This morning, I had a “someone is wrong on the Internet” moment. The someone was Clay Christensen, David Skok and James Allworth who wrote a long piece for the Nieman Foundation for Journalism at Harvard entitled “Mastering the art of disruptive innovation in journalism.” The report is about the woes facing the newspaper industry and what they have to do to get back in the game. But the narrative makes the classic mistake of searching for keys under a lamppost because that is where the light is. That is, it fails to start with the causes of disruption and so, I think, makes an error in focussing on second order issues. Put simply, I contend, as I have done many times before, that what was disrupted for the newspapers was not journalism but advertising.

Anyhow, the report starts actually in the right place:

The problem is a profound one: A study in March by the Pew Research Center’s Project for Excellence in Journalism showed that newspapers have been, on average, losing print advertising dollars at seven times the rate they have been growing digital ad revenue.

Yes, the reason newspapers are in trouble is that the advertising didn’t follow the consumers online. But from there the assumption is that those advertising revenues are gone and they aren’t coming back. They don’t ask where they went and why and so cannot properly analyse this industry. Instead, taking that as an assumption, they conclude that the disruption was elsewhere.

With history as our guide, it shouldn’t be a surprise when new entrants like The Huffington Post and BuzzFeed, which began life as news aggregators, begin their march up the value network. They may have started by collecting cute pictures of cats but they are now expanding into politics, transforming from aggregators into generators of original content, and even, in the case of The Huffington Post, winning a Pulitzer Prize for its reporting.

They are classic disruptors.

Well, to me, they are classic entrants. The Internet has allowed lower cost journalism to capture attention. But were these guys the cause of the loss in advertising revenue? It seems hard to believe. It wasn’t just new entrant readership that moved online, it was all readership. Again, if an industry is being disrupted, surely we have to ask what disrupted their revenues? And the likely culprit is the move of readers online per se rather than what some organisations did to take advantage of that.

Now once you have decided to ignore the lost revenue from advertising and treat that as gone, you have to look elsewhere to find opportunities. The new entrants went for a model of not having to rely as much on revenue to cover costs. They went down the quality chain to a good degree (albiet with some exceptions) but, most importantly, they offered a platform for people to perform journalistic style activities — or at least provide content that competed for the attention of readers of traditional journalism — and then relied on the fact that those people had other reasons to be putting effort into writing. I’m doing that right now. You’ll see later that I have a book to sell but, in actuality, I just had a beef with this study and want to get it all off my chest. That someone might want to read this is a bonus.

I will give the Nieman authors their due: if you want to ignore advertising and think about how else to make money as a media business, their discussion covers all the options in a pretty accessible way. I don’t have anything to disagree with there. I just think it is second-order and, therefore, possibly missing bigger opportunities and changes.

Now on to my point: advertising was disrupted. How do we know this? Advertising revenues went away. They didn’t go to HuffPo, they went seemingly into the ether. The first order question is why? Lots of answers are postulated and I don’t want to go into all of them now. The leading one is psychology. Apparently, online ads or digital ads just don’t work. That is the thesis. Except that no researcher has found this in a lab environment and no theory explains the mechanism. Some people say that mobile advertising is what is harder but I should remind everyone that newspapers are a mobile device and they seem to do just fine.

My leading candidate is that the market for advertising was disrupted and hasn’t re-organised itself from the shock. The disruption came because readers, instead of hanging around for 30 minutes with a newspaper or on just one website, pick and choose across 20 instead. That means that neither news outlets or advertisers know what ads readers have likely seen. When a reader stays with a newspaper, it is a good guess that they have seen an ad on page 2 when they get to page 20 so there is no need (unless you want a follow-up) to repeat the dose. But when the reader started on CNN and ended up in the NYT, what are you supposed to do? It takes some actual research to show but the impact of this alone is enough to destroy ad revenues by killing the efficiency of the advertising market. Oh and by the way, it is an application and extension of the matching market theory that won a Nobel prize this week (it is about matching advertisers to consumers).

This leads to a natural conclusion: before we start re-organising the newsroom perhaps we need to re-organise the advertising salesroom and, in particular, the platforms for advertising. In my book, Information Wants to be Shared, I spend much time going through some options for this. So I won’t traverse that again here. But as it is a disruption, there is a need for experimentation. The problem is so many in the media have, for reasons I cannot understand, decided to focus on journalism rather than advertising. The report writers are not alone. Clay Shirky’s classic post makes the same error. Why? I suspect that it is because journalists actually have a lot of sway in the organisational decisions of newspapers and as Shirky has long taught us “institutions always move to defend the problem for which they are the solution.” Indeed, the Nieman report took that to heart and literally defined the problem that journalists were the solution to! I think it just happens to be the wrong problem to focus on. They are their own writers’ examples of the Innovator’s Dilemma.

