Debundling the Newspaper

Mass circulation newspapers have borne the brunt of “disruption” by the internet. Clearly, they are trapped in a death spiral of declining circulation and revenues.

Yet our local newspapers remain as influential as ever and in some cases their readerships have never been higher (ironically, thanks to the internet).

Where has all the value dissipated to?

As always, let’s explore this in the framework of competition and moats.

Journalism is only part of the product

Newspapers served a function similar to the internet before the internet. It controlled information distribution within a captive geography (with all the network effects that comes with it). What you received daily was a physical bundle of information. Aside from the news, you also received various useful pieces of information such as the weather forecast, the TV guide, the racing guide, real estate listings, classified etc.

Journalism was the competitive differentiator between rival newspapers within an oligopolistic market (often simply catering to different political leanings) rather than the ultimate determining factor as to whether or not you subscribed to a newspaper.

In other words, journalism was a product feature and not the product in itself.

Importantly, if you placed value on any component of this information bundle, you had to pay for the entire bundle.

This information bundle has now been disaggregated. Its various components are now delivered via the internet by third parties. If we looked at their market valuations – e.g. Domain, Seek, Carsales.com, eBay just to name a few – it gives us a rough sense as to how much value these former components of a newspaper delivered to consumers (and in turn advertisers).

Digital Advertising to the Rescue?

Now, newspapers actually make most of its money from advertising by leveraging its captive audience. Advertising is all about share of attention. It is also a zero-sum game given each of us have a fixed amount of attention span to consume media.

Below is a chart from Mary Meeker’s 2017 internet report. Note the degree to which print media is still vastly over-monetised with respect to its share of audience attention:

Interpolate this with the data that in 2015, $1.9bn of a total of $2.4bn of Australian newspaper industry advertising revenue still comes from print advertising, and it paints a very dire picture indeed.

But surely there must be some upside from the rapidly growing digital advertising market?

Here, it’s simply a highly efficient game of demand versus supply. Within the almost perfectly competitive landscape that is the internet, newspapers now have to contend with an almost infinite supply of content (both commercially and user generated) catering for each and every niche segment. If in doubt, just take a look at your Facebook feed (the new king of content distribution and the best monetiser of advertising today) and you’ll see that your friend’s baby photos, viral cat videos, “news” created by Macedonian teenagers and New York Times articles are all equal in the eyes of this distribution channel.

And with the efficacy of digital advertising networks today, previously opaque advertising markets are now highly transparent and ruthlessly results-driven. Sadly this open advertising market does not place a significant premium for eyeballs acquired through a long-form investigative article over eyeballs acquired through a 15-second viral cat video (most of us I would assume are consumers of both).

Journalism as a positive externality

Newspapers have historically never had to compete in truly competitive markets on the merits of its content alone. The truth is that owning a newspaper was a well-trodden pathway to becoming extraordinarily rich and whenever you find an accumulation of a “f#$# you” level of wealth, you will find a wide moat protecting that particular market.

So we can see that supernormal profits generated from ownership of localised information distribution (the moat) paid for quality journalism. One could even argue that quality journalism was in fact a positive externality derived from a particular (now legacy) monopolistic industry structure.

Given how much importance we place upon journalism as a public good, I am in no doubt that it will continue to be delivered in some way, shape or form. And in this context, I suspect we will have to accept that truly competitive markets do not always deliver the best public outcome.

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Note: The above article constitutes the author’s personal views only and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. Being obviously passionate about the art of investing, the author may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – I hold a long position in NZM at the time of publishing this article (This is a disclosure and NOT A RECOMMENDATION. Any position held by the author may, for example, be part of a pair trade or a hedging position so it is not informative in isolation).