahoo! – TV: CNN. com • Newspapers responded by creating their own free web sites cannibalization • Global reach of the internet means that the local monopoly of print news does not exist online intense competition for audience • More competition, cannibalization lower profits! Spring 2009. Lecture 9 37 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Porter’s five forces model of industry competition will help you define the players Potential Porter’s five forces model of industry competition will help you define the players Potential Entrants Threat of new entrants Suppliers Bargaining power of suppliers Industry competitors Bargaining power of buyers Buyers Rivalry among existing firms Threat of substitute products or services Substitutes Spring 2009. Lecture 9 38 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Free news web sites are a substitute for newspapers 5 F orc from a Free news web sites are a substitute for newspapers 5 F orc from a consumer’s perspective; from an advertiser’s es perspective Google, Monster etc. are substitutes ana • Aggregators? (like Google News) Potential Entrants • • Newsprint makers News agencies Technology vendors Printing press vendors • The New York Times… • The Journal News… Substitutes Spring 2009. Lecture 9 39 is • Individual news consumers • Advertisers • Other news outlets (buy stories) Industry competitors Suppliers lys Buyers • • News web sites Job sites Search engines Craigslist We’ll come back to this later The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The internet changes news production and distribution economics – see video In-house reporters, photographers The internet changes news production and distribution economics – see video In-house reporters, photographers Freelancers Mu ltim ed Traditional News Production and Distribution Editing, Layout Printing Distribution ia Customer Agencies: Reuters, AP, Bloomberg, . . Freelancers Agencies: Reuters, AP, Bloomberg, . . Spring 2009. Lecture 9 Internet News Production and Distribution Editing, Web Layout Customer WAY lower cost!! 40 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

TV sites and internet portals dominate online news audiences News Site Audiences for February TV sites and internet portals dominate online news audiences News Site Audiences for February 2008 Source: Nielsen net ratings, reported on http: //www. naa. org Spring 2009. Lecture 9 41 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The New York Times is the most visited newspaper web site Source: Nielsen//Net. Ratings, The New York Times is the most visited newspaper web site Source: Nielsen//Net. Ratings, Custom. Mega. Panel, US Report: NAA NADBase - Topline Panel: Spring 2009. Lecture 9 The Internet and Business. 42 Combined Home and Work Period: Nov. 2006, www. naa. org R. David Seabrook. Purchase College, SUNY.

Political news blogs generate the most intense interest News Site Audiences for February 2008 Political news blogs generate the most intense interest News Site Audiences for February 2008 Source: Nielsen net ratings, reported on http: //www. naa. org Spring 2009. Lecture 9 43 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspapers are forming alliances with internet companies Example of Strategic Alliance Consortium of Local Newspapers are forming alliances with internet companies Example of Strategic Alliance Consortium of Local Newspapers Yahoo! • Unique local content • Local relationships • Membership • 12 newspaper companies • 264 newspapers • 44 states + • National reach • Advanced internet advertising technology • Enhanced newspaper online ad revenue using Yahoo!’s graphical ads, ad-serving technology, targeting, inventory management • Can provide national access to local advertisers • Yahoo! paid search on newspaper web sites • Yahoo! gets local news content to spread across its sites Source: Media News Group press release 4/17/2007, Spring 2009. Lecture 9 The Internet and Business. 44 http: //www. medianewsgroup. com/Press/Releases/2007/NPC_Yahoo_Release_FINALfor 41607. pdf R. David Seabrook. Purchase College, SUNY. ? source=rv

Industry Economics Spring 2009. Lecture 9 45 The Internet and Business. R. David Seabrook. Industry Economics Spring 2009. Lecture 9 45 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Direct quote from Warren Buffett on newspaper economics: 1 of 2 Be for ei Direct quote from Warren Buffett on newspaper economics: 1 of 2 Be for ei nte rne t “When Charlie and I were young, the newspaper business was as easy a way to make huge returns as existed in America. As one not-toobright publisher famously said, “I owe my fortune to two great American institutions: monopoly and nepotism. ” No paper in a one-paper city, however bad the product or however inept the management, could avoid gushing profits. The industry’s staggering returns could be simply explained. For most of the 20 th Century, newspapers were the primary source of information for the American public. Whether the subject was sports, finance, or politics, newspapers reigned supreme. Just as important, their ads were the easiest way to find job opportunities or to learn the price of groceries at your town’s supermarkets. The great majority of families therefore felt the need for a paper every day, but understandably most didn’t wish to pay for two. Advertisers preferred the paper with the most circulation, and readers tended to want the paper with the most ads and news pages. This circularity led to a law of the newspaper jungle: Survival of the Fattest. ” Spring 2009. Lecture 9 The Internet and Business. 46 Source: Berkshire Hathaway letter to shareholders 2006: http: //www. berkshirehathaway. com/letters/2006 ltr. pdf R. David Seabrook. Purchase College, SUNY.

Direct quote from Warren Buffett: 2 of 2 “Thus, when two or more papers Direct quote from Warren Buffett: 2 of 2 “Thus, when two or more papers existed in a major city (which was almost universally the case a century ago), the one that pulled ahead usually emerged as the stand-alone winner. After competition disappeared, the paper’s pricing power in both advertising and circulation was unleashed. Typically, rates for both advertisers and readers would be raised annually – and the profits rolled in. For owners this was economic heaven. (Interestingly, though papers regularly – and often in a disapproving way – reported on the profitability of, say, the auto or steel industries, they never enlightened readers about their own Midas-like situation. Hmmm. . . ) Now, however, almost all newspaper owners realize that they are constantly losing ground in the battle for eyeballs. Simply put, if cable and satellite broadcasting, as well as the internet, had come along first, newspapers as we know them probably would never have existed…. …True, we have the leading online news operation in Buffalo, and it will continue to attract more viewers and ads. However, the economic potential of a newspaper internet site – given the many alternative sources of information and entertainment that are free and only a click away – is at best a small fraction of that existing in the past for a print newspaper facing no competition…. We hope that some combination of print and online will ward off economic doomsday for newspapers, and we will work hard in Buffalo to Spring 2009. Lecture 9 The Internet 47 develop a sustainable business model. I think we will be successful. Butand Business. R. David the days of lush profits from our newspaper are over. ” Seabrook. Purchase College, SUNY.

Roughly 75% of newspaper revenues come from advertising • Industry advertising revenue $45 B Roughly 75% of newspaper revenues come from advertising • Industry advertising revenue $45 B • Subscription revenue $11 B • Ad revenue/total revenue = 45/56 = 80% Spring 2009. Lecture 9 48 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Real estate, automotive and employment are the largest segments in classified advertising Spring 2009. Real estate, automotive and employment are the largest segments in classified advertising Spring 2009. Lecture 9 49 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Five forces analysis (1 of 2) Factor Impact on Newspaper Industry Profits • Industry Five forces analysis (1 of 2) Factor Impact on Newspaper Industry Profits • Industry competition • Most newspapers serve individual regions • Even national newspapers target different market segments (e. g. NYT targets educated upper income, USA Today targets mass market) • Limited head-to-head competition charge high prices to advertisers BIG profits! • Suppliers • ? Assume for now that supply of newsprint and technology is competitive, so suppliers are not a big factor in profitability • New entrants • If Google News can use newspaper content for free and take web site traffic then they are a threat • Maybe the news agencies (AP, Reuters) might enter the market with web sites aimed directly at the public Spring 2009. Lecture 9 50 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Five forces analysis (2 of 2) Factor Impact on Newspaper Industry • Substitutes • Five forces analysis (2 of 2) Factor Impact on Newspaper Industry • Substitutes • Free news sites on the web are a good substitute for newspapers, especially for people under 40 • Online markets are a good substitute for classified ads • Online advertising sites (such as Real Estate) a good substitute for newspaper ads for some (many? ) people • Significant threat! • Buyers • Individual buyers don’t have much ability to negotiate price • But big advertisers such as Coca-Cola or General Motors can probably “throw their weight around” and demand discounts Spring 2009. Lecture 9 51 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Each advertising classification faces online competition • Real estate • Zillow • For. Sale. Each advertising classification faces online competition • Real estate • Zillow • For. Sale. By. Owner. com • Automobiles • Autotrader. com • Carsdirect. com • Jobs • Monster. com • Careerbuilder. com • Hot. Jobs. com Spring 2009. Lecture 9 52 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspapers have taken a massive hit, losing around 41% of their classified revenue from Newspapers have taken a massive hit, losing around 41% of their classified revenue from 2006 to 2008 Spring 2009. Lecture 9 53 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Google’s advertising revenue is growing! Spring 2009. Lecture 9 54 The Internet and Business. Google’s advertising revenue is growing! Spring 2009. Lecture 9 54 The Internet and Business. R. David Seabrook. Purchase College, SUNY. Source: Google Financial http: //finance. google. com/finance? fstype=ii&q=NASDAQ: GOOG&hl=en

The New York Times company exhibits falling advertising revenue and shrinking profit margins New The New York Times company exhibits falling advertising revenue and shrinking profit margins New York Times Company Selected Consolidated Income Data Source: New York Times Company Annual Reports Spring 2009. Lecture 9 55 http: //www. nytco. com/investors/financials/annual_reports. html The Internet and Business. R. David Seabrook. Purchase College, SUNY.

5 year NYT stock price vs. S&P 500 Market down 30% NYT down 90% 5 year NYT stock price vs. S&P 500 Market down 30% NYT down 90% Source: Big. Charts. com Spring 2009. Lecture 9 56 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Revenue analysis New York Times Company – 2007 Source of Revenue Spring 2009. Lecture Revenue analysis New York Times Company – 2007 Source of Revenue Spring 2009. Lecture 9 57 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Look at “revenue drivers” to understand the impact of the internet and to generate Look at “revenue drivers” to understand the impact of the internet and to generate ideas to make more money Impact of Internet Advertising Number of sales Price per subscription Lose ads to online competitors Ad price down due to competition Consumers get free news online Raise price to noninternet users Number of licenses Price per license 58 Web sites will pay for content Web sites will pay for strong brands Number of ads Price per ad Revenue Subscription Other syndication, licensing Spring 2009. Lecture 9 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Cost Analysis New York Times Company – 2007 Cost Structure Note: SG&A means “Sales, Cost Analysis New York Times Company – 2007 Cost Structure Note: SG&A means “Sales, General and Administrative” costs Spring 2009. Lecture 9 59 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Look at “cost drivers” to understand the impact of the internet and to generate Look at “cost drivers” to understand the impact of the internet and to generate ideas Impact of Internet Papers printed Materials (9%) Wages (24%) Reduce print costs Cost of newsprint Lower demand Reporters, photog. Printers, laborers Technical staff Costs Other (16%) SG&A (51%) Spring 2009. Lecture 9 Reporters now do video, voice as well Reduce print staff Need skilled internet staff ? ? Amount of advertising Need to advertise to compete Cost of advertising Reporters edit own Number of managers copy Cost of managers Eliminate some Building… print facilities 60 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Bu sin es sm od els Business Model Spring 2009. Lecture 9 61 The Bu sin es sm od els Business Model Spring 2009. Lecture 9 61 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspaper business model before the internet • Why will people buy (give us $$)? Newspaper business model before the internet • Why will people buy (give us $$)? – We are the only source of local news – People will pay to be informed of what’s going on – People want to find out about local products and services • Why will this business be profitable? – – – Limited or no competition People will renew subscriptions every year We will be “the only game in town” for advertisers We can raise advertising rates every year High local fixed costs plus low variable costs means competitors will stay out (see economics section) Spring 2009. Lecture 9 62 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Many people say that because of the internet “the newspaper business model is broken” Many people say that because of the internet “the newspaper business model is broken” • Why will people buy (give us $$)? – Local news YES - still need local reporters NO – bloggers do it better – People will pay NO - Younger demographic used to free news – People want local ads NO - Can find online YES? – real estate • Why will this business be profitable? – – Limited competition NO – very easy to reach new People will renew subscriptions every year NO We will be “the only game in town” for advertisers NO We can raise advertising rates every year NO Spring 2009. Lecture 9 63 markets The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Failed business models: • Current model: combination of physical paper and free online content Failed business models: • Current model: combination of physical paper and free online content not working • Pay for selected content – NY Times introduced Times Select • Most content still free • Columnists required paid access – Abandoned the experiment on September 19, 2007 Spring 2009. Lecture 9 64 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Influential observers believe the newspaper in its current form is dead • “the core Influential observers believe the newspaper in its current form is dead • “the core assumption behind all imagined outcomes. . . was that the organizational form of the newspaper, as a general-purpose vehicle for publishing a variety of news and opinion, was basically sound, and only needed a digital facelift” • “It makes increasingly less sense even to talk about a publishing industry, because the core problem publishing solves — the incredible difficulty, complexity, and expense of making something available to the public — has stopped being a problem. ” Source: Clay Shirky, quoted in The Opinionator, March 16, 2009. Spring 2009. Lecture 9 65 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

New business models that might work include paid content for specialized publications and internet-only New business models that might work include paid content for specialized publications and internet-only newspapers • Paid content (specialized publications) – Wall St Journal charges $1. 99/week for online access – Works because people don’t feel compelled to send financial news to their friends • Internet-only newspapers – Such as Seattle Post-Intelligencer – Much smaller news staff, link to other news sources – Much lower cost (due to lower staffing and abandoning printing presses and distribution costs) may allow them to survive on internet-only advertising revenue Spring 2009. Lecture 9 66 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

There are several other business models kicking around, but no silver bullet • Micropayments There are several other business models kicking around, but no silver bullet • Micropayments – Why will they buy? – exclusive content – Readers pay a few fractions of a cent to read an article – Experience not encouraging • Endowments – Why will they buy? – charity – Turn newspapers into non-profits – Endowments fund operations • Public financing – Why will they pay? – “public good” – Similar to PBS, BBC – Political barriers Spring 2009. Lecture 9 67 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Co mp eti tiv e. S tra teg y Competitive Strategy Spring 2009. Lecture Co mp eti tiv e. S tra teg y Competitive Strategy Spring 2009. Lecture 9 68 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

How do online news sites compete without reporters? • Buy news from wire services How do online news sites compete without reporters? • Buy news from wire services – See Yahoo! – See AOL • Need their own editors to decide what to post • Use their existing layout technology • Provide complementary services (such as email) to drive visits and hence advertising Spring 2009. Lecture 9 69 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

How do blogs compete? • Narrow focus e. g. political news • Look for How do blogs compete? • Narrow focus e. g. political news • Look for the latest information – exclusives • Advertising-supported business model • Blog companies starting to form (see http: //theinternetandbusiness. wikidot. com/online-publishing) Spring 2009. Lecture 9 70 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Every newspaper now has an online presence • Cannibalization – they “eat their own” Every newspaper now has an online presence • Cannibalization – they “eat their own” newspaper sales • But better cannibalize yourself than have someone else eat your business • Almost all offer free content • Try to drive number of visitors up to increase advertising revenues • But ad revenue does not climb fast enough to offset falling offline ads and circulation revenue Spring 2009. Lecture 9 71 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

How can newspaper companies compete? • What do they have that online sites don’t? How can newspaper companies compete? • What do they have that online sites don’t? – – Local reporters on the ground Local ad sales people Relationships with advertisers Brand loyalty • What can they do that online sites can’t? – Reach people who don’t use the internet (currently an older, wealthier population, but dying out) – Reach people when they’re away from a computer or smart phone – Deliver color advertising on paper that can sit around and be looked at many times (“persistence”) Spring 2009. Lecture 9 72 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The New York Times’ strategy is to use its brand, to become a dominant The New York Times’ strategy is to use its brand, to become a dominant multimedia news platform, and to focus on the most profitable industries • New products and services – “leveraging” the trusted New York Times brand • Growth in digital operations – Goal is “to build a fully interactive, news and information platform, achieving sustainable leadership positions in our most profitable content areas” – In 2007 “concentrated on building out. . . health, business and technology” • Research and development, including data mining and web analytics • Rebalancing portfolio (selling some businesses) • Cost management – consolidate printing plants Source: The New York Times Company Annual Report 2007, pp 25 -26 Spring 2009. Lecture 9 73 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Newspapers have formed strategic partnerships with web sites • A “strategic alliance” or “strategic Newspapers have formed strategic partnerships with web sites • A “strategic alliance” or “strategic partnership” is an agreement to cooperate or work together on some part of the business • Auto advertising – Media. News Group and Kaango. com • Job advertising – NYTimes and Monster. com Spring 2009. Lecture 9 74 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The New York Times has multiple strategic alliances New York Times Strategic Alliances • The New York Times has multiple strategic alliances New York Times Strategic Alliances • CNBC and NYT share digital content in business and technology • Times Company “one of Google’s largest content partners” • Monster Worldwide alliance creates cobranded recruitments sites • Alliance with Yahoo! for regional advertising – Exchange ads, use behavioral targeting Spring 2009. Lecture 9 75 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

The New York Times is trying to develop innovative technology too • Can send The New York Times is trying to develop innovative technology too • Can send and receive Real Estate listings by phone • Customized newspaper online Spring 2009. Lecture 9 76 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Most newspaper business strategies based on focus and differentiation • Focus on different market Most newspaper business strategies based on focus and differentiation • Focus on different market segments to reduce competition – WSJ focuses on financial news; competes with Bloomberg, Financial Times – New York Times trying to be the global “quality newspaper of record” – different content to tabloids – NY Post competes with other tabloids, but now also celebrity news web sites and sports sites – Local newspapers try to compete by producing news more relevant to small populations • Most existing newspapers try to capitalize on their brand – the trust customers have developed in them Spring 2009. Lecture 9 77 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Ma rke tin g. S tra t. Marketing Strategy Spring 2009. Lecture 9 78 Ma rke tin g. S tra t. Marketing Strategy Spring 2009. Lecture 9 78 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Marketing strategy: NY Times example • Product: same positioning as physical paper: quality, targeted Marketing strategy: NY Times example • Product: same positioning as physical paper: quality, targeted at educated readers; online version has more multimedia, blogs, interactive capabilities, user comments • Price: zero! (online) to readers; trying to charge premium prices to advertisers • Promotion: – NYT uses heavy television advertising to try to boost subscriptions – Deep discounting of initial subscription period – Experimenting with viral marketing and social networking (Source: naa. org) – New York Times news quiz application on Facebook – NYT application allows sharing of stories on Facebook – Reporters now appear frequently on television • Place: global distribution, trying to become more of a global newspaper (see new Global Edition) Spring 2009. Lecture 9 79 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Fu tur e. D ev . Future Developments Spring 2009. Lecture 9 80 The Fu tur e. D ev . Future Developments Spring 2009. Lecture 9 80 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Up The newspaper industry is undergoing wrenching change -to -da te N ew s Up The newspaper industry is undergoing wrenching change -to -da te N ew s • April 5: “Times Co. Threatens to Close Globe” • April 2: “Hearst Seeks 20% Annual Cost Reductions at Newspapers” • March 29: “Extinction threatens the SF Chronicle” • March 17: “Seattle Post-Intelligencer Shifts to Web Only” • March 11: “As Cities Go From Two Papers to One, Talk of Zero” • February 27: “Rocky Mountain News Folds Amid Ad Slump” • February 22: “Philadelphia Newspapers Seeking Bankruptcy” • Twitter feed: http: //twitter. com/themediaisdying Spring 2009. Lecture 9 81 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Some say the newspaper is dead; certainly change will continue • Some people predict Some say the newspaper is dead; certainly change will continue • Some people predict that the newspaper is dead – “the final copy of the final newspaper will appear on somebody’s doorstep in 2043” – Source: Eric Alterman, “Out of Print: The Death and Life of the American Newspaper”, The New Yorker, March 31, 2008, quoting Phillip Meyer, The Vanishing Newspaper (2004) http: //www. newyorker. com/reporting/2008/03/31/080331 fa_fact_alterman • More consolidation – Mergers, consolidation of news staff • Lower costs – Reporters have to create video and do their own editing (see wiki for source) Spring 2009. Lecture 9 82 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

I believe that future success will depend on solving a problem better than competitors, I believe that future success will depend on solving a problem better than competitors, but even then its not clear how much people will pay • Anyone can publish content, so business models based on publishing capability are dead • But some problems persist – Access to sources – Developing a reputation to gain respect of the audience – Filtering the good from the junk • Successful future business models will need to solve the remaining problems in a way that competitors cannot • How much will people pay for unique access to sources, reputation, filtering the good from the junk? Spring 2009. Lecture 9 83 The Internet and Business. R. David Seabrook. Purchase College, SUNY.

Homework Due 4/13/09 6: 30 pm Spring 2009. Lecture 9 84 The Internet and Homework Due 4/13/09 6: 30 pm Spring 2009. Lecture 9 84 The Internet and Business. R. David Seabrook. Purchase College, SUNY.