Hal and Eric want to save journalism

Author James Fallows has a long Atlantic feature story on why he believes Google is sincere in wanting to save journalism from its business models. (OK, long Atlantic feature is redundant, but at 9,000+ words it’s longer than most academic papers.)

While the author’s friend (and Google CEO) Eric Schmidt plays a central role, so too does chief economist Hal Varian. (Somehow Fallows doesn’t mention that Varian wrote the best-known information economics book and was the founding dean of Berkeley’s information school.)

Two excerpts from the article:

[P]eople inside the press still wage bitter …debates about whether…customers will ever be willing to pay for online news… But at Google, I could hardly interest anyone in the question. The reaction was: Of course people will end up paying in some form—why even talk about it? The important questions involved the details of how they would pay, and for what kind of news. “We have no horse in that race or particular model in mind,” Krishna Bharat, one of the executives most deeply involved in Google’s journalistic efforts, told me, in a typical comment. His team was already working with some newspapers planning to put their content behind paywalls, others planning to remain free and hoping to become more popular with readers annoyed when paywalls crop up elsewhere, and still others planning a range of free and paid offerings. For Bharat and his colleagues, free-versus-paid is an empirical rather than theological matter. They’ll see what works.

Some insights from Hal Varian:

…“Unbundling” is an insurmountable business problem for journalism. “Bundling” was the idea that all parts of the paper came literally in one wrapper—news, sports, comics, grocery-store coupons—and that people who bought the paper for one part implicitly subsidized all the rest. This was important not just because it boosted overall revenue but because it kept publishers from having to figure out whether enough people were reading stories from the statehouse or Mexico City to pay the costs of reporters there.

“Newspapers never made money on ‘news,’” Hal Varian said. “Serious reporting, say from Afghanistan, has simply never paid its way. What paid for newspapers were the automotive sections, real-estate, home-and-garden, travel, or technology, where advertisers could target their ads.” The Internet has been one giant system for stripping away such cross-subsidies. Why look to the newspaper real-estate listings when you can get more up-to-date, searchable info on Zillow—or better travel deals on Orbitz, or a broader range of movie showtimes on Yahoo? Google has been the most powerful unbundling agent of all.
…
Burdened as they are with these “legacy” print costs, [dead tree] newspapers typically spend about 15 percent of their revenue on what, to the Internet world, are their only valuable assets: the people who report, analyze, and edit the news. Varian cited a study by the industry analyst Harold Vogel showing that the figure might reach 35 percent if you included all administrative, promotional, and other “brand”-related expenses. But most of the money a typical newspaper spends is for the old-tech physical work of hauling paper around. Buying raw newsprint and using it costs more than the typical newspaper’s entire editorial staff.

The article also talks about Google’s ideas about changing the substance of journalism via Google News. Its head, a Bangalore native, hopes to reduce pack journalism and provide a more multicultural perspective for Americans and other English-speaking people around the world. (Sorry, it’s hard to take seriously any search engine that promotes RT — Pravda on TV — as co-equal with CBS or the NY Times.)

Still, Fallows does a good job of capturing the “deeply symbiotic relationship” that Google realize it shares with quality content provider. He also lists a range of initiatives, big and small, that Google is taking to help newspapers make the inevitable transition from dead trees to online as their primary source of revenues.

And more generally, Fallows and Google offer a more nuanced and sophisticated view of Web business models for the coming decades. Given the high failure rate of Web 2.0 business models, I were leading an online startup I’d make it a must read for my entire staff. The ideas about bundling, cross-subsidies, scarcity and pricing are also ones that are broadly applicable to any class on business models or information economics.