Clay Christensen @RSAInnovate: Why the spreadsheet is killing job creation

Clay Christensen at the RSA in London

Clay Christensen at the RSA in a talk titled “The Capitalist’s Dilemma”.
Photo by Kevin Anderson, Some Rights Reserved

Disruptive, or empowering innovations, create jobs, but they take time to pay off, while efficiency innovations eliminate jobs and free up capital (save money) in the short term, Harvard Business School professor Clay Christensen said in a talk entitled “The Capitalist’s Dilemma” at the RSA in London last night. The problem he sees is that management has become a conversation almost entirely focused on spreadsheet-driven financial targets and short term efficiencies rather than longer term value creation, which also creates jobs.

If you’re not familiar with Christensen, he sums up the focus of his work in the preface of The Innovator’s Solution, a book he wrote with Michael Raynor. He says:

It is easy to explain why poorly run companies fail; but many of history’s most successful and best-run firms have lost their positions of leadership, too. Why is so hard to maintain success?

Christensen looked at disruptive innovation, or what he called empowering innovation last night, and why incumbents were overthrown by upstarts. In some industries, such as the case with newspapers, they recognised the disruption but were still unable to adapt. I’ve written two pieces for The Media Briefing, looking at Christensen and his former Harvard colleague Clark Gilbert‘s advice for the newspaper industry and how they can adapt.

Last night, Christensen was talking about innovation in much broader terms and looking at the affect of focusing on short-term cost-saving innovation versus longer term empowering innovation.

What he wanted to understand was why unemployment has been taking longer to return to pre-recession levels since the recession in 1990. What was interesting is that he was looking not just at unemployment but more precisely the “lag from when real GDP returns to the pre-recession peak to when employment returns to the pre-recession peak”.

Clay Christensen at the RSA in London

Click to go to Flickr for the full-size image. Photo by Kevin Anderson

As you can see from the graph, looking at recessions in the US from 1948 until now, the average lag was six months, but then the lag began growing from 15 months to 39 months to the current lag after The Great Recession. Sixty months after it began, and we still don’t know when unemployment will return to pre-recession levels. What is causing these jobless recoveries?

To put it succinctly, he blamed a short-term focus driven by the financial models easily run in spreadsheets by “26-year-old analysts”. He summed it up the theories and the practice of finance that is leading to this short-termism in this table.

A theory of finance Tools of finance
pre-eminence of returns on capital spreadsheets – Visicalc, Lotus, Excel
calculus needs something to maximise measurement via ratios
Milton Friendman gave the target NPV (Net present value)
Guided by Delaware courts, not legislation ever since Management becomes the assembling, optimising and shipping of numbers.

Created with the HTML Table Generator

Just to look at the power of spreadsheets, he said that they were the biggest recent development, adding:

A 26-year-old can build the financial models of companies and effortlessly test the impact of different inputs onto outcomes that matter.

He said that business is now driven by “the church of finance”, in which finance becomes a religion both in terms of how it is taught and the level of belief of its adherents. With the true believers of finance driving management, decisions are boiled down to measuring the efficiency of deploying capital.

Christensen explained the effect of this finance-driven focus through his framework of innovation. He sees three types of innovation:

• Empowering, which make the expensive and inaccessible, cheap and accessible.
• Sustaining, innovation that simply replaces an old model with a newer model
• Efficiency, “These reduce the cost of making and distributing existing products and services,” as he wrote in the New York Times.

Clay Christensen at the RSA in London

Empowering innovations create jobs but they use capital, and they are longer term investments, often taking five to 10 years to see a return. “Efficiency innovations pay off in a year or two. Instead of using capital, they save it,” Christensen said, but instead of creating jobs, they eliminate them.

The problem he sees in the US (and the UK, although he wasn’t ready to say that will full confidence) is that he estimates there is now a third of the empowering innovations being created as there were in the 1950s, 60s and 70s.

Why is the US economy so anaemic? It isn’t weak corporate balance sheets. He said they were “pristine” and stronger than they had been in years. The problem also isn’t lack of capital, and he said over and over that the US is awash in capital, which is why private equity and hedge fund managers say that so much money is chasing so few deals these days. The problem is that the “finance mechanism hijacks capital and recycles it unto itself”, Christensen said.

That’s the problem, and he did point to a few solutions. For one, he said that capital needed the will to invest in longer term, empowering innovations. He pointed to the US tax code that punished short-termism by charging the personal rate of tax on investments of less than a year, which for top-bracket income earners would be 35 percent. However, if you hold that investment just one more day, 366 days instead of 365, then the tax rate drops to 15 percent. He said that 366 days is not the kind of long-term investment that will spur empowering, job creating innovations. Instead, he recommended low or zero taxes on money invested five to eight years.

He also criticised the solutions spun by the Democrats and Republicans, the two dominant parties.

I think the Democrats and Republicans are both wrong on this redistribution issue. In the US, the top 1 percent own 28 percent of disposable income. The Republicans say that we have to let them keep their money to invest in jobs. Most of them don’t invest in jobs but use their capital to create more capital.

The Democrats are wrong as well.

If we don’t have empowering innovations, the solution isn’t to redistribute wealth in the other direction, which is in line with the Democrats efforts to increase taxes on higher income brackets. I like how Christensen put this in the New York Times:

If the I.R.S. taxes their wealth away and distributes it to everyone else, it still won’t help the economy. Without empowering products and services in our economy, most of this redistribution will be spent buying sustaining innovations — replacing consumption with consumption. We must give the wealthiest an incentive to invest for the long term. This can create growth.

Of course, one of the great debates in our current politics is how to deal with rising debt in our societies. Christensen is pro-growth, and when asked whether “we can say definitively that austerity doesn’t promote prosperity”, he said very quietly, “yeah”. However, Christensen seemed to nicely get around the gridlock of the current debate on how to deal with the debt. However, he does admit in his article in the Times that the issues are complicated.

Innovation and journalism

For me trying to think about how innovation affects journalism, I had one take away. When a product becomes commoditised, it opens up opportunities both above and below the commoditised project. I do believe that the over supply of information has commoditised much of breaking news such that as Christensen pointed out in a 2011 study:

The wealth of information available almost instantaneously has lowered the value of the general interest news story such that it’s often less than the cost of production. General interest and breaking news reporting comprised of answering the “who, what, when and where” has become commoditized. It cannot create enough value to sustain a news organization in the long term.

The question becomes what opportunities exist above and below the commoditised “general interest news story”. What could those products be? It’s a good question, and it’s one of the reasons why I bought a copy of The Innovator’s Solution after the talk. I managed to get a few seconds with Christensen after his talk, and I thanked him for his research in 2011 and asked what he would recommend in terms of how to work within a traditional news organisation. His answer was sobering, but that will have to wait for another blog post.

Clark Gilbert’s five business model ideas that are changing the news industry

After writing about how print-digital integration was absolutely the wrong response to digital disruption, I’ve been going back to more of the ideas of Clay Christensen and Clark Gilbert on how the news industry should respond to disruption. I would strongly encourage you to take an hour and a half of your time and watch Clark Gilbert speak at Harvard University’s Nieman Foundation. I had read his ideas, but he’s even more forceful and compelling in person (or via video).

Clark Gilbert, Deseret News – April 25, 2013 from Nieman Foundation on Vimeo.

He quotes the president of an online newspaper division:

Overall, the newspaper industry’s involvement in the internet has been one where it had a lot to lose and it’s been trying not to lose it, as opposed to starting from scratch and having a lot to win.

Gilbert has created a disruptive division that is all about winning digital opportunities. About 47 minutes in, he lays out five business model ideas that are changing the news industry and are helping his digital division grow at 40 percent year-over-year.

  1. Digital revenue should a third of your business in 2012 and half of your business by 2015
  2. A digital buyer needs a digital seller
  3. New channels are the difference between Transformation A and Transformation B
  4. Digital marketplaces (Not Digital Publishing) will win
  5. Dual transformation requires new organisation

And he says that number 2 is non-negotiable, and watch the video at 51 minutes to see why Gilbert is even more adamant about that now. Your jaw will drop. Seriously, this is worth your time.

They have four digital advertising channels:

  1. Companies that want a legacy-digital bundle
  2. Large local digital only
  3. Small local digital only
  4. National advertisers that do a significant amount of targeting and re-targeting.

He said that he recently noticed that the legacy-digital bundle sales had plateaued, but one of his other channels (he didn’t say which one) is growing by 70 percent year-over-year, which is just one reason why they have 40 percent year-over-year digital revenue growth.

Number four will interest everyone who is in local media. He says that digital marketplaces are winning local.

Gilbert makes an even more forceful case than he did in Austin where I saw him in April that integration, especially on the business side, was absolutely the wrong idea. When the Washington Post integrated its print and digital, digital revenue growth stopped. When the Dallas Morning news integrated print and digital, digital revenue growth stopped, Gilbert said.

Contrast that with Gilbert’s company. In 2009, legacy revenue accounted for 90 percent of the business and digital came only from 10 percent. In 2012, he said that legacy revenue channels would account for only 33 percent of overall revenue. Digital revenue is now bigger than revenue at their TV station and their radio station, and it will soon pass print.

I’ll just finish with this comment from Gilbert:

News is not a business model. It’s a public good.

However, you can build a business around the brand that you create with this public good.

Fellow journalists, you should be fighting for this kind of thinking because Gilbert plows back a third of all the profit from the digital division to fund the newsroom.

New Bloomberg Media CEO, Justin Smith, rouses the troops

Justin Smith has a great track record of repositioning great media brands for the digital era. His most recent media makeover, The Atlantic is only his latest success story. Jeff John Roberts at paidContent had a great interview and profile of Smith looking at some the secrets behind his success. Smith is a digital evangelist and more. Two-thirds of Atlantic Media’s advertising revenue is digital, and while other media companies have suffered over the last three years, Smith’s Atlantic has been in the black since 2010. 

if there is one thing I’ve learned over the last few years, building a solid media company isn’t just about growing digital as quickly as possible but building successful products regardless of the platform. Roberts puts it this way:

And this is what Smith understands so well about building a media company today: the challenge is not print vs digital or about paywalls, but about using brand power to grab revenue wherever you can. 

As Smith moves on to his next challenge, Bloomberg Media, Digiday has excerpts from an email to his new troops. Smith has always invested in talent, and that was key to his strategy at The Atlantic. As a matter of fact, if there was one thing that ties together a lot of disparate strategies, whether it is Smith’s Atlantic or the revitalised Orange Country Register, it is about about making smart investments to deliver a great product

I’ll highlight just a couple of other comments that Smith makes. He has called on the staff at Bloomberg to embrace change and entrepreneurship. In terms of change:

The media industry is bifurcated into two distinct worlds: the struggling traditional segment that longs for a simpler, more profitable past that will never return; and the vibrant, entrepreneurial segment that is reinventing the industry before our eyes. The simple act of choosing to live on the new, wide-open frontier is a powerful step toward success.

And his definition of entrepreneurship is about adaptation and speed:

One definition of entrepreneurship is the ability to evolve your product, business model, technology, or talent base to capture a changing market opportunity. Moving quickly is paramount: the faster you move, the more you learn, and the sooner you can optimize for success. 

Bloomberg was already a strong brand and a source of revenue that most media companies would kill for, the $24,000 annual subscription for its financial terminals. It will be fascinating to see how Smith supercharges Bloomberg. 

Print-digital integration ‘sucked the life blood’ out of journalism’s future

This post originally appeared on The Media Briefing.

On both sides of the Atlantic, the newspaper business is experiencing its own episode of back to the future, reverting to a past when billionaire sugar daddies buy and prop up ailing titles.

The motivations sit on a continuum from a public service minded sense of noblesse oblige all the way to treating media as something akin to a US super-carrier, as the ultimate tool to project power. The new class of owners include former KGB agentshotel developershedgies and, of course, this week, Jeff ‘Vishnu’ Bezos, the creator and destroyer of retail business models.  

Historians will simply say, twas ever thus, and point to the fact that we’re merely returning to an older model of ownership. But could newspapers have responded to the digital tsunami in any other way than they did?  

The newspaper industry had a clarion call on how to respond to disruption, but like most disrupted industries, the industry has failed to adopt these strategies.

Newspapers are only the latest in a long line of industries that have been rocked by technological change. Clayton Christensen has studied hundreds of companies across a number of industries that have faced disruptive innovations, and in 1997, he wrote the Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.

Clark Gilbert is former professor of entrepreneurial management at Harvard Business School and began working with Christensen to apply the Innovator’s Dilemma to newspapers more than a decade ago in 2002. Unlike other industries, which simply did not see the disruption coming, newspapers recognised the threat posed by the internet, but Gilbert said, “Unfortunately, threat-induced response also leads to very rigid behavior.”

He added:

We found that despite recognizing the problem, most companies aggressively “crammed” the new business into the old business model and sales processes. For example, most newspapers tried to force their online sites to make money by selling the same types of advertising to their traditional print advertisers. The early online advertisers were different and the type of advertising they sought was much more focused around the interactive and direct targeting attributes of the new media.

Threat had motivated action, but it was resulting in an aggressive replication of the newspaper business. Newspapers had spent a ton of money, with little to show for it. In an effort to defend their core market from attack, newspaper companies were missing the new emerging market altogether.

More than a decade ago, Gilbert also had statistical evidence that should have been a warning to newspaper executives that digital-legacy integration was not the answer to their problems. In fact, it was exactly the wrong thing to do. He said:

In our large sample study, sites that separate their online organizations from the newspaper were more than twice as innovative than sites that remained integrated into the newspaper. More importantly, these sites gained 60 percent higher market penetration!

Fast forward to 2013. Three years ago, Gilbert left Harvard Business School to become the CEO of Deseret News. While on average US newspapers earn 17 percent of their revenue from digital, The Deseret News and Deseret Digital media earns 45 percent of their revenue from digital, according to the American Press Institute (API).

In April, I heard Gilbert speak at the International Symposium of Online Journalism in Austin about how he has applied the insights from the Innovator’s Dilemma to the Deseret News in Utah, and he laid out why integration was absolutely the wrong approach to disruption.

“In industries that are being disrupted, 9 percent of companies make it,” he said. Of the 9 percent that made it, 100 percent had set up a separate disruptive business unit.

Separate means:

  • A separate physical location.

  • Separate profit & loss.

  • Separate direct sales.

  • Separate content product and technology teams.

  • Separate management structure.

However, it is important to understand that while Gilbert says integration is a mistake, potentially a fatal one for your company, he is not simply advocating a digital first strategy. Key to his strategy is a dual transformation, creating a new disruptive digital company while also transforming the traditional print product.

In his transformation of the legacy print and broadcast business, he said that it is important to understand that in the age of digital media, generalists are not as  valuable as specialists. Local media should excel in this age, but instead they have suffered.

To help the newspaper find its USP, Gilbert used detailed market research to identify six core coverage areas. Yes, they slimmed down the legacy product, but they ploughed savings back into covering these six core areas that allowed them to create a differentiated product.

For the disruptive digital business, they are creating a company that looks beyond the twin revenue streams of advertising and paid content that dominate the income mix of most media companies.

“Its divisions include, but are not limited to, e-commerce, marketplace services, digital consulting and other emerging revenue streams in which tablets, mobile and social are integral parts,” the American Press Institute reported.  

Instead of one struggling company, Gilbert is trying to create two dynamic companies. They do meet, but he keeps the interaction at a minimum. Otherwise, the legacy business often “suck(s) the life out of” the digital disruptive business, he told the American Press Institute, adding, “You don’t get excellent from either if they’re integrated.”

Of course, the US isn’t alone in examples where splitting the legacy and digital business delivered better results. In fact, one of the pioneers is Scandinavia’s Schibsted. In 1999, it decided to split its digital divisions from its newspapers, and it has gone to build one of the most successful media companies in the world by building one of the most successful digital classified businesses in the world. With operations in 28 countries, US analyst Ken Doctor reported in February of last year that Schibsted earns 36 percent of its revenue from digital.

Looking at the recent newspaper buyouts by billionaires, the real question should be whether they will do the same thing as their previous owners, sinking millions into a disrupted business or whether they will heed Gilbert’s research and create a separate disruptive digital unit. Maybe that’s where Bezos will breath new life into the Post with a resurrected Post Digital. 

The Bezos Post: The Graham family’s honourable gamble

Jeff Bezos’ purchase of the Washington Post and its community newspapers caught me and just about everyone else by surprise, with the possible exception of the Graham Family, which has owned the paper for the last 80 years. They have been talking to a half dozen buyers since last December. As I said on Twitter when I found out, this was the most surprising deal since AOL bought Time-Warner, although I hope for Bezos and the Post that the result is different. 

Like a lot of media watchers, I was trying to make sense of this head scratcher. As Steve Yelvington said on Facebook:

Jeff Bezos’ purchase of the Washington Post is as interesting for what he didn’t buy as for what he did. It’s not a real estate gambit; he didn’t buy the Post HQ building (which is still on the market). He did’t buy @wapolabs, which seems to have gone dark anyway. He didn’t buy Slate. And he didn’t buy Kaplan, which operates in an industry (education) that seems ripe for disruption.

I got a chance to scratch my head in public on the BBC today. Thinking back on it, I think that the sale says more about the Graham family than it does about Bezos at this point. The Graham family vetted six different buyers, and they chose Bezos. In the New Yorker, David Remnick, who spent a decade writing for the Post, and he spoke to publisher Katharine Weymouth, a member of the Graham family. She said:

Don took this process extremely seriously. He would not have sold the paper to anyone who didn’t share our values.

Donald Graham, and the rest of the family, truly seemed to have come to believe that the newspaper would be better off under Bezos than under their stewardship. Graham told the Washington Post’s Ezra Klein this:

As we looked ahead, if revenues kept declining we’d have no choice but to keep cutting. Roughly 85 percent of stock in the Post Company is owned by shareholders not in the Graham family. So the money we’re losing isn’t our own. We didn’t feel good about that. Still we were quite certain that The Post could survive and have a long future, but we wanted to do more than survive. We wanted to be successful and expanding and financially strong. So for the first time in either of our lives we asked ourselves if we thought our small public company was still the best place for the newspaper.

One thing that wasn’t covered very much was the business terms of taking the newspaper private. However, one assumes that this isn’t a Sam Zell-Chicago Tribune leveraged-to-the-hilt buyout that assumes the worst case scenario is flat revenue just before the global economy almost takes a swan dive off a cliff. 

What will Bezos do to help the Post “do more than survive”? Bezos is bringing his customer-centric focus to the Washington Post, and he implicitly understands the relentless urgency of news in the internet age. In his letter to the Post staff he wrote:

The Internet is transforming almost every element of the news business: shortening news cycles, eroding long-reliable revenue sources, and enabling new kinds of competition, some of which bear little or no news-gathering costs. There is no map, and charting a path ahead will not be easy. We will need to invent, which means we will need to experiment. Our touchstone will be readers, understanding what they care about – government, local leaders, restaurant openings, scout troops, businesses, charities, governors, sports – and working backwards from there. I’m excited and optimistic about the opportunity for invention.

However, this is a man who also has not only the resources but also the mindset balance the impatience of internet time with a grounding in a long-term vision. As Matt Buchanan wrote in the New Yorker:

Bezos is a man, after all, who’s trying to build a clock that will run for ten millennia which is buried inside of a remote mountain in Texas, simply because he desired the existence of “an icon for long-term thinking.” 

The Graham family’s bet on Bezos is a brave, honourable gamble, and I hope for the Post, for their staff, for Washington and for journalism, that Bezos is the man for the challenge. It is going to be a great experiment to watch. 

Other interesting takes on this: 

• Alan Mutter riffing on the idea of Washington Post Prime in the Post’s Wonkbook blog.
Megan McArdle’s look at the deal in Bloomberg. The most fascinating part of her post has nothing to do with the Washington Post and newspapers but the numbers of the decline in ad pages for major magazines. (The double-digit decline in ad pages in The Economist and The Week took me by surprise.)
“Why Washington Post sale matters to you: scale and innovation” by Earl J. Wilkinson of INMA. I’ll be writing about this tomorrow. One of the best posts on the topic bar none if you’re a publisher or news executive. 

Journalism and disruption: Change is easy and hard

With nearly 20 years of digital journalism experience, I’ve been through a lot of change in the industry and, editorially, 2013 reminds me a lot of the late 1990s. We’re seeing a lot of editorial experimentation – drones, Google Glass and all kinds of data journalism. I lived through an earlier era when editorial innovation exploded, and I hacked together a lot of projects using all kinds of technology and web services during my time as a field journalist for the BBC and digital editor at The Guardian. With the mobile, multimedia and web technology in 2013, these digital projects can seem easy and effortless (especially compared to the duct tape and spit we had to use in the early days).

However, it would be a mistake to think that just because it’s easier than ever to produce amazing digital editorial experiences that this makes organisational change easy. It takes an entirely different set of skills to get buy-in from stakeholders or to Jedi mind trick the empire builders of senior management. It is hard, and even I underestimated the size and nature of the challenge as I transitioned from young digital maverick field journalist to digital editor in the middle of the last decade.

While a lot is different in 2013 than it was in 1996 when I started in digital journalism, or even than it was five or six years ago, change still is hard. In some ways, it is even harder now as most newspapers struggle with redeploying diminishing resources carefully from the core business to new digital initiatives. The politics are fierce. Even when it is in an organisation’s best interest, even when it is an organisation’s stated interest to embrace digital, winning the political and cultural battles is hard, thankless work. I know people who stayed and fought these battles inside organisations, and I have deep respect for them and learn from them whenever possible. When I return to working for an organisation, hopefully soon, I will take lessons that I’ve learned from these friends.

If you want to know how hard it is, it’s really worth reading an article by David Cadogan at The Canadian Journalism Project. I love the piece because it takes me back to my own early days in digital journalism, the days of dial-up internet and lots of hacked together solutions, just with much, much more primitive technology. He writes:

In November of 1997, we put my flagship paper, the Miramichi Leader, online with a piece of off-the-shelf software our web press company manager found. By that time, our readers had 28k or 56k dial-up modems and access to Internet. Still, we could publish only stories, pictures and classified ads. A full-page colour ad would have taken more than a day to download.

I remember how exciting it was to push the limits of what we could do with the technology we had. For example, working on a video project for the BBC a year after the September 11 attacks I shot and edited video on my laptop, and then went out to dinner as my computer compressed the video to send via a very slow connection to London.

David talks about online subscriptions, message boards and even user generated story ides. This was in the late 1990s, about the same time I joined the BBC, and we were doing very similar work. I loved it. It played to my passion for journalism, technology and exploring news ways of storytelling. I still get excited thinking about what we achieved.

In the final section of the article, David says twice that he failed. “I failed abjectly at trying to get newspapers to buy into these opportunities,” he says. He was a publisher, investor and newspaper association director. He had industry connections and some of his own resources, and yet he couldn’t convince other publishers to embrace digital opportunities and get ahead of digital disruption. It was, and it often still is, incredibly hard to convince people to change, particularly when the full impact of new technology, in this case the Internet, isn’t yet obvious. I’ve heard stories like David’s from editors and managers across the industry, and I have a few of my own.

When I took the buyout from The Guardian in 2010, I felt sad because I knew that as a digital journalist with 15 years of online experience, that there was so much more I could have done had I been able to figure the secret handshake that unlocked resources and strategic support. I often joke that at The Guardian, anything was possible for me as long as it required no staff and no budget.

I do think that 2013 is a different era, because major organisations have stated that their goal is to focus on digital. There are news orgs that say they are digital first, and that was really rare in 2006. The direction of travel is, without doubt, towards digital.

A lot of young journalists will be like I was in the mid-1990s, able to work on exciting projects that push the boundaries of journalism and engagement. But move away from the coal face, and battles over digital, over change, are still happening. These battles are not unique to just one or two organisations, they are commonplace across the industry (and across many other industries too).

I’ve learned a lot during my work as a consultant about how to help organisations change. I can’t wait to take this experience to my next job. I’ve still got the passion and the fire for creating the future of journalism, but I have a few new tricks, beyond being geekier than the average journalist, to move the dial of organisational change in the right direction.

David’s article is also is important for young digital journalists to realise that there were a lot of innovators who fought, and sadly often lost the battle, to help newspapers respond to digital disruption. To believe that you are the first generation of digital guerrillas is to be ignorant of journalism’s history. I started in digital journalism in 1996, and I count true digital pioneers from a generation before me as mentors and friends. My work and the work of the current generation of digital journalists is built on their shoulders. All of us from those early days can look back and see points where we failed to bring about the change we wanted, but I salute David and so many others like him. They might not have achieved all of their ambitions, but they made this new era of digital journalism possible. You, sir, did not fail.

Digital media success beyond cranking out lots of low-cost content

Dipping through my morning digital media reading on Zite, I found a piece that put digital media success simply, though I’d argue overly simplistically. Josh Sternberg writing at Digiday, wrote:

Winning in digital media now boils down to a simple equation: figure out a way to produce the most content at as low a cost as possible.

Volume as a winning strategy is then taken as on faith throughout the rest of the piece. Sternberg goes on to say that publishers are turning to volume to “combat low ad prices”. But ad inventory oversupply has been one thing driving down digital ad rates, and pumping out more content exacerbates rather than solves that problem. As Justin Lewis said on Twitter:

I think that high content volume at low cost can be a good strategy for start-ups and some established brands: It has worked well for the Huffington Post and Forbes. But in the volume game, we’re going to see a few big winners and a lot of sites swimming in the deadpool. Consolidation will happen, although the lure of the media is so great that I’m sure that we’ll have quite a bit of churn with new content sites and apps being launched all the time despite a few big players owning most of the space. This is why the Daily Mail isn’t comparing itself to other newspaper sites but to internet giants like Yahoo and MSN, even if it has a way to go to get into that league. It’s a bold statement of how aggressively they are going to push the volume model. They started with a large base of readers and have simply adapted the skin-and-celeb model of tabloid journalism to the digital world, which isn’t that difficult to do.

However, it’s important to remember that volume of content is not the same as commercial success. The figures are a couple of years out-of-date (2010 data), but Ken Doctor looked at the average revenue per user (ARPU) of the New York Times and the Huffington Post. In it, he found that each of the 48 m global unique users at the New York Times was worth $3.54 versus 96 cents for each of the Huffington Post’s 31 m users. It would be very interesting to see the ARPU for the New York Times with its paid content strategy now firmly in place. The New York Times has struggled like most newspapers in developed markets over the last few years, but their paid content strategy is successful. As Ken says, a premium brands get higher returns than non-premium ones.

Digital paid content is also becoming a source of serious revenue for early paid content pioneers. In February of this year, the Financial Times announced that it has more digital subscribers than print subscribers, 316,000 versus 286,000. Jeff John Roberts at paidContent says, “But it’s hard to see how the FT case study can apply to anyone other than the FT.”

The FT has always been held up as an exception not an example for other, largely general interest, news publications, but dismissing its lessons out of hand is a mistake. However, the FT shows the counter-example to the volume strategy: 316,000 digital subs is peanuts compared to the millions of pay views, but it is proving to be a financially sustainable strategy.

More than that, publishers are moving beyond a two-pronged revenue strategy of ads or paid content. Most publishers, even the Daily Mail’s parent company, are developing multiple revenue streams to create a sustainable business, including events, digital marketing and development services and e-books just to name a few.  There are other publications, such as The Atlantic, doing quite well that are pursuing different strategies.

And that’s only big traditional publishers. My former Guardian colleague Bobbie Johnson launched low-volume, high-quality science and tech publisher Read Matter after a hugely successful Kickstarter campaign. They must be doing something right. They were acquired by Ev Williams’ newest project, the blogging platform Medium, in April of this year.

You don’t have to play the volume strategy to win in digital, but you do have to find a way to translate your digital audience to revenue. That’s the big challenge, and thankfully, big numbers aren’t the only way to do that.

Want to get paid for journalism? Don’t be afraid to ask your audience

Last autumn, I was talking to a colleague and we were discussing the economic challenges the news industry, and really just about every other content industry, faces. I finally just boiled it down to this:

Anyone can write these days, but getting paid for it is a bitch.

We live in a world where 72 hours of video are uploaded to YouTube every minute (as of May 2013) and between 600,000 to 1 m books were published this year in the US alone. The amount of content available creates a challenge that not only journalists but also musicians, film makers and writers face. There is just so much stuff competing for people’s attention. National Public Radio’s On the Media asked recently: Who’s gonna pay for this stuff? 

Here is how the hosts framed the discussion:

BOB GARFIELD:  As far back as we can remember, media was among the most lucrative industries on earth. The symbiosis of mass media and mass marketing was a path paved with profit for the  entertainment and information industries.

But today’s cheap and relatively simple technology have lowered the barriers of entry into that world, yielding a nearly infinite glut of stuff, brilliant and otherwise, to compete for audience and funding from every other thing out there, whether made by Warner Bros., or a Korean pop singer whose video was the first to hit a billion views on YouTube.

BROOKE GLADSTONE:  The “Big Bang” in content has exploded the mass of mass media into a zillion fragments, most of which lack the critical mass to survive solely on ad revenue. So, who’s gonna pay for this stuff?

It’s a great show, well worth listening to if you’re passionate about finding the new business models to support journalism and other media in this age of abundance.

It’s a great programme that unpicks some of the issues, and if journalism is your passion, it’s well worth listening to the section on crowdfunding, including a Kickstarter campaign by Roman Mars, the host of 99% Invisible, to fund his third season. I loved this bit:

BROOKE GLADSTONE: Has your success using Kickstarter changed your view of your future?

ROMAN MARS: Definitely. I did Kickstarter because I needed a problem solved. I needed to, to pay myself a little bit of something and pay my contributors to do this show, because I was going broke paying them and not paying myself. It was just about that.

What I got from Kickstarter changed the way I viewed like my audience and how I can operate in this world. It gave me time. There’s a perversity of money that money follows money [LAUGHS], and so like when I raised money on Kickstarter, I got more underwriting support.

Exactly, that’s exactly it. You know, I realized in this process, and part of this is, you know, me enjoying the success of the Kickstarter campaign, is that I kind of like solving the problem of funding the show. I didn’t think I would ever enjoy this part.

But I kind of like it. I kind of like this idea of entrepreneurial journalism. It’s just a puzzle, like anything else. And I’m a producer, and my job is to solve problems. And this is just the most immediate problem that we have.

Listen to the entire segment. It’s worth it just to hear Mars’ enthusiasm.

I really loved this for so many reasons. He became passionate about solving the problem of funding his journalism, but in the end, he found an authentic, honest way to involve his audience not just in creating the podcast but also in supporting it. US public radio has long history of listener pledge drives so crowdfunding projects is just a natural extension of that. The crowdfunding campaign showed that there was demand for what he was doing. That’s important, and crowdfunding isn’t just about raising money but also seeing if there is demand for what you’re doing.

What really grabbed me about this was Mars’ passion about solving the problem of sustainability. It’s great to hear, and I hope that Mars’ passion is infectious. It certainly rubbed off on me.

News, advertising, subsidies and revenue streams: Disentangling products and profits

Yet again, I started to write a comment and then decided that it was a blog post rather than a comment. I was responding to a post that Jeff Israely, a former Europe correspondent for Time magazine and founder of Worldcrunch, has written for Nieman Lab. I love Worldcrunch, and when I was thinking of doing my own news startup, we had a chat or two. I completely understand the point that Jeff is making in his post, and this isn’t a criticism of what he wrote, but a conversation that we need to have amongst journalists trying to get our heads around the business of what we do. 

Journalism! We don’t need no stinking subsidies!

Ok, so that’s a tongue-in-cheek summary of Jeff Israely’s post for Nieman Lab, Don’t you call me subsidised — people are paying for news. Jeff, please take that in the good-natured way in which it is intended. 

I agree people are paying for news, and I understand how the idea of subsidy grates as a journalist. It’s offensive to think we’re taking handouts. However, in business terms, a cross-subsidy isn’t a handout but a revenue stream, often but not always, closely aligned with the core business, that generates net profits to support the entire enterprise. It happens in a lot of businesses. I can see the problem that Jeff has with the term subsidy, but I think it’s helpful to think of this in a different way. Does Gilette subsidise its shaving business  by selling the blades? No, but it’s become the way that it keeps the entire business profitable.

The journalism business debate is littered with unhelpful terms, and we’re not using the business term subsidy accurately. It bleeds out the business nuance of what’s really going on. Journalism is the business of news, but that business is supported not by a number of subsidies but rather by a number of revenue streams, some more lucrative than others. So, let’s stop using the term subsidy, or at least stop using in inaccurately. Let’s think about revenue streams, with the idea that a revenue stream may not necessarily be a profit centre. (I know that’s stating the bleeding obvious, but I often think that Econ 101 should be compulsory for journalists.) Reframing the discussion in terms of revenue streams rather than subsidies is a lot more productive. That’s why I like Jim Brady’s formulation that the business model problem for journalism isn’t going to be solved by a silver bullet but rather shrapnel, a bundle of revenue streams that support the mission. 

Jeff mentioned Google. Is it in the search engine business? Sure, that’s one of its products, but its business, it’s main source of revenue, is advertising, with 96 percent of its revenues coming from ads. Just like the news business, Google wouldn’t be able to dominate online advertising the way it does if it didn’t provide the search product. Google saw off other search engines – Hotbot, Altavista, etc – because it did a better job of delivering results, but it has excelled as a business because it has developed (well acquired really) an incredibly lucrative revenue stream tightly integrated to its core business of search. It has attracted a huge user base, one that dwarfs that of most news sites, so while CPMs have plummeted, it still is able to be profitable.

That’s why the MailOnline is pitching itself as competing not as other news sites but against internet giants. It’s in the volume business, and it wants what Google has. Smart, I say begrudgingly. We need a world where the Mail’s brand of journalism and its fellow travellers aren’t the only ones with good business models. Yes, I’m looking at you, when I say that. 

Back to news and in particular print media, we used to have a Google-sized fat revenue stream that more than paid for news and information that we journalists provided, and it happened to be advertising. The US newspaper business was especially dependent on advertising to pay the bills. Newspapers in other countries had a much larger percentage of  a lot more on news stand sales or subscriptions. In the US, the big problem for print media is the collapse of advertising for print newspapers, especially newspapers. Alan Mutter makes a lot of really terrifying graphs that put this collapse in the stark terms. From 2005 to 2012, first half newspaper ad sales dropped between 23 percent to 86 percent, depending on the type of advertising. Advertising used to be 80 percent of revenue for most US newspapers, what Ken Doctor called the 80/20 rule of newspaper revenue. Newspapers, like a lot of other post-industrial businesses, are just struggling through a transition where their primary source of revenue has been disrupted. 

