FTC: Don't blame Google for newspaper woes

Newspapers all across the U.S. and Canada have been faced with falling advertising revenues.
Written by Doug Hanchard, Contributor

Newspapers all across the U.S. and Canada all have something in common, falling advertising revenues. Some of the most famous newspapers are facing bankruptcy. In Canada, five of the largest metropolitan newspapers are being auctioned off in a package deal after owner Can West Global defaulted on its loans. In the U.S. Time Magazine has identified 10 current publishers that are in financial peril including the Seattle Post Intelligencer, Boston Globe, Philadelphia News, Miami Herald, Detroit News and the Minneapolis Star Tribune which is reportedly filing for Chapter 11. The Federal Trade Commission has not investigated any complaints so far. Some advocates are starting to see a smoking gun in the hands of a devil they know.

Hal Varian, Chief Economist at Google, recently attended a FTC workshop in Washington D.C. and presented a unique perspective on newspaper economics. In his presentation he gives a quick financial history of newspaper and advertising statistics varying from 1959 to present day. His main discussion points describe that consumer habits and trends were changing because of various new mediums or traditional mediums revamping their products and services. Varian states Google has only a fraction of market. Fraction of what, numbers of ads or total marketing and advertising dollars? I would argue that Google is the King of annual ad revenue, bringing in the combined total of ABC, FOX, NBC and CBS. Newspapers ? Are you kidding? Apparently not according to Mr. Varian.

In his Google blog he clarifies his views further.

The news industry's financial problems started well before the web came along. Circulation has been falling since 1985 and circulation per household has been falling since 1947! Ad revenue for newspapers was roughly constant in real terms up until 2005, and ad revenue per reader actually increased up until that time. Since then, the drop in advertising rates due to the recession, coupled with a significant drop in circulation, has exacerbated newspapers' financial difficulties.

In the last five years many more people have been reading the news online: About 40% of internet users say they looked at online news "yesterday." Higher income households report even larger numbers, making online news readers a potentially attractive audience for advertisers.

However, visitors to online newspaper sites don't spend a lot of time there. The average amount of time looking at online news is about 70 seconds a day, while the average amount of time spent reading the physical newspaper is about 25 minutes a day. Not surprisingly, advertisers are willing to pay more for their share of readers' attention during that 25 minutes of offline reading than during the 70 seconds of online reading. So even though online advertising has grown rapidly in the last five years, it appears that somewhat less than 5% of newspapers' ad revenue comes from their internet editions, according to the most recent Newspaper Association of America data.

There's a reason for the relatively short time readers spend on online news: a disproportionate amount of online new reading occurs during working hours. The good news is that newspapers can now reach readers at work, which was difficult prior to the internet. The bad news is that readers don't have a lot of time to devote to news when they are supposed to be working. Online news reading is predominately a labor time activity while offline news reading is primarily a leisure time activity. One of the big challenges facing the news industry is increasing involvement with the news during leisure hours, when readers have more time to look at both news content and ads.

What about search engines? Many readers go directly to their favorite news site, but a good fraction use search engines to access news specific news topics. According to comScore, clicks from search engines account for 35-40% of traffic to major U.S. news sites. Since most newspaper ads are priced on a per-impression basis, this means that 35-40% of major U.S. newspaper online revenue is coming from search engine referrals. That is a big fraction of online advertising revenue but, as we saw above, online ad revenue is only about 5% of the total.

Furthermore, the real money in search engine advertising is in the highly commercial verticals like Shopping, Health, and Travel. Unfortunately, most of the search clicks that go to newspapers are in categories like Sports, News & Current Events, and Local, which don't attract the biggest spending advertisers.

Newspapers such as Robert Murdoch's News Corp (which includes properties such as The Wall Street Journal, New York Post, Fox News and others) have been fighting Google, accusing the company of ripping off its content.  Arguments submitted by EPIC regarding fair use go as far back as 2003. The FTC received a submission by the USC Annenberg Center on Communication Leadership & Policy in November of 2009,  indicating that debate is far from over;

The move to the internet poses problems and possibilities for the news industry. It allows for increased collaboration between news producers and the timely provision of news stories. It also allows for the easy and instantaneous copying of others' news stories, a practice which decreases readership and the potential for ad revenue at the original content producers' site. Copies that violate current copyright law, and summaries and rephrasings that do not, abound online, drawing readers and ad dollars. A news originator, in order to earn some returns on its product, could try protecting its content via a paywall, or could seek a deal in which it licensed its content and customers paid via their monthly broadband bills. When paying for news is optional, either because free alternatives or exact copies of the same stories exist elsewhere, such revenue-seeking moves aren't likely to be successful. Social norms are such that most readers currently expect to read news for free, and would likely shift to free versions if the original stories became paywall-protected. Similarly, if paying for licensing in monthly bills was optional, and not mandatory, a few could pay and distribute to the many more who did not. Action taken at the individual business level, in the current legal climate, is likely to be ineffective. More strongly enforced laws, or even stronger laws, are likely necessary.

Content originators are currently gaining little revenue from the internet, or anywhere else. This threatens their viability. In order for news producers to thrive, they need financial incentives to produce content online. There are a number of ways to enable such incentives, and the government should carefully research which of these ways is least disruptive and most supportive of a diverse and vibrant press. It should understand the underlying technological and practical realities surrounding the online news marketplace before jumping in with a solution. Some strong contenders for a solution include ensuring robust copyright and other intellectual property protection, either through strong enforcement of the laws currently in place or increased

intellectual property protection, while keeping cognizant of the First Amendment. If the current copyright law is deemed effective enough, it could be made more easily enforceable, with a quicker path to judgment when obviously exact copies are found online. Alternatively, financial incentives could come more directly, in an exchange of copyright protection for more direct government subsidies. In the competition field, antitrust laws need not necessarily be changed to allow newspapers to derive revenue from online content, but the antitrust enforcement agencies and the courts should look to their experience with past content-industries to craft appropriate rules, potentially allowing news providers to work together in novel ways. With the right model supported by the right laws, the news producing industry may be able to thrive in the digital age.

Google is looking for ways to deflect the looming negative publicity that will unfold as more newspapers fold in the coming months and years. I'm not so sure it Varian's arguments on behalf of Google will succeed and the FTC will have to act.

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