Provide A Public Service With Small Profits, Or Destroy It With Large Ones?

Call me a contrarian on this one. But I don’t buy all the hype that the internet is even the primary culprit of the demise of journalism. The primary culprit is the same as it is all over the country, in every industry and in government: equity extraction.

Let me explain, in short: when executives expect unrealistic profits of 20% and higher per annum on businesses something has got to give. It’s an unnatural and unsustainable growth rate. For the first ten or so years of a small to medium size company’s life? Sure. But when you are 3M, or GE? Unrealistic and ultimately impossible.

So, when such rates cannot be achieved by organic growth in the business, executives start shaving off perceived fat and before they know it they’re cutting off the muscle and then shaving off bone chips. And when they’ve gotten to the bone chips they borrow other people’s money to buy new companies, load up those companies with debt and extract equity form them and then because it looks like the parent is still growing award themselves huge bonuses. It’s a shell game.

That is what has happened to the news industry in America. The excessive obsession with unnaturally high profits has led to a vicious circle of cutting budgets, providing less services, which is then followed by even more drastic cuts. The local San Antonio paper is a great example of this. Twenty years ago there were two large dailies in my hometown. Both competed with each other for real scoops. Both had book reviews by local writers, providing local jobs. Both covered the local arts and sports scene. Both covered local politics in depth and local and state news in depth. Both had vigorous investigative teams. Both had bureaus in Mexico and both had offices and reporters on the ground in DC.

And then corner offices of Gannet and Harte-Hanks were populated with Kinsey-esque managers and the rout was on. Gone are the bureaus in Mexico. Today book reviews are now outsourced !for free! to bloggers via syndication. (And while it is well and good to have one’s name in print, I’d submit most would like some earnings off their intellectual property, as well.) Local arts? The office in DC? Well, that’s the AP, now. So, today, San Antonio has one daily that is as flimsy and tiny as the local alternative. The only real strength left with the local daily is the City Hall coverage. Everything else has been outsourced to the wire services or people writing for free. It’s hardly more than thirty pages. That’s a lot of wealth destruction and job loss in twenty years. And 80% of this happened before Al Gore even invented the internet. All in the name of higher industry profits–not some overwhelming fear of the world wide inter-tubes. So, who’s profiting? Certainly not the intellectual vigor of the locals? And certainly not the writers who are all now ‘journalism entreprenuers.’ The only people who profited are the executives who obsessed over profits, to lard up their own bonus pool.

And while I agree with the overall thrust of Massig’s argument here, mostly because I think we are too far gone to get back to where we started, I think the overly obsessive focus on large profits, or the free market in general, when it comes to journalism is wrong.

The question that journalists inevitably ask Google, Schmidt went on, ”œis, okay then, why don’t you just write us a large check?” The problem, he said,

is that just transferring money from an area where we’re making a lot of money to an area where we’re making little money does not solve the problem for the long term. You’re fundamentally better off building the new product that is profitable and growing – again with the news, with magazines and so forth. It’s better for everyone. Because ultimately a subsidy model is a temporary solution. It’s not a long-term solution.

On that point, I think Schmidt is right.

No, Schmidt is wrong. It’s not about subsidies. It’s about money. And it’s about profits. And it is all about collecting obscene profit margins. When you run a public service it’s reasonable to expect reasonable rates of return. But not obscene ones. Same with the banks. Same with the cable news programs. Same with network news and newspapers. Reasonable profits are sustainable. The Google model is not.

You can provide a public service with small profits for a long, long time, but if you demand large ones you will destroy it. Just ask the big banks.

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Sean Paul Kelley

Traveler of the (real) Silk Road, scholar and historian, photographer and writer - founder of The Agonist.

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  • I wonder if there is a continuum that should be at work here, in which start-up companies and those providing a discretionary good or service are entitled to outsized profits to cover the risks involved. Technology companies generally qualify, as do innovators like Ben & Jerry’s or Starbucks in the retail sector.

    However, a mature industry providing a non-discretionary good or service should not be entitled to outsized profits, defined as returns on equity in excess of 5% – 10% p.a. The industries you mention – banking, cable news, network news, and newspapers – are really utilities of a sort. They provide a common good that is either indispensable and/or important for the social fabric of the nation. We can throw in health care and pharmaceuticals to this mix. The more an industry is a utility serving the common good, the more government, acting on behalf of the people, should impose controls on returns.

    Sounds anti-capitalistic? Not in the least. If industries like these are allowed unchallenged profits and returns for their managerial class, they severely damage capitalism in the long run. Eventually they blow up when the ROE mania reaches its limit and way too much profit is being garnered by management at the expense of the public. In the case of the financial industry, there was a long-standing set of protections for the industry so that the public welfare would not be damaged with something like a bank run. In this recent crack-up, the industry has managed to get the Fed and the Treasury to draw on these protections to the point of absurdity, absolving the industry of any wrong doing, protecting the malefactors, and encouraging similar behavior in the future. Even our government shows very little appreciation for the true public welfare, as opposed to some imagined damage if large banks were left to fail.

