History Lesson: Newspapers Haven't Charged For News In 180 Years

from the get-it-straight dept

It's been said here before, but Jay Rosen points us to a post at NewsFuturist that points out that newspapers haven't charged for content in 180 years. Before that, subscribers paid the full freight -- but since then, subscriptions have always been less than the cost of producing the physical paper and the cost of delivery. The actual reporting has been paid for by advertising, not subscriptions, for nearly two centuries. And there's a pretty basic economic reason for this, and it's the same one we've been making for years, but is nicely summed up here:
The price of a product in a competitive market falls to the marginal cost of creating and delivering one more unit.

For printed newspapers, the marginal cost was a little more paper and ink, maybe an extra block on the delivery route. Subscription fees never accounted for the fixed costs of producing the content: the building, staff, printing press, etc. That share of costs has long been paid by advertising and diluted by economies of scale.

The same economic forces apply online. And because the marginal cost of bits is nearly zero, the appropriate price becomes too small to bother tracking. Free is the result.

In fact, the principle of marginal-cost pricing is even stronger in the Internet economy because there are very low barriers to entry and nowhere near the startup costs of print. And the marginal costs such as bandwidth and storage decline every month.

Those who ignore the rule of marginal-cost pricing and try to charge users for content in a competitive market will be undercut by more efficient competitors who stick with free. They'll also face an endless fight against piracy, because economics says the product should be free and technology makes it easy to duplicate and spread.
The thing that seems the most difficult for some to get is that last paragraph. When we talk about the reasons why it doesn't make sense to charge for the content itself, all we're pointing out is that if you do it, you'll fail. All you've done is open up an opportunity for someone else. We're not saying "information should be free." Should has nothing to do with it. It's will be free, because the economics drive it there, and as much as you don't like it, or don't like the implications of it, it doesn't change that it's what is happening. So, you either learn how to embrace it (as many are doing, quite successfully) or you die.


Reader Comments (rss)

(Flattened / Threaded)

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    Anonymous Coward, Jul 24th, 2009 @ 3:17pm

    The Third Choice

    So, you either learn how to embrace it (as many are doing, quite successfully) or you die.

    Some see a third choice: get rid of competitive market economics by getting the gov't involved. They seem to like that idea much better.

     

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      Anonymous Coward, Jul 24th, 2009 @ 5:09pm

      Re: The Third Choice

      "So, you either learn how to embrace it (as many are doing, quite successfully) or you die."

      Actually, there is another option. Go back and read the history, newspapers were suppose die when radio came around, when TV came around, etc. Newspapers have been e-killed so often that it's a joke.

      But at the end of the day, there is no better, no more convenient format to carry news information with you to enjoy in a subway, on the train, with lunch, etc. Until we get maybe to Kindle version 47, newspapers have nothing to worry about, because their core buyer is still there and still enjoying what they do.

      The real threat to newspapers? People under 25 who don't give a crap about anything outside of their arm reach (unless it also involves a movie star or a skateboard). The internet generation is widely connection and seriously ignorant about the world. They don't buy newspapers, and that demographic will one day kill newspapers. It isn't better information distribution, because most of them just don't care.

       

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    Chronno S. Trigger (profile), Jul 24th, 2009 @ 4:30pm

    Education

    "The price of a product in a competitive market falls to the marginal cost of creating and delivering one more unit. "

    I had one marketing class in college, just one. The first thing that was pointed out to us is this exact phrase (it was a business college), and then they drilled it into our heads over the next three months. Why is it that people who have been doing this for years don't know that?

     

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    Overcast (profile), Jul 24th, 2009 @ 4:36pm

    Some see a third choice: get rid of competitive market economics by getting the gov't involved. They seem to like that idea much better.

    But eventually, the Government just takes it over - Take 'fire companies' for an example.

    There hasn't been a 'for profit' fire company that I'm aware of for a very long time - I guess since Ben Franklin's idea. Of course, in that case - Fire Departments are necessary, without doubt.

    News is somewhat necessary too - but unlike a fire department, news being government controlled is a very, very bad thing.

     

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      Anonymous Coward, Jul 24th, 2009 @ 5:07pm

      Re:

      But eventually, the Government just takes it over...

      Not if you take over the gov't first. Just ask the entertainment and banking industries.

       

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    Michael Foord, Jul 24th, 2009 @ 5:00pm

    Marginal cost - really?

    "The price of a product in a competitive market falls to the marginal cost of creating and delivering one more unit. "

    There are lots of markets where this just doesn't work though. Take restaurants as the prime example - where the marginal cost is very low but the fixed costs are very high. Even in the presence of strong competition restaurants can't afford for prices to fall *anywhere near* marginal costs.

    Of course they try to avoid competing solely on price, but price competition is often a strong factor - and prices still don't get near to the marginal cost. It just doesn't make economic sense (neither in theory nor in practise).

     

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      Mike Masnick (profile), Jul 24th, 2009 @ 5:20pm

      Re: Marginal cost - really?

      There are lots of markets where this just doesn't work though

      Basic economics? No, it works everywhere. You really can't avoid it...

      Take restaurants as the prime example - where the marginal cost is very low but the fixed costs are very high. Even in the presence of strong competition restaurants can't afford for prices to fall *anywhere near* marginal costs.

      Right. Because what happens is that restaurants work hard to differentiate and create benefits that get away from perfect competition -- such as better ambiance.

      But on the whole you seem to be confusing how you want things to work (restaurants to survive) with how it does work (most restaurants fail).


      Of course they try to avoid competing solely on price, but price competition is often a strong factor - and prices still don't get near to the marginal cost. It just doesn't make economic sense (neither in theory nor in practise).


      It's not about "making sense." It's about economics. How it does work. The way you get around is by providing significant scarce value -- but, as you noted, it's still quite easy to compete on price, and many restaurants do that, which does, in fact, drive prices down towards marginal cost.

       

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    Michael Foord, Jul 24th, 2009 @ 5:41pm

    Your cause would be much advanced if you made arguments that didn't involve repeating the same points over and over again.

    Anyway - here's another piece of basic economics:

    "In all walks of life, a basic rule of rational economic decision making is: do something only if the marginal utility you get from it exceeds the marginal cost of doing it."

    Note the 'exceeds'. Marginal revenue ignores fixed costs and any industry that does that doesn't have long to live.

    Prices may fall *towards* marginal costs - after a while several members of the market will go bankrupt it will no longer be perfectly competitive (the rule is only true for perfectly competitive markets) and the prices will go back up.

    As with the restaurant example, quoting your rule as an absolute is easy to debunk.

     

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      Jiminy Cricket (profile), Jul 24th, 2009 @ 6:12pm

      Re:

      "Your cause would be much advanced if you made arguments that didn't involve repeating the same points over and over again."
      I don't dispute anything in your post, but huh?

      He should make the same arguments using points other than the salient ones? Just change his points to things like, "Because I friggin say so!" "Because the sky is blue!" "Because I'm a writer, not a surgeon!"

      Or he should use the same points in different arguments? "CwF+RtB = where babies come from!"

       

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      Mike Masnick (profile), Jul 24th, 2009 @ 7:19pm

      Re:

      Your cause would be much advanced if you made arguments that didn't involve repeating the same points over and over again.

      Wait... what? If the point is correct, why should it not be repeated?


      Note the 'exceeds'. Marginal revenue ignores fixed costs and any industry that does that doesn't have long to live.


      Yes, exactly. No one denies that. But you are confusing the decision to make an investment with the pricing decision.

      As with the restaurant example, quoting your rule as an absolute is easy to debunk.

      Are you seriously trying to claim that restaurants defy basic economics? You don't want to go down that path, because you're going to look very, very silly. I already explained why and how restaurants differentiate. But that's not them violating the laws of economics. It's them following the laws of economics. This does not mean that price is not driven to MC in a competitive market. It means those restaurants have done exactly the correct thing in *innovating* and *differentiating* to avoid it being a true competitive market. That's not violating P = MC. It's understanding it and applying it properly.

      The problem here, though is that newspapers are NOT talking about differentiating in a way to avoid the competition. They're talking about just putting up a paywall and pretending people will pay.

      The economics is correct and I'll keep repeating it until you prove that basic economics is wrong.

       

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        Michael Foord, Jul 25th, 2009 @ 4:05am

        Re: Re:

        "Are you seriously trying to claim that restaurants defy basic economics?"

        No just pointing out your [deliberate] misunderstanding of the point. Calling it 'basic economics' doesn't make your misuse of it any more correct.

         

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          Anonymous Coward, Jul 27th, 2009 @ 8:50am

          Re: Re: Re:

          I can't for the life of me figure out what has been misused.

          Prices will go as low as competition makes it. That's in essence what P=MC means, that prices will inevitably drop to the marginal cost when there is enough competition in the market.

          In the information market, there is a massive amount of competition. Thus, inevitably, prices have dropped to zero, which is the marginal cost of disseminating that information.

          How does an information business make money? By having unique value. In this case, that's viewers, which means other companies see value in your product, and will pay to have those viewers directed to them.

          By charging for information, you're removing your value. Your content has become less desirable because of the price, thus you will have less viewers. Because you have less viewers, your value to other companies has diminished, because they're getting less exposure for their money.

           

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      Anonymous Coward, Jul 26th, 2009 @ 4:08pm

      Re:

      Your cause would be much advanced if you stopped saying 2+2=4 every time. Try saying 2+2=5 for a change!

       

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    Bruce Boyden, Jul 24th, 2009 @ 8:48pm

    Attributing the revenue

    How do we know the subscription and newsstand fees go exclusively to printing and distribution, and the advertising revenues go primarily to salaries and fixed costs? It would seem more correct to say all the revenue goes into one big pot that pays for both, in which case, newspapers have been charging readers for content.

     

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      Mike Masnick (profile), Jul 24th, 2009 @ 9:18pm

      Re: Attributing the revenue

      How do we know the subscription and newsstand fees go exclusively to printing and distribution, and the advertising revenues go primarily to salaries and fixed costs? It would seem more correct to say all the revenue goes into one big pot that pays for both, in which case, newspapers have been charging readers for content.

      No, actually, that's not accurate at all. The economics suggests that the price is driven to the marginal cost of the actual product, and that's exactly what we see with news. The cost that you pay for the paper is effectively (or slightly less) than the marginal cost of producing/delivering the physical paper. So it's quite clear that it's the ad revenue that really pays the bills (and in many cases subsidizes the printing/delivery). People don't pay for the news (see: online). They pay for the physical paper that delivers the news, just as they pay for the physical internet connection that delivers the news.

       

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        Derek Kerton (profile), Jul 25th, 2009 @ 2:58pm

        Re: Re: Attributing the revenue

        Look at it this way: you're a newspaper publisher in a big city market with two other papers.

        You want to get your paper out to as great a circulation as possible, so you can be the most attractive to advertisers, have more budget for writers, and have better content.

        So, what price would you set? How about a price that is as low as you can go -- without losing money on each paper sold. OK, so you charge just enough to pay for the printing and distribution of the paper. Charge any more, and you'll lose some buyers, charge any less, and you'll be losing money on each paper.

        Thus, the price of the physