The Decline of Newspapers
By: Business Bytes
Tags: Newspapers, Business Strategy, Disruption, Internet, Investing

Welcome back to our weekly snippets. This week, we’ll look into the decline of the once lucrative newspapers business model. How did it previously generate revenue and profits? What was their sustainable competitive advantage? Why did revenue decline? How did the internet disrupt the business model? Let’s get into it!

Newspapers were once ‘rivers of gold’

Rupert Murdoch once described his newspapers as ‘rivers of gold’.

Before the internet & TV, newspapers & radios were the major source of information. Daily newspapers updated us on local and global news, sports scores, celebrity gossip, stock price movements and weather forecasts. Pre-internet, it was a great product.

Early (and overly-optimistic) news articles on the Titanic

Newspapers generated revenue through newspaper sales and advertising. 1/3rd revenue was through newspaper sales, 1/3rd display ads and 1/3rd classified ads. On the cost side, newspapers bought printing presses, ran editorial rooms (hired journalists, editorials), sold advertising (hired salespeople, newspaper designers) and built distribution networks (acquired property to build distribution centres, invested in delivery fleets).

Why were newspapers ‘rivers of golds’?

The virtuous cycle that led to newspaper’s sustainable competitive advantage. Advertisers preferred to advertise on newspapers with higher readerships. Classified advertisements were more valuable for newspapers with more readers. The virtuous cycle looks like something like this: High readership -> more advertising revenue -> increased quality and quantity of content & cost reduction -> more readership. It was difficult to take share from newspapers with higher readerships. Limited advertising inventory drove up revenues. Before the internet & TV, there was limited advertising inventory. There were newspapers, radios, billboards and paper flyers. Newspapers had a monopoly in the classified ad space (Yellow Pages weren’t printed regularly). The limited inventory drove up advertising rates for newspapers. Some have described newspapers as having a ‘monopoly on the delivery of ads; supermarket ads, classifieds, car dealer ads’. Some regions could only support 1 newspaper. Due to the relatively high cost structure of newspapers, some regions could only support 1 newspaper. Local newspapers which serviced 1 area had pricing power with readers and advertisers.

How the internet changed the game

Buffet sold his newspapers in 2020

Newspapers were valuable to customers because it was a primary source of news, information and content. The high cost structure of a physical newspaper business meant there were only a certain number of newspapers to choose from. Additionally, newspapers could only be delivered daily.

On the internet, distribution is free and instant. Newspaper content was replicated and/or distributed online; Twitter had breaking news, Google had sports scores, weather forecasts, stock prices, Medium had opinion pieces. Soon, newspapers started moving their content online to compete.

Physical newspapers became less valuable to readers as 1) content was moved online 2) the internet enabled instant delivery whereas physical newspapers were constrained to daily deliveries (readers prefer to get their content instantly). The downward spiral began as decreased readership led to decreased value for advertisers which led to newspapers cutting costs and decreasing the quality of their product.

To make things worse…

On the advertising side, the internet led to two fundamental shifts 1) ad inventory went from being limited to being limitless (driving down ad prices) 2) efficient targeted advertising was possible. Whilst there is value in maximising customer reaching, the ability to target dog lovers (Facebook user who liked a dog photo or Google user who typed in pet food) is a great proposition for advertisers.

Moreover, the classified ads business worked better online (think Craiglist, Indeed/Linked Jobs, rent.com). The industry’s monopoly on the classified business was toast.

The rivers of gold have dried up

~1–2% of GDP is spent on advertising

The physical newspaper industry had a great business model and was a valuable product. It’s another victim of the internet!!

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