Friday, April 20, 2012

How I ran my newspaper monopoly (and Warren Buffett ran his)

Back in the 1960s, before baseball had a designated hitter, I had a paper route. This was a job formerly given to 12-year-olds but now has been taken over by adults.

It was a measure of the daily newspaper's market dominance that a kid who wanted a paper route had to buy it from another kid. Having a paper route was the pre-teen equivalent of owning an NFL franchise, an enviably profitable protected monopoly. Mine was a particular block on a particular street. The price to buy it was equal to one week's collections -- in my case about $40.

In the grand old days of newspaper monopolies, people had only a few places they could get the news -- either a daily newspaper, the nightly TV news or radio. If you wanted to know if the local major league team won and hadn't listened to the game on the radio, you had to stay up till 11 o'clock and wait until the announcer gave the score. Or you waited until the next morning's newspaper arrived.

Total market coverage

Owning a daily newspaper was a fantastic business in the 1960s. Market penetration was over 100% (that is, total circulation in the U.S. exceeded the number of households.) 

On my route of 61 houses, for which I had bought the rights, all but two or three households took the paper every day. Sometimes I filled in for the kid who delivered the afternoon paper, and he had about three-fourths of the households as customers. On that block, market penetration was close to 175%.

In those days the publisher of a daily newspaper could promise advertisers virtual total market coverage and charge hefty rates. Profit margins often exceeded 30% (by 2011, they were a fourth of that)Because of this distribution juggernaut, the Sunday paper was filled with inserts for every kind of retail operation -- auto dealers, department stores, tire and auto repair shops, discount stores, supermarkets, jewelry stores. The Sunday paper came to me in four sections, and my brother and I put them together on an assembly line. We had to use a wagon to deliver them.

Your idiot nephew

The paper was not so much a news product but a distribution vehicle that happened to have some articles in it. Typically the newspaper had 70 percent advertising, 30 percent news. And actually that 30 percent called "news" included the comics, the horoscope, sports, pages of stock tables, recipes, social news, features and, of course, some news. 

In other words, the news was an extra benefit. In my first job as a newspaper copy editor in 1975, we spent the week before Thanksgiving wrapping little columns of news filler around enormous Christmas shopping ads. Pages and pages, night after night. Every retailer in Christendom wanted to be in that Friday paper the day after Thanksgiving. The stories we placed on those pages were timeless dreck: the hero dog, the house made of matchsticks, the history of cranberry sauce. 

The high profit margins lured Wall Street into the business, and various newspaper companies built up chains of these money machines that became even more profitable by consolidating administrative and sales operations. 

It was so easy to make money that Warren Buffett said in an interview (see page 2 of transcript):

"If you’ve got a good enough business, if you have a monopoly newspaper, if you have a network television station, I’m talking in the past, you know, your idiot nephew could run it."
All that has changed. Today market penetration for daily newspapers has shriveled by two-thirds to 36 percent (114 million households, 40 million daily circulation.) And naive journalists like me finally realized that the newspaper business was always about advertising and distribution, and the news rode along like a remora on the shark's belly. 

I like the description contained in this quote from Clay Shirky's blog entry Newspapers, Paywalls and Core Users:

There has never been a mass market for good journalism in this country. What there used to be was a mass market for print ads, coupled with a mass market for a physical bundle of entertainment, opinion, and information; these were tied to an institutional agreement to subsidize a modicum of real journalism. 
In that mass market, the opinions of the politically engaged readers didn’t matter much, outnumbered as they were by people checking their horoscopes. This suited advertisers fine; they have always preferred a centrist and distanced political outlook, the better not to alienate potential customers.
In other words, newspaper objectivity, long held as an ideal of the profession, was also a business strategy. We can see this clearly now that the newspaper business model has collapsed. It was a beautiful monopoly while it lasted.

Search for a new model

We all know what happened. The Internet came along so you no longer had to stay up until 11 p.m. to find out the ball scores or anything else. If you want to know a stock price you can get it on your cellphone without looking in a newspaper. It is cheaper and easier to get the news you want online than to retrieve a soggy paper from your front sidewalk, since the conscientious 15-year-old who used to put the paper inside the door on rainy days has sold out and retired.

Selling the route in 1967 was one of the few investment decisions that I timed perfectly. The news business is every day less profitable. 

Today I spend my time on this blog writing about how to develop business models that will support high-quality journalism. The truth is that journalism of that kind is not really a business so much as a public service. The struggle is still under way to create new models that will support that service. 

In teaching young people about what the newspaper industry used to look like, I often hark back to that image of a block with every household receiving, on average, 1.75 newspapers. I might as well be talking about the age of dinosaurs. 


Charles Anderson, a friend and former boss, wrote to remind me that even though the news represents a small percentage of the printed product, it has been a vigilant watchdog and the heart of the community. He is the retired executive editor of the Star-News in Wilmington, N.C. 

Jim: good piece though it pains me to consider even the possibility that I spent 41 years producing an insert wrap, although today the newspaper comes in an insert. 
I think it somewhat ignores the point that newspapers once, and in some cases still do, got people elected, convicted, fired, and all sorts of civic issues such as bonds for schools, roads, etc. passed. Those that took the “watchdog” role seriously performed an incalculable civic duty. That such commitment has wavered  in favor of warm and cuddly relations with power and advertisers damages democracy greatly. 
I have to say, with some exaggeration for effect, that I felt if in that process we sold soap or buy-one-get-one-free Honey Nut Cheerios, fine. You might guess I am going grocery shopping today and it was in the Harris-Teeter insert. But on the front page was a story about efforts to get the state to intercede in our horrendous fire and casualty insurance rates east of I95: twice the rest of North Carolina. As well, a pretty well written piece on a 4-month old needing a heart transplant, and the agony the parents are in knowing that for their child to live, someone else’s must die. 
That I found both that particular news and that particular insert interesting and useful was serendipity perhaps but — speaking just for me — if it were not for the “news” I would have never seen the inserts.  If I wanted that I would get Ad-Pak, and it is free. Maybe I missed it since I am aging fast, but those are points I think you missed. News remains the driver, however diminished its role in this post-digital world. I say that because there is all kinds of babble about “cloud” or some such, and I am just not interested.
Anyway, you’re doing good so keep it up. -- Andy

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