Newspapers are Mainframes

The recent travails at Knight Ridder   are getting a lot of attention (NYT, Jeff Jarvis) of late.  Some believe we are beginning the death march for newspapers and old media.  I had the opportunity to spend some time at KRI in 1997-1999 managing their Internet venture investment program.   I had a point of view then that remains today, but generalizes to more than just newspapers and media.

I was a unique animal at KRI, being a senior person who came from the Silicon Valley entrepreneurial culture, not the newspaper industry.  I was often reminded by the execs about how insular the industry was and I was there to inject a new way of thinking.  Tony Ridder deserves a lot of credit for inviting this kind of challenge. I was then an ex-software company founder – turned angel investor – turned Internet search engine executive. An uncommon resume for a newspaper company employee.

The people who own the P&Ls at KRI are the Publishers.  They are the CEOs of their respective newspapers. I was invited to meet the Publishers at a regular Publishers meeting. I was introduced to them by Bob Ingle, who ran New Media at the time.  Bob always loved to stir things up to challenge the status quo.  So he told this group of newspaper Publishers that one of the first things I ever told him was that I don’t read newspapers.  (Which was and remains true). 

I proceeded to tell them the following. 

The short-form story in the modern history of computing is the deconstruction of the mainframe.  Nothing in computing exists today that did not exist in some precursor form back in the original mainframes.  The evolution of computing is the continuous unbundling of each of the components, cost reduction and miniaturization, and subsequent empowerment of the user at the point of delivery. Newspapers are Mainframes.  The transformational power of the Internet lies in its incessant pressure to unbundle.

From there I proceeded to talk about my background in software and venture investing.

Thud. 

I forgot I was talking the SysOps -- the guys who ran the mainframes.  The silence was deafening. Not surprising that I only had one question at the end, from Tony Ridder, “Why don’t you read newspapers?”  Fair question.  I read a lot, but it’s about the re-bundling. I prefer to re-assemble for myself from many sources – a news mash-up in today’s parlance.

My theory of newspapers is fairly simple (or some might say simplistic).  There are three main cost elements -  physical assets for manufacturing and delivery, human assets for advertising sales, and human assets for information creation and editing.  The business model of the newspaper is based on two principles – network effects and bundling.

The network effect is the classifieds business.  The reason there is only one major newspaper per city, nearly everywhere, is that the classifieds business is a winner-take-all business.  This made newspapers ‘natural monopolies.’  The net effect of the natural monopoly was that the competitive pressure for innovation disappeared.  How many industries can you name where the product form, features, and delivery has not changed in 75 years? The marketing gene was largely bred out of the industry by becoming local monopolies.  Monopolies fail catastrophically because of their inability to respond when the competitive landscape changes dramatically.  This is the incumbent’s disadvantage.  The very immunity to competition that made newspapers such great businesses also created resistance to market forces.

The bundling is the aggregation of all the varied content to attract and retain the audience.  The core premise is you’ll read some content regularly, not necessarily all content.  At any point in time only about 11% of the audience is in the market for a job, home, or car.  But when they read the sports/business/comics/home sections, they’ll turn to the classifieds for the ads. The rest of the paper is the nectar, with the hope that you’ll pollinate occasionally in the classifieds.

But the Internet is that ruthless and incessant force for unbundling.  Everything is a click away.  Search costs are crushed. 

Newspapers are Internet victims, but they are far from being the only industry under siege.  Newspapers are especially impacted because two of the three main components of their cost structure are obsoleted.  Advertising sales moves from traditional ‘push’ to advertiser self-service.  All the physical assets of printing and delivery are obsoleted by the shared infrastructure of the Internet. If most of the cost structure goes to zero value, what’s left are news gathering and editing organizations and IT.

The Internet offers the opportunity for new entrants to build worldwide scale businesses with relatively little investment.  But crushes the residual value of shareholder equity invested in obsolete local, physical cost structures.  What looks like a great return on equity business for a new entrant looks like a balance sheet disaster for the incumbent. 

This epiphany hit home in a staff meeting when it became clear that the top line impact of all of a successful New Media effort at KRI might have the scale of one medium-sized newspaper property.   It might be very profitable, i.e., a great investment for shareholders, but a migration to an on-line business portends a much smaller total enterprise.

This is the real lesson of Internet-driven transformation.  It causes an unbundling of your traditional cost structure.  Core competences can no longer be centered on captive supply-side excellence.  Any business that relies on a vertical integration of value-added steps is vulnerable to unbundling of those steps.  Worldwide outsourcing of labor, professional services, manufacturing, and customer service are all Internet-enabled unbundling driving through many industries. 

The flip side is the Internet enables captive demand-side excellence, especially with the newer Web 2.0 technologies and business models.  Now it is easier than ever to integrate and individuate your customers to hold them closer.  Social computing, VOIP, and software on-demand technologies all make it easier to organize your business around satisfying your customer at the lowest possible cost. 

Knight Ridder became a “pure play” newspaper company several years ago when it shed its non-newspaper assets.  Focus increases manfuacturing efficiency – good.  Lack of diversification increases exposure to obsolescence risk – bad.  I think KRI is a great company and could be a great cash cow for someone else’s portfolio.  Like all cash cows, the key is to manage it for cash and invest in other, higher growth opportunities.  Newspapers aren’t going away, yet.  But ignoring the Great Unbundler has boxed it into a strategic corner that will force a change of ownership and an eventual decline.

The ironic thing is some of the most-read feeds in my RSS reader come from the Mercury News and the NYT.  I re-bundle.

Comments

[Simon Brocklehurst]

Interesting analogy, Peter. Another view of the short history of computing is that people have been consistently predicting the death of the mainframe for the last 20 years. Yet mainframe sales have continued to be strong - because what many commentators (and hardware companies) failed to understand was that mainframe technology did not stand still.

Rather, there was continued innovation in mainframe platforms that meant they always kept a lead. It continued to be more cost-effective to deploy mainframe solutions than "unbundled equivalents". Mainframe sales remained healthy, and even experienced long periods of significant growth.

So extending the newspaper analogy further might suggest that the newspaper publishers need to innovate their platform to ensure they continue to provide benefits over what the unbundlers can offer. And maybe they're already doing just that...

What if it's not really newspapers that are the mainframes? Maybe it's "media" as a whole that is the mainframe? For example, Rupert Murdoch's (News Corp) used his newspaper businesses to subsidise his newer media ventures e.g. satellite TV broadcasting. Currently, it's the other way around - the TV companies subsidise the papers. In other words, News Corp has continued to innovate its mainframe platform... and it has continued to grow...

Interestingly, today the trend is to actually integrate "unbundled technologies" such as Linux and J2EE into the mainframe platform. And it seems that News Corp is doing precisely the same thing e.g. the acquisition of MySpace.

Just my two cents...

[Digitalthinktank.ortg]

At the digitalthinktank.org we've been exploring the viability of newspapers in the digital age. Consider the mainframe as an aggregator of information, and the following discussion on our web site may add to yours. Here's an excerpt:

The growth of aggregators as both portals for masses of information as well as vehicles for advertising (i.e. goggle), has spurred discussion regarding the future viability of newspapers, magazines, or what we’ll call “mediators.” The theory is as portals take an increasingly larger share of advertising dollars (witness Microsoft’s entree into the world of classified advertising) that the traditional “mediators” media concerns that spend significant amount of time acquiring and filtering information are obsolete in the digital world. Yet some of the most visited websites on the internet are newspapers (i.e. the NYTimes at roughly ten million visitors per month), and web traffic at many periodicals is rapidly increasing. Thus, it seems as aggregators reach saturation, the need for mediators will become more acute, not less, provided old media properly develops a paralell strategy for leveraging it's ability to "mediate" information.

[David Kuczek]

I am currently doing academic research on newspapers and new media. How could key strategies for traditional newspapers look like in an unbundled internet world? Most newspapers have a.) little insight into the underlying economies of the internet b.) horrible fear of cannibalization of traditional profits.

In an optimized Google-AdSense-Economy page impressions are cash. Considering that traditional newspaper resources belong to the most widely read internet sites, those traditional newspapers will also benefit the most in the online world. The main question is how long the transition from traditional profits to online profits will last and which size of readership traditional newspapers must acquire online to reach the old profit level. Maybe they will never reach their old profit level and thus have to downsize.

Additionally brand awareness of regionally monopolistic newspapers is high, even among young non-readers. The next strategic question would be how to leverage their brand awareness before specialized weblogs and free classifieds take over their business. Any thoughts?