Two Industries That Dis Paying Customers

What Happens When No One Understands a Business Model

July 2007 By Denny Hatch

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A couple of weeks ago, I read that the final article by David Halberstam, who was killed in an automobile crash outside San Francisco on April 23, was available on the Vanity Fair Web site. As a long-time customer and admirer of Halberstam’s work, I wanted to read it.

I found “The History Boys” and downloaded it for free.

It was scheduled to appear in the August 2007 Vanity Fair and I—a nonsubscriber to the magazine—was able to access it long before it arrived on newsstands or in the mailboxes of paying subscribers.

That meant I—a Web junkie—could discuss it at a dinner party while Vanity Fair’s paid subscribers sat there with egg on their faces, feeling ripped-off by Vanity Fair.

When my wife, Peggy, and I ran the newsletter WHO’S MAILING WHAT!, our paid subscribers were our livelihood and our extended family. We knew them by name. I spoke at their conferences, greeted them at conventions and answered any and all questions. In return, they paid for our mortgage, our dinners out and our trips to Europe.

The idea of screwing our paid subscribers in favor of a bunch of strangers was unthinkable.

Yet this is the current business model of the magazine and newspaper industries.

The Internet has thrown a wrench into the inner workings of an already complicated business model and only The Wall Street Journal has figured out how to deal with it.

How is your business dealing with the Internet?

“‘Free’ is a magic word,” said direct mail guru Dick Benson.
One of the great tragedies of modern business was to allow the worldwide Web to become advertising-driven rather than making users pay for the incredibly valuable information and entertainment it provides. In the words of Arkansas Democrat-Gazette publisher Walter E. Hussman, Jr., in his Wall Street Journal op-ed piece on May 7th, “How to Sink a Newspaper”:

One has to wonder how many of the newspaper industry’s current problems are self-inflicted. Take free news. News has become ubiquitous, free, and as a result, a commodity. Anytime you are trying to sell something that becomes a commodity, you have lost much of the value in providing that product or service.

Not many years ago if someone wanted to find out what was in the newspaper they had to buy one. But not anymore. Now you can just go to the newspaper’s Web site and get that same information for free.

Last Saturday, I had dinner with Russell Perkins, CEO of InfoCommerce Group and the country’s foremost expert on the hard copy and electronic publishing of directories, data and information. “By the way, did you see your name in print in my cranky little e-zine?” I asked him.

He shook his head in the negative. “Was it in the story that started off with Katie Couric?”

“That was it.”

Perkins thought a moment and said, “You had a hyperlink to this week’s New York magazine story on Couric and I clicked on it, read that story and never got back to your blog.” He looked off into space. “Why would New York magazine put that story on the Web for anybody to read when they are charging people money for a subscription?” I sent Perkins an early draft of this piece, and he replied:

Some may respond to your article, “Yes, but New York magazine is monetizing that content online by selling ads around it, so they’re really not so dumb.” Take a look at the Katie Couric story. It’s awfully light on ads, and two of the ads (including a pop-up) are house ads pushing print subscriptions to New York magazine.

Some may respond, “Yes, but they don’t put the whole publication online for free.” Correct (in most cases), but why take the handful of articles that are most timely, most likely to be talked about, cost you the most to create and are uniquely your property, and toss them out for free? I would submit that this approach simply guts the publication.

This whole approach, in my opinion, creates something of a death spiral. Magazines have long held that they are in a stronger position than newspapers because they can create, longer, deeper, more analytical stories and are thus not burdened by the “yesterday’s news” syndrome. However, by throwing out major stories a week before they are accessible in print, guess what? The magazine suddenly takes on a distinct “yesterday’s news” flavor to me.

Note: Now that the Couric story is old news, you will find it on the New York magazine Web site with zero ads. On this e-zine, today’s paid advertisements are found in all back issues. Thus a researcher looking for month-old—or year-old—archived material still will find today’s ads. Today’s advertisers own all of Business Common Sense for the duration of this issue—an added goodie that says “thank you” to those that support us.

This E-zine Relies on the Kindness of Strangers
Since the Target Marketing Group and I decided to launch this enterprise in January 2005, I started combing the media for stories to download into a private archive of current events. Here’s how it works:

*I pay for three newspaper subscriptions—Philadelphia Inquirer, The New York Times and The Wall Street Journal. I read them in the morning and make a note of the stories that I want to download. I could pay a fraction of the hard copy cost by subscribing to the online editions only, but I like something physical to read over my morning coffee. I pay a small extra charge for The Wall Street Journal online and subscribe to The Financial Times online and TIME magazine. The ballpark number of what I spend on newspapers and magazines is less than $1,000 a year. If I did not take the hard copy editions, my research bill would be under $200 a year.

* When I hit the office around 7 a.m., I download the stories I noted and then visit 20 additional Web sites ranging from Drudge, Slate, Huffington Post and Editor & Publisher to three U.K. papers, cherry-picking stories of interest which I download for free.

* Every Thursday I incorporate the prior week’s stories into the master archive, indexing and cross-indexing them. Since January 2005, I have amassed a database of approximately 25,000 news stories and biographies of people and companies in 156 major categories and many hundreds more subcategories.

* When I decide on a topic to cover—based on what’s in the news—I transfer relevant stories from the archive to a working file and this becomes the wiring diagram for the piece.

* Somebody was paid to write every one of these stories. If the average amount spent for that reporter’s time was $100, my archive of 25,000 stories is worth $2.5 million. If it’s $500, the database is worth $12.5 million—not bad for an investment of under $1,000 a year.

* Sometimes Google will list a story in the archives of a newspaper or magazine that wants me to register and then pay $3.95 to see the complete text. Ninety times out of 100, I can enter the first sentence of the story into Google, and in less than one second, find it on six other Web sites for free. The original copyright owner will have licensed it to some other Web site that does not charge for archived material or a blogger will have stolen it. Only The Wall Street Journal seems to have protected its intellectual capital from pirates like me.

In short, magazines and newspapers are giving away billions of dollars worth of editorial content for free. This past April, the Audit Bureau of Circulation projected that newspapers in the first quarter of this year will have lost an average of 2.5% readership on weekday editions and 3% on the weekend papers. Not only is this a loss in subscription revenue but also in advertising revenue, which is based on the number of subscribers.

In addition, free commuter papers—such as Metro with 83 editions and 23 million daily readers worldwide—are siphoning off paying readers and advertisers from established newspapers.

In terms of advertising revenue, Editor & Publisher reported last week that in seven major categories in 2006, newspapers lost 14.3% in advertising dollars, while the Internet gained 17.8% and TV advertising rose 4.4%.

In writing this story, I was curious about the circulation and advertising situation with magazines (as opposed to newspapers). With a little sleuthing in Google, I found AdAge.com’s “Magazine 300, 2006 edition index,” which reveals circulation, advertising revenue and advertising pages for the top 300 consumer and business magazines for 2004-2005. It is a massive compendium of information that had to cost many thousands of dollars to create.

This incredible chart was free, as is my subscription to AdAge.com which e-mails me the top stories from Advertising Age every business day.

Why? Why me? I have been getting this material for free, downloading reams of it for my database, and I have never paid Crain Communications (the AdAge parent company) one nickel in over two years, and I have no idea who its advertisers are or even if it has any. This is nuts.

Would I pay $3.95 for this AdAge.com circulation information? No way.

But I might pay 15 cents for a story—or 25 cents for a very long story—especially if I knew it was exclusive to the AdAge.com Web site, or if I knew that no matter where I found it, the access fee would be the same.

As you can guess, as a researcher, I love all this free information and the incredible convenience of not leaving home. As an author, I am outraged that all this reportage is free for the swiping, and that these superb writers and their publications are being denied their rightful royalties. The Wall Street Journal and Financial Times “get it”—charging for online subscriptions. As Walter Hussman wrote in “How to Sink a Newspaper”:

The Wall Street Journal Online now has 931,000 paying subscribers, more than the paying subscribers to all but three U.S. newspapers: USA Today, The Wall Street Journal and the New York Times. Our newspaper, the Arkansas Democrat-Gazette in Little Rock, does not offer our news for free on the Web site. We offer free headlines. On a few selected stories, we offer a few free paragraphs, designed to get people to read our paper. We also offer free classifieds.

Recently I had the opportunity to compare our Web site policy with the free news policies of other papers. For the six months ending March 31, 2007, the newspaper industry’s circulation was down 2.1% daily and 3.1% Sunday. By contrast, the Arkansas Democrat-Gazette’s circulation was up 1.24% daily and up less than 1% Sunday.

The ASCAP Model
Back in 1914, the American Society of Composers, Artists and Publishers (ASCAP) devised a system that enables composers and lyricists to collect a small royalty every time a song is performed in public—on radio and TV, in concerts, malls, nightclubs, etc.

Why should songwriters get money every time their work is used while the creators and publishers of nonmusical intellectual property get nothing—or just a few bucks from researchers too stupid or lazy to find it for free elsewhere?

The WIPCO Model
In 2004, I proposed the formation of the Web Intellectual Property Collection Organization (WIPCO)—a nonprofit association. It would be comprised of authors and publishers whose material is available on the Internet and who feel they deserve to be paid in perpetuity for their work just as their colleagues in the music industry are.

The ASCAP scenario is a nightmare compared to WIPCO. Imagine trying to collect a royalty for every song played by 11,500 commercial radio stations, 11,000 cable systems, 2,300 colleges and universities, 1,000 symphony orchestras, 5,700 concert presenters and 2,000 noncommercial broadcasters, as well as the TV networks and then getting that royalty to the copyright owner.

In terms of WIPCO, everything is electronic and trackable. Content can be tagged and royalties can be instantly collected and distributed. All that’s required is for publishers to join the organization, register the work and the royalty deal. For the researcher or newspaper reader, WIPCO would work like E-ZPass, the system that allows motorists to go through tolls without paying cash each time. When you sign up for E-ZPass, you give a credit card account number and the account is charged, say, $25. Every time you use a bridge, tunnel or toll road, the toll is deducted from your account. When the account gets low, E-ZPass automatically charges another $25. Same thing with WIPCO, which would take 20% of all royalties collected for expenses.

Thus an AP story could appear free all over the Internet for the first week. Thereafter, a built-in electronic lock would activate and anyone that wanted that AP story would be charged a dime—4 cents for the newspaper Web site that it appeared on, 4 cents for AP and 2 cents for WIPCO. Since everything is electronic, the cost is virtually nil, the payments effectively are pure profits for everyone concerned.

As it is, some 50 to 70 million people go to newspaper sites every day, some for news, many more for data—job listings, real estate, automobiles for sale, weather, etc. It seems to me 15 cents a visit for this information is not outrageous. Nor would a subscription of a nickel a day or $1.50 a month for all the local news. Billing would be impractical on an individual basis by snail mail, but with WIPCO in place, everything would be electronic and automatic. A nickel a day is nothing to the consumer but something to the publisher who has no paper, ink, production or delivery costs.