12 Responses to Media disruption: it is not journalism, it is advertising

  1. David Skok says:

    Joshua,

    Thank you for taking the time to thoughtfully lay out your arguments. I can speak for all the authors, when I say that we’re grateful for the feedback.

    The advertising disruption is a profound one, but Clay’s theories would argue that from the perspective of the newspapers, causality is the other way around. That is, advertising follows readers, not the other way around.

    To attract new advertising (whether that be traditional display ads, sponsorships, or branded content), the Jobs-to-be-done theory would argue that you need an audience first. Then the advertisers will flock to your platform.

    Buzzfeed is a terrific example of this. As company’s president, Jon Steinberg, told Bloomberg Business Week last March, the company’s custom ad solution grossed $50,000 to $100,000. According to Business Week: “It ran upwards of 100 ad campaigns last year. Those can gross, on average, $50,000 to $100,000 a pop. A conservative estimate—100 campaigns grossing $75,000—puts revenues in the $7.5 million range, or around $150,000 per employee in 2011.”

    The point of this example is to illustrate that if a company can provide innovative ad/sponsor solutions and already attracts a large audience, then revenues will follow. To do this requires satisfying the right jobs-to-be-done and tackling the cultural change that we addressed in the third section of the paper.

    Display ads may indeed be a commodity, which makes an innovative sales culture even more imperative for news organizations.

    Thanks again, we’re honored in your interest.

    • Joshua Gans says:

      Thanks for chiming in David. It is good to continue discussions and engagement.

      I have been studying the media for many years and, of course, it is true that you need readers in order to earn advertising dollars. But the issue has not been that news outlets, even traditional news outlets, have been losing readers. Some estimates I have seen (and one has to take these with a grain of salt) suggest that news readership has been growing 8 percent per year for the last decade. That is a sign of health not distress. To be sure, it may be spread out over more outlets but that doesn’t make it an industry problem.

      The issue is that the advertising dollars have not followed the readers. If you look at NPAA statistics, since 2000, there has been massive declines in advertising revenue going to newspapers (both print plus online). The reason is that the online ad rates are a fraction of those in prints. There is no use grabbing readers when they don’t bring in ad dollars because it is really difficult to find other sources of revenue for them.

      As an aggregate these ad numbers have not shown signs of slowing in terms of their drop. But I agree that they ought to be higher. If BW can find a way that is great but from industry people I have spoken to there has been no similar stories of hope. In any case, I am sure you agree that it is part of the equation that really needs to be part of a full analysis of the industry.

      But my point is that I agree that improving the advertising sales room capabilities is critical here.

  2. Contact me anytime if you want to talk about digital advertising.

    Your statement that advertising dollars “went away” is odd considering that as an industry advertising has tracked with GDP growth for decades and continues to do so. Also digital ad spends are rising not falling and have consistently been the fastest growing segment of the advertising industry for over a decade.

    Your reasoning about the fragmented attention of individuals online is correct. And it disrupts traditional advertising sales. This is one reason that the fastest growing segment of the online display advertising market is “targeted” advertising through real time bidding platforms like DoubleClick using retargeting methods and other behavioral methods to follow the individual audience member as they navigate between multiple publishers.

    This fragmentation separates publishers from relationships with advertisers completely and makes their remnant, unsold advertising the highest value product while giving them the lowest return for that audience attention. It is a sticky situation, but it has an obvious, if very difficult counter—publishers must make their sold advertising products higher value, more engaging and more successful for advertisers. Publishers must preserve the relationships they have with their best clients.

    • Joshua Gans says:

      When you look at NPAA figures, advertising revenues have been blasted back fifty years. They have declined with GDP.

      Now there may be overall digital advertising that is better but that includes search. Display ad revenue on news outlets has not shown high rates. They are lower than in print. That is the part I am worried about.

      The other part of your comments I agree with and discuss elsewhere.

      • Agreed, and online advertising includes much more than just search.

        But, those dollars did not disappear, they shifted to new forms of advertising—primarily online. So it’s not really a mystery at all. The advertising industry has continued to grow while traditional players have lost to disruptive new entrants both in terms of audience attention and dollars spent.

        Something that is specific to broadcasters and newspapers: both of those markets had very high barriers to entry. That meant that a small number of players had the attention of most consumers. Now, in a more fragmented digital age, the barriers to entry for creating content and connecting with consumers is much lower. Therefore competition for consumer attention and advertiser dollars is fiercer. This has nothing to do with online ad effectiveness relative to print ads, and it has everything to do with the institutional differences between those markets. We have moved from monopolies and oligopolies closer to a perfect market.

        There are other factors that also adversely affect digital revenues. For example, the sophistication of advertisers lagging behind consumer behavior. So it takes time for advertisers to move their dollars online. Or simply the sizes of sales forces and dollars spent marketing these new products. That still lags behind traditional products.

        Finally, it is not surprising that legacy players find it hard to match disruptors. That is not unique to media. Disruptive innovation often exploits the weaknesses of legacy. For example, print and distribution of a newspaper represented the key barrier to entry for a local market, but now it is a loss leader 6 out of 7 days a week for many. While online only operations can operate with much smaller overhead. And sales forces which sell local advertising online don’t have to be connected with a media organization at all, they just need access to a DSP to buy local audiences from real time bidding systems.

  3. Metatone says:

    I think you identify an important issue with online advertising. However, this is also a second order effect. The first order effect is the one you mention, but dismiss, because it is framed inaccurately: “Apparently, online ads or digital ads just don’t work. That is the thesis. Except that no researcher has found this in a lab environment and no theory explains the mechanism.”

    What actually happened is that the digital environment created a new way of measuring ads: click-through. And on click-through (and other fancy analytics) it really looks like advertising doesn’t work as, well, advertised.

    Now what’s interesting is that this is not evidence that advertising doesn’t work for awareness and brand-building, etc. However, the new online ad companies were so hot for the analytic model (as their point of difference over trad. advertising) that they kept banging the drum for analytics. And they were smaller companies – and the first wave websites were smaller operations – so they were happy with the amount they were bringing in. And once rates have been set, it’s hard to push them up.

    Of course, the key problem with the lab studies I’ve seen is that they compare online ads with print ads (for example) and say “online ads are just as good.” Which they are – the hidden reality is that print and TV ads were probably over-priced. Over time people got less interested in a lot of ads, just from overload, if nothing else. But it’s only with online that this can get measured…

    • Rob Lewis says:

      Amen!

      Further: Advertising 101 teaches us that media impact is essentially a product of two quantities: reach and frequency. No sophisticated advertiser places one ad in a publication and says “There. We’ve got that audience covered.” (though plenty of UNsophisticated advertisers do). The fact that a site-hopping online consumer may have already seen your ad somewhere else isn’t a bug, it’s a feature.

  4. shorewalker says:

    Josh, as someone who has been working away at creating online media which does a job, there’s something in what you say. But I think you’re ascribing too little weight to the reality of an oligopolistic market hit by a massive supply shock.

    1. Metatone above is almost certainly right to observe that print ads were overpriced when online media arrived.

    2. Advertising budgets are now being deployed over hundreds of times more publications than before. Magazine and newspaper ads were subject to a constraint in print – there are only so many publications you can fit on the newstand – that disappeared when online media arrived.

    3. Readers’ attention is also being deployed over far more material than before. Christensen et al are describing a real issue when they describe media consumption in the doctor’s waiting room. Magazines and newspapers used to be among a small group of solutions to “give me something to read for 20 minutes”. Now magazines and newspapers are competing with everything on your smartphone – Twitter, Facebook, email, phone calls, playing games, and a million great websites that aren’t them, including a few written by that very engaging Gans bloke.

    The Few Media are now being replaced by the Many Media. In this world, traditional magazines and newspapers get killed by sheer weight of numbers.

    You might also question the assumption that there is some “right” response for large media organisations that ensures their survival. Look around the Gans publishing empire and see what evidence you can find that the economies of scale in media are the same as they were 20 years ago.

    I feel a little sorry for the people running large media organisations right now. They keep getting told they are idiots, dullards and laggards. In fact they seem more likely to be smart people charged with solving an unsolvable problem.

  5. Dan says:

    Isn’t a simpler answer that the supply of news ads has gone from inelastic (the print era) to elastic (digital) in microeconomic terms? When you shift the supply curve this way then the profits falls out of the marginal revenue curve for news advertising. So national news ad revenue drops from $55B in 2006 to $25B in 2011 (or thereabouts). That’s all. It’s not a matter of overpriced or under-priced ads, but of supply and demand.

  6. Paul says:

    In addition to the great observations already made here, remember that classified ad revenue all but vanished and is unlikely to return to providers of news, print or online. Even more true than “advertising follows readers” is “advertising follows likely customers”. There are better and cheaper ways for classified advertisers to reach their audience than news.

  7. […] Second, there are some blog posts here on tracking, on Facebook, on paywalls, and the problems of advertising in general here and here. […]

  8. […] and a half? When I looked at that data, I thought it was advertising that was being disrupted although as I have noted before some prominent people have disagreed. One of these days someone will explain to me why advertising isn’t part of digital strategy […]

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