Rupert Murdoch needs to change his cost model, not charge for content: Kohler

It is tempting, and easy, to ridicule Rupert Murdoch’s announcement that News Corp intends to charge for online content as the cough of a dying oligopoly, and that’s been the general reaction.

“It’s a gift to the competition,” said the London Telegraph. “Murdoch to Charge for News Online ‘If We Ever Publish Any’”, was the headline in the Huffington Post, one of his nemeses.

The self-destruction of newspapers has been a tragic tale of inattention and hubris, and only the first of those mistakes seems to have been overcome voluntarily.

Enthusiasts inside all the newspapers put up websites of their stories 15 years ago and persuaded their bosses that the advertising would come and that life would be great.

But it didn’t, or not enough of it did. And at the time the industry leaders like Murdoch were not paying attention anyway – they were too busy spending the newspapers’ cashflow on other things.

Now they have discovered that it was actually the impending death of their business models to which they weren’t paying attention.

But then again who was to know that the price of online advertising would settle at about a 10th of the price of print advertising?

This is, after all, a classic business event: a technological change that causes a price reduction. And the result is always the same – lower costs.

While absurdly high print advertising prices have subsidised large editorial budgets, and low or zero cover prices, it won’t do it online.

Could the newspaper cartel have survived for longer had they got together at the beginning and put a “cover price” on their websites? Possibly, since in those early days there was little or no online competition. But at best that would have simply delayed the reckoning, because a tsunami of competition was always inevitable.

Anyway, the thing that’s really killing the traditional media is not the fact that online content is competitive and free, as Rupert Murdoch seems to think. After all, many of his newspapers – suburban and commuter rags – are already free, and where they exist cover prices go nowhere near covering the cost of the product.

It is the fact that the price of advertising has collapsed. Murdoch’s real problem is that the balance of power between publishers and advertisers has entirely flipped.

Advertisers and their agencies now rule the roost. They refuse to pay more than a 10th or so per unit of what they pay in print, and they demand much better service, such as only paying for actual new customers, not simply for “branding” that can’t be measured.

And why shouldn’t they act this way? The publishers have been screwing them for 100 years, charging outrageous prices to access their treasured audiences. Technology has now turned the tables.

Rupert Murdoch’s answer to this is to screw his readers instead. Nice one Rupe.

It won’t work of course, or at least it won’t work anywhere near enough.

And it’s not as if all online content is free. There are plenty of subscription websites, many of them profitable.

Business Spectator‘s sister publication, Eureka Report, for example, is a profitable online magazine that costs $330 a year and currently has more paying subscribers than it’s ever had.

Murdoch’s Wall Street Journal is another successful online subscription newspaper, although its model is a mess, in my view. It charges for some stories and not others, the distinction between paid and free is random and confusing and, in any case, you can get free access to all the locked stories via Google – simply by searching the headline.

The WSJ’s subscription revenue simply comes from brand inertia, because the business community is still in the habit of using it, and such habits break slowly. The product itself is not very good, and the “Journal habit” will eventually fade.

Online journalism that you can charge for has to be either very good or very useful, and just being good probably won’t cut it for long either. There is too much excellent material that is free and will remain so.

The challenge for the newspaper industry is not to find a way to charge for online, or to find philanthropists and governments willing to subsidise them. Those ideas are just fantasies and distractions.

The challenge is to come up with a new cost model because prices have collapsed (advertising prices, that is).

It happens in business all the time. As a result, numbers shrink through bankruptcies, mergers and redundancies until a new viable equilibrium is reached between price and cost – between producer and customer.

What won’t happen is the death of quality journalism – it’s flourishing.

We are merely witnessing the death throes of an oligopoly’s hubris.

This article first appeared on Business Spectator.