To tie this up, I would say that hopefully with a wider range of revenue streams, we’ll end up with a more resilient journalism eco-system, one that isn’t so reliant on a single point  revenue failure, advertising. The over-reliance on advertising was especially problematic because it so cyclical. Newspapers have always taken a big hit during recessions because ad budgets are often the first to get slashed. 

Ok, this is a relatively dispassionate, rational look at the news business. Why does this entire discussion pose a problem for journalists?  The economic decline of the print business, with thousands of jobs lost, already has us feeling very vulnerable. The collapse of the business that supported journalism in many developed countries feels like a critique of the value of journalism. Why won’t people pay us for the valuable service we provide? It feels painful even writing that, and I don’t mean to dismiss or diminish the cultural upheaval we’re going through. It feels like an attack on the value of journalism, and we have to recognise the emotional side of this to work through it. But again, we’re letting the imprecision of our language get in the way.

I keep going back to some advice that was given to my college classmate, Theo Francis, when he was working for a news startup. A business-minded uncle said:

You know you’re creating value. But can you capture it?

For those of us who believe in the social value, and the economic value of journalism, what we need to rethink is how we capture economic value to support the work we do. We need to think of revenue streams to support the mission. I believe in journalism, and to quote Kunda Dixit at MDIF’s Media Forum last (MDIF being my day job):

To be truly independent, media needs to be financially viable. 

We’re already creating value, and now, we’ve got some heavy lifting to do in terms of figuring out how to capture value in the digital age. 

Kickstarter-funded Read Matter finding subs do better than singles

Bobbie Johnson by Jeremy Keith from Flickr, Some Rights Reserved

Bobbie Johnson by Jeremy Keith from Flickr, Some Rights Reserved

Building sustainable journalism is a topic near and dear to me as it is core to the work that I do now, and Hacks/Hackers London on Wednesday provided one of those rare times when you get to hear someone a real journalism entrepreneur talk about what has worked and what hasn’t with their start-up. Of course, it’s also great to see a former colleague at The Guardian, Bobbie Johnson, find success.

He and co-founder Jim Giles launched Read Matter with a campaign to raise seed capital on crowdfunding site Kickstarter. They set a goal of raising $50,000, but in less than 48 hours, their goal was firmly in the rear view mirror. In the end, they raised almost three times their goal, brining in $140,201. As Bobbie told The Next Web, crowdfunding can be a great bit of market research. It allows you to find out whether there is real demand for your project.

One of the things that I think really helped their Kickstarter campaign was a great video that clearly explained what Read Matter was in a highly engaging way. It was a great bit of marketing, and if you believe in your journalism, I believe that you have to be ready to sell it. It’s not enough to have the conviction that journalism should win in the marketplace of ideas, you do need to work to make sure that it cuts through the overwhelming torrent of things competing for people’s time and attention.

However, taking a step back before the campaign, Bobbie and Jim did business plans. Bobbie quickly flashed the Excel spreadsheets they used to try to figure out if there was an actual business with how they planned to produce one long-form science and technology piece a month. For a lot of journalists trying to do start-ups, I’d strongly suggest speaking with someone with business experience. It’s not something that we were taught in J-school, but in this new world for the brave, this is something you’ll either need to develop or get via a partner in your project.

Bobbie and Jim are learning as they go along, and one of the things that really stood out for me was lessons that surprised them. They had expected most of their sales to be single sales, but they are actually getting more of their revenue from subscriptions. I read Bobbie’s experience that single sales were too high friction. It’s much easier to set up a subscription through iTunes, Amazon or your own payment system than it is to remember to buy something every month when it comes out. I think that has a profound implication for how news groups are packaging up their long-form, high-gloss, high-cost pieces. Does this mean that instead of trying to sell Kindle Singles, that it might be better for news groups to sell subs for long-form journalism? Should they have several packages that target niches? Read Matter covers only science and technology. Would they be as successful if they tried to sell “investigative journalism” rather than a single topic? My gut says that investigative journalism as a class of content might have more value to journalists than it does intrinsically to audiences. What I mean is that audiences are usually interested in topics, not classes of content. That is why I’m sceptical about the sustainability of trying to strip out deep investigative journalism from a broader package of content.

I’m doing a lot of thinking about how to support long-form, often investigative journalism. As  another speaker at Hacks/Hackers London on Wednesday – David Leigh of The Guardian – pointed out, the cross-subsidy in journalism businesses, mostly fat advertising returns, are going or gone. To me, the real question is not how to support investigative journalism on its own but how to find new sources of cross-subsidy to support it.

That aside, kudos to Bobbie and Jim. I know that their future success will take a lot of work and more learning, but it is encouraging to see people succeeding with new models to support the real heavy lifting of long-form original content.