The newspaper business has been in decline for the past twenty years. Almost every single source of revenue, from newsstand and subscription sales to classified and retail advertising has fallen dramatically. This has led to the bankrupt reorganizations of a number of very prominent national newspapers. The Washington Post, The New York Times and The Wall Street Journal all fired hundreds of journalists and staffers in 2009 in an effort to reduce costs. Even these efforts have not been enough to restore healthy profits, The New York Times reported a 26% drop in year-to-date profits in the fourth quarter of 2010.
The forces driving these trends are complex, but the basic cause is that the newspaper business is organized around a model that was extremely profitable when newspapers were the only medium to receive news, but extremely vulnerable in the face of competition.
News as a product has two important economic features. First, news is non-excludable, meaning that once the news is reported anyone can use it. Second, while it is expensive to pay reporters to gather information, the costs of actually distributing this information is the same regardless of how much information is actually produced.
Before television became a regular source of news, newspapers had a loophole in the non-excludability condition of news. While a newspaper could not prevent a competitor from reporting on a breaking news story once it had published an issue, the lag of a single day was enough to make breaking a story before another newspaper a very profitable activity.
Moreover, because distribution costs were the same regardless of how much information each paper collected, there was a tendency toward monopoly once a big paper had set up a sufficient distribution network. The fixed costs of distributing information had another side effect; newspapers became an extremely effective way to distribute classified ads because the marginal cost of including them in the paper was so low. Similarly, it became extremely profitable to include advertising in the paper since the additional cost of including ads was so low. Classified and retail advertising still accounts for 80% of the revenues in the newspaper business.
The rise of the Internet and cable news has completely transformed this economic situation. No longer could newspapers expect to be the biggest beneficiaries from reporting a story. As soon as an outfit like The New York Times reports a new story, cable news networks and bloggers can move quickly to cover the story – with much of the profit of the hard work of newspaper reporters going to other players. This is one the primary drivers behind the trend that there are now less than .5 newspapers per household in the United States, fewer than there were in the 1800s.
Furthermore, classifieds can be handled much more effectively through online services and newspaper advertisers began being lured away by Internet ad networks, which promised contextual ad targeting. Thus, both circulation and revenue have fallen off of a cliff in recent years. Circulation has fallen by more than a third since the mid-nineties while ad-revenue per circulation has fallen by 20% in the last ten years. The result has been an industry that has seen its revenues fall by half.
The newspaper business is in decline, but there is now far more news available to interested parties than there has been at any time in our nations history. The Internet has enabled citizen journalism to an extent that was never before thought possible.
The Internet has enabled disintermediation in many industries. Travel agencies and bookstores have been replaced by websites that cut the middlemen. Something similar is happening in news, where many journalists build a following of people that will read their work regardless of where it is published. For this reason, sites like The Huffington Post prominently display pictures of their columnists, whereas bylines in The New York Times are very small.
News companies are worried because the average time that a user of a news website spends any given day is only a fifth of what they might spend reading the paper. However, this is because consumers of news no longer pick just one paper, instead they hop around to wherever they find information they want or journalists they like. Given the possibility for access to news from the workplace and mobile devices, consumers may actually spend more time reading the news today than they did ten years ago. Given the superiority of ad targeting on the Internet compared to physical space, the overall ad revenues from news might go up, though likely much of the benefit will go to reporters instead of the papers.
For these reasons we do not need to fear too much the journalism will disappear. The form will change radically over the next few years. However, the result will likely be far more content, available to far more people.