Basic Economics

Taking a Page From Papers

Question:

What are the basic economics of the industry? How do companies make money? What are their costs?

Article Summary:

It isn't really news that newspaper companies are loosing money. With the easy availability of news on the internet, both circulation and advertising revenue have fallen. However, weekly advertising circulars have remained a reliable revenue source. Now, even this product is going digital.

Associated Press, in partnership with 32 newspaper groups and 20 retailers, plans to launch a mobile version of advertising circulars today called iCircular. It will offer discounts, promotions, a digital shopping list, and even store hours/locations. The chairman of the Associate Press board of directors' revenue committee hopes that this app will further newpapers' break-in to the hot mobile market. This app will also provide the newspapers and retailers the advantage of being able to collect tracking information about consumers, which is impossible with print circulars.

The revenue from advertising circulars has remained steady in the past decade as the newspaper add revenue fell. The steady $5.2 billion revenue accounted for 18% of total newspaper add revenues in 2010, up from the 9.2% in 2000. Nonetheless, it is predicted that the revenue will fall as other, more robust markets, attract ad dollars previously kept by print circulars. This would be disastrous for the already precarious position of newspaper companies. Some attempts to preserve the revenue stream from circulars have already been made - Gannett Co., a newspaper publisher, has released earlier this year Shop Local, a successful online circular.

The 18month old idea for iCircular, however, still does not have a fully thought-out business model. The advertisers participating in the test version that will run until the end of the year are not paying anything to be included. The Associate Press board of directors is scheduled to meet in late October to determine the business model.

Opinion:

This article is notable for the reason that it illustrates two major themes in the economics of the media industry:

1. Revenue is divided mainly into that from products and from advertisements, the latter being more important for many areas of the industry such as newspapers and TV; and

2. Print media is going out of style.

As a daily adherent to the morning coffee and paper and its evening twin, a novel and tea, I have a vested interest in the continued success of print media. This success, however, hinges on the advertisements we all love to hate, particularly that of the weekend circulars.

The media industry is going progressively digital. Most visual media is now available online as well as in its original form, the former often cheaper if not free. The importance of the physical product, such as the newspaper, is therefore loosing its strength. However, while the advertisements in the daily paper are usually ignored by consumers, the weekend circulars have remained the main attraction at some Sunday breakfast tables. Many people are now choosing to check news online, but so far, no widespread replacement for the circulars has been found.

In simplest terms, the business of media is primarily the delivery of other people's messages to the masses. The income streams are therefore divided into that from the people (for messages they want to hear) and that from those who are promoting themselves (and are willing to pay for the opportunity to do so). The exact products and services range widely - from iTunes to book publishers - making more specific generalizations difficult.

While all media companies are struggling with the growing pains of adapting to a digital market, in the long run it could mean higher revenue streams. It is doubtful that the industry will ever go completely digital, however, the lessened importance of the physical product will cut production costs, though that of software development and maintenance will rise. For the moment, the industry is in limbo - struggling to be both digital and physical. Like any other product industry, media companies must pay for production and distribution. In the current market, they also need to spend on innovative research into best ways to leverage the digital age into media success.