    If capitalism wants to survive, it is time to control obscene profits, excessive returns and profit margins, and the debilitating drain on the public welfare that ensues.

    The French and the British get it to a degree. They are taxing banking bonuses at 50%, which is a start, though not necessarily a direct assault on the ROEs of these industries. The US is so far behind on this, and so enslaved to the imaginary benefits of crony capitalism, where only the managers thrive, that it can’t even discuss taxing bonuses at similar levels.

  • …this town (increasingly outside print media as they get downsized) – scene of probably the largest scale, most protracted and most unknown outside the confines of Canada, old fashioned by God newspaper war (all this to say, a tier 1 North American market under maximum pressure) – and the number one thing that all of them tell me that hammered the business was ad revenues, particularly classifieds but also display ads, falling off a cliff. Even the paper with the deepest pockets in town has been feeling it. A good chunk of it is due to other factors (sub-optimal management, changing demographics of the readership, etc.) but the primary driver is the decline in ad revenue and the number one factor behind that is technology change.

    “The absence of any US-Iran bilateral channel…may have the perverse effect of reinforcing Iranian interest in progressing in the nuclear realm so that the US will be forced to take it seriously and engage it directly.” ~ Richard Haass

  • You are missing the point which is that print media, instead of investing in the technologies of the future and the ad revenues that would come with it, engaged in wealth extraction as the parade passed them by. Who was in a better position to exploit the burgeoning electronic demand for information than traditional media, particularly print media? Again the problem was wealth extraction ahead of investment.

  • …of the future that suddenly allows a daily newspaper to out compete ebay and craigslist for classified ad revenue? What’s the magic fix that gets ad buyers to put the display ad back up onto its pedestal in a fragmented media market that increasingly has transnational catchment areas? Even if one unchains the daily from delivery of product on paper – something that has only recently become viable, they’re still toast compared to their competitors. The “solution” [really resolution] is to a very large degree not about technology – it’s about the middle of the market basically being killed. Even with the zippy doo da technology that’s [maybe] finally about 18 months out [been 18 months out, I’ve been repeatedly assured, for something like 5 years now] I have the distinct feeling that what one is going to see when the dust settles is a literal handful of viable national papers and a lot of stuff that’s not much above the community free paper, with very little that’s much good in between. Notably that means that the majority of major NA markets are going to be served by one paper that’s a ghost of its 80’s self. The question at this point is really where it is that journalism is going to live, because a lot of it that used to live at the major market dailies isn’t going to find a home there anymore.

    More concretely to the point of the original assertion, where exactly was the wealth extraction in the Toronto newspaper business? I don’t doubt it’s happened in a lot of markets, but I don’t see it in this market and I have a feeling that it is far from being a universal explication.

    “The absence of any US-Iran bilateral channel…may have the perverse effect of reinforcing Iranian interest in progressing in the nuclear realm so that the US will be forced to take it seriously and engage it directly.” ~ Richard Haass

  • Can’t speak for the Toronto market as to wealth extraction.

    My assertion, however, is that had the print guys been focused on investments for the future they would have and should have grabbed the markets that craigslist, at least, ended up with. There were other, unrealized, opportunities for creating advertiser’s portals that could well have driven other competitors out of the market. Instead, and broadly, the old line print guys stuck with old models in a mature market and created “growth” by cost cutting.

  • It wakened some memories I had about the impact of GE’s acquisition of news services many years ago. I have only a vague recollection but it was along the lines of the head of NBC news services meeting with Jack Welch. Welch indicated that from here on out the news was going to make a profit, the same level of profit required of every other division. The news head at first literally thought he was joking and began to laugh. Upon hearing that Welch was indeed serious, his job did not last much longer.

    Another more recent example is what Rupert Murdoch did to the very valuable online product called MySpace. Within what 18 months he basically destroyed it, and it was essentially through the high equity return requirements placed on this ‘public service’ entity. The space became over cluttered with advertising, the folks could not innovate with R&D cut to nothing and they were overrun by competitors. Rupert destroyed that entity.

    Finally, I saw an interview with Murdoch arguing that he actually was not a conservative, but that Fox News tended to be conservative because it is cheaper, and hence more profitable, to do conservative news than liberal news.

    There are many news services in my book that cannot go bankrupt fast enough, among them Washington Post. I literally cannot wait till they close their doors.

    It is classic short term vs. long term thinking. And it is an utter disregard for the public space occupied, and the necessary public responsibility of these newscasters.

  • these ‘utilities’ (because that is a really good way to think of the mature industry companies) can argue for a higher return is if they in fact were to innovate, which would require a short term lower rate of return for perhaps a period of time with higher returns achieved later if the innovations bear fruit. But to extract the return before any innovation is the travesty.

    Banking had its own problem. Can banking really innovate? They argued yes and proceeded to create all these ‘new products’ and this supposedly justified the outsized returns. But it turned out to be mispriced risk.

    Once any product has paid for its innovative investment should fall to a commodity level rate of return that should be no more than 5% to 10%. It can only be higher through government monopoly protections or the harvesting of excessive equity.

  • Other than temporary spikes from, say, a whiz-ban innovation or an outstandingly popular product i don’t see why any publicly held corporation need exceed the 5 – 10% p.a. that Numerian defines. That percentage would be after paying all the bills, including salaries that go into the “real” economy from spending.

    Does “the market” exist to serve corporate financing or do the corporations exist to serve “the market”?

    If it’s the latter than we shouldn’t be surprised by the Darth Vader choke hold from an invisible hand.

  • …developments that I’ve seen over this period pretty consistently indicate that the guys with the good general alternative model that they’ve already established somewhere have a big advantage over local initiatives when trying to set up competing products. Doesn’t seem logical, but that’s how it’s worked out in a number of markets. As an example, the various chained freebie papers (e.g., Metro out of Northern Europe) generally seem to have triumphed over the local competition, unless the local competition had been previously established – and even then, they not uncommonly felt the increased competition quite significantly and I suspect actually occupied somewhat different niches (e.g., weekly entertainment vs. daily commuting). I just don’t see a lot that gives me confidence that the typical metro daily could generally have out competed something like craigslist. Undoubtedly there are some, but I’d bet a good deal that they’re the exception rather than the rule – look at all the challenges they had just replicating the typical paper online.

    It’s easy to say with hindsight that these guys could have done something else and clearly should have done something else, but I don’t know how damning the criticism is at the end of the day. There were an awful lot of attempts to monetize alternative forms of delivery – they just didn’t work. The readership just wasn’t having it for a whole range of reasons and now, frankly, they’re going to reap what they sowed.

    “The absence of any US-Iran bilateral channel…may have the perverse effect of reinforcing Iranian interest in progressing in the nuclear realm so that the US will be forced to take it seriously and engage it directly.” ~ Richard Haass

  • I run a small publishing company serving a dedicated local market place. I compete against national brands which supply information on a national basis and which emphasize online access. I started databasing my information in the 1978-1982 period and created an internet product emphasizing local info to compete with the nationals who, by the by had always competed in my market. Maybe that alerted me to the threat they posed, but frankly the potential of electronic information was so obvious and so exciting at the time that I would have moved down that path regardless of competition.

    It was obvious to me what was happening and I had scant resources to manage. But we compete successfully. I am not applying hindsight.

    Local newspapers had a virtual monopoly on local ads. That they failed both to invest in their futures and to understand that those local ads were as important as information as were the news stories which, after all, are mostly pr releases to which some “objective” gloss is added, and that they were not just a source of revenues is simply pathetic.

    Yes the will reap a scant harvest from their lack of investment.

  • …daily doesn’t, small size and nimbleness front and centre, I would say judging from your experiences. There’s more to it than that, I’m sure (clear product vision, smarts, early start etc.), but as an example the number of things I’ve heard my friends talk about that were judged to be impossible to implement because of moribund labour agreements is pretty large (roughly as distressingly large as the number of things that management boned, I’d say).

    The guys that I talk to definitely never failed to understand that local ads (classified and display) were critical – in spite of their attempting to keep them, those ads went away and nothing that they were able to do kept them successfully. From where I sit, that suggests they got out competed pure and simple.

    Me, I think it’s all a pretty thorny set of problems and more than just the other guys were too stupid to see what was going on; folks have been telling me what was going on for years – their papers just couldn’t come up with anything that was better that still fit into their business model. Seriously, what does the local product that’s better than craigslist, that a metro daily could have developed, implemented and not ultimately lost market share to the established transmarket competitor look like? I (apparently like much of the newspaper business) am having a failure of vision. Even at this probably too late date, if you’ve got insights I’d very, very much love to hear them. Similarly, what thing gets the major ad buyers to turn away from the [to my mind spectacularly false (but probably not a lot more false than the traditional buy, in fairness)] promise of cheap buys of tuned impressions targeted at particular demographics?

    I just have a tough time ascribing all this simply to profit taking and lack of investment. I certainly saw lots and lots and lots of money invested in trying to head off these challenges [at least in theory] over the last decade or so. From where I sit, as an outside observer and dedicated consumer of product, it wasn’t a lack of willingness to spend to try and find solutions so much as it was the extreme difficulty of finding something that fit in with the rest of the enterprise.

    “The absence of any US-Iran bilateral channel…may have the perverse effect of reinforcing Iranian interest in progressing in the nuclear realm so that the US will be forced to take it seriously and engage it directly.” ~ Richard Haass

  • Unbridled greed did start the first of multiple death cuts of American newspapers. Profits of 20, 25 even 35% were expected by medium-sized dailies; the money was not put back into “product development.”

    Why care about advertisers? The newspaper was, after all, the only wheel in town. Publishers thought the free shopper (said with disdain, always) was the only competition.

    And that’s why the newspaper industry was a sitting duck for the explosion of the internet (didn’t they see that one coming? being information and news specialists?)and a craigslist. The local paper should have become the local craigslist, first.

    Last, my journalism friends love and believe in their profesion; they’re heart-sick by the way the greed of publishers and corporate owners are killing their industry.

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