Raja Jasti’s Blog - Renaissance Thinking

Chris Dixon writes about the current imbalance in the negotiating power between google and newpapers.

Newspapers, like all websites, are suppliers of content to Google.  In most markets, with genuinely competitive buyers and suppliers, the revenues are shared between buyers and suppliers in proportion to their relative bargaining power.  Their bargaining power depends on how fragmented each side of the market is – how many genuine alternatives each company has.

Normally there is some reasonable level of interdependence between buyers and suppliers, hence the revenue split is positive and non-negligible. Pepsi and Coke are always jostling with their bottlers about the percentage split but in the end each side usually makes a profit.

And in situations where the relative bargaining power is severely imbalanced, there are normally business mechanisms for correcting the imbalance.   For example, before Staples was founded, office supply stores were mostly mom-and-pop shops that were tiny relative to their suppliers, and hence had very little bargaining power.  The central business concept behind creating Staples was to “roll up” these shops and thereby increase their bargaining power with their suppliers.  In doing so, they were able lower their costs and increase their margins even while lowering their prices.   One of the primary reasons companies merge is to increase bargaining power with respect to buyers and suppliers.

As a “buyer” of web content, Google has incredible dominance, so much so that the price they pay for that content is zero.  If the NYTimes decided to opt out of Google tomorrow, Google users would barely notice.  (Perhaps the only content site that would matter and hence in theory could bargain with Google would be Wikipedia – but even Wikipedia only accounts for ~2% of Google click throughs).  On the flip side, the NYTimes would see a massive decrease in traffic and hence ad revenues.  Google has so much power they can split 0% of the revenue for organic traffic (and of course charge for paid links).

Now imagine a world where search engines are truly competitive.  I know it’s hard – but imagine there are say 20 search engines, each with 5% market share.  And suppose they differ primarily according to which content sites they index.  (I am not saying I’d prefer this world – I’d actually hate it – but please bear with me for the sake of argument).   On the content side, suppose there are only a couple of newspapers left – maybe the NYTimes, WSJ, USA Today, and the Financial Times (which, btw, will probably be the case in a few years).  In this situation the newspapers would have enough leverage to get the search engines to pay them for inclusion in their organic listings.  I know that in my own case if two search engines were nearly identical except one included my favorite newspaper and the other didn’t, I’d use the one that did.  I suspect a lot of other people would make the same decision.

His basic argument is that google holds the power as the aggregator of demand while newpapers power is fragmented. This is the reason behind the newspaper industry trying to join arms to increase their bargaining power vis-a-vis google. It is quite true that a more competitive search market would benefit the newspapers. Someone asked an interesting in the comments section of the orriginal post. Should bing pay to have exclusive access to NYT and WSJ to increase its market share? If NYT and WSJ has a paid model then this would make absolute sense. My sense is that if the content is free on NYT then the cost to bing to buy exlusivity to NYT content (Bing needs to cover the loss in revenue from google) would be too high to make such a deal.

NYT is one of my favorite newspapers. It seems to be doing the right things to transition itself successfully to the digital age. It released the new version of its TimeReader application. The more newspapers do put the news infront of readers wherever they are the better they will be at coping with this trasition. The nice thing for NYT is that they can charge for these types of applications.

There are two interesting things about the new New York Times Reader application. First, the company has abandoned SilverLight for Adobe Air, thereby ensuring cross-platform compatibility without that nasty Microsoft aftertaste. Second, the application is great.

Now, for the good stuff. I used the earlier app briefly and put it away. I find that this new version is much cleaner than the earlier iteration. The front page is extremely readable and sections are clearly laid out. The application stores up to seven days of content and includes the crosswords as well as much of the standard print layout. You can’t do a full, site-wide search through the app simply because that data isn’t there. However, you can read the paper on a laptop.

There is a bit of lag in the Air app under OS X and I’m not sure if it’s buffering or there are other issues with the UI.

But is this the proverbial straw that broke the even-toed ungulates’ back? I’ve been toying with the idea of canceling my paper subscription for years now but there is something in me that thinks I won’t get the news if I don’t have it arrayed on the surface made of fibrous material. I like moving from page to page, scanning the interesting articles, and ignoring the rest. I can get that job done over breakfast.

However, when I was traveling my NYT couldn’t come with me. I would suspend delivery and never read a word of the paper. Now, with this app, the NYT is not longer a physical thing. But it’s not as simple, I think, as digitizing the times. I originally thought the Kindle would be the answer to my prayers but again, I haven’t found a good analog for the newsprint experience. This - and potentially the DX - might finally relegate the print edition to the obsolete folder in my head.

A few strange behaviors I noticed included the occasional disappearance of the front page images as well as a problem with in-book images, like this image-less obituary. Articles from a few days ago had their images intact.

This is, however, the way to go. The service costs $14.95 a month. Paper service costs about $40 a month in Brooklyn, a considerable cost savings. I suspect using this service will be a lateral move for me - just as it will be for many print hounds. After using the Reader and reading the paper for a while, the paper version will become little more than a vestigial tail. While part of me is sad - I’ll miss the paper - the rest of me knows this is the only way to keep this crazy thing we call journalism alive.

NYT has an op-ed piece called ‘dynosaur at gate’ about google and the newspaper industry.

The 53-year-old Schmidt is soft-spoken, exuding the calm knowingness of a therapist as he explains why privacy is passé and why passé newspapers are not going to pry more money out of Google to save themselves.

The therapist tone works with me because my profession is in a meltdown. Firms, like Google here and Craigslist in San Francisco, have hijacked journalism, making us feel about as modern as the Tyrannosaurus rex model that sits on the Google campus.

Google is in a battle royal over whether it has the right to profit so profligately from newspaper content at a time when journalism is in such jeopardy.

Robert Thomson, the top editor of The Wall Street Journal, denounced Web sites like Google as “tapeworms.” His boss, Rupert Murdoch, said that big newspapers do not have to let Google “steal our copyrights.” The A.P. has threatened to take legal action against Google and others that use the work of news organizations without obtaining permission and sharing a “fair” portion of revenue. But what’s fair will be hard to prove.

“So,” I ask Schmidt in a small conference room that, disturbingly, has an ejector seat. “Friend or foe?”

“We claim we’re friends,” he replies, maintaining equanimity even when a cartoon stuffed doll on a desk behind him falls on his head.

Why can’t Google, which likes to see itself as a “Don’t Be Evil” benevolent force in society, just write us a big check for using our stories, so we can keep checks and balances alive and continue to provide the search engine with our stories? After all, Schmidt acknowledges that a lot of what’s on the Internet is “a sewer.” He told me people don’t come to Google for “crap,” but for what’s “useful.”

He declines to pony up money, noting that newspapers could opt out of giving their content to Google free and adding, “We actually like making our own money for obviously good capitalist reasons.”

He says: “The best way to get out of this is to invent a new product. That’s the way Google thinks. Incumbents very seldom invent the future.”

He admits that it’s harder for newspapers to target ads as precisely as Google does. If you’re reading about a murder with a knife, he says, you can’t show a cutlery ad. He’s talking to newspapers about a new ad model that “understands your history” and your interests.

“They’d know enough about your demographic to know male, female, age group, what have you,” he says. “The whole secret here is the ads are worth more if they’re more targeted, more personal, more precise.”

To save journalism, Google has to know my most intimate secrets?

NYT reports:

A newsstand in the West Village, in Manhattan. Analysts said some predictions of ad revenue declines were not bleak enough.

NEWSPAPER advertising, already in its worst slump since the Depression, suffered by far the sharpest drop in generations during the first quarter of 2009, down 30 percent for some papers, industry executives and analysts say.

Publishers will start to report first-quarter results this week, but people who follow the industry and have had a glimpse of the 2009 numbers say it is clear that once again, even the most pessimistic predictions were not dark enough. They are expecting declines sharp enough to wipe out profit margins at many papers that, despite two years of battering, had stayed comfortably in the black, and to push already-weak publishers closer to bankruptcy, perhaps even closure. “I think over all we’re going to see a decline somewhere in the mid-20s” compared to the first quarter of last year, said Edward Atorino, a media analyst at the Benchmark Company, a research firm. “There have been a lot of signals that things have gotten much worse in the last couple of months — the furloughs, the pay cuts, the layoffs.”

John Morton, an independent newspaper analyst, agreed with that assessment, adding “from what I’m hearing, I suspect 30 percent won’t be too unusual for the bigger papers.”

One of the few publishers to make a public statement is the Gannett Company, owner of the largest and most profitable newspaper chain in the country. At a conference with analysts last month, Gracia Martore, the company’s executive vice president and chief financial officer, indicated that so far, 2009 newspaper ad revenue was down roughly 30 percent, and more than that at its flagship paper, USA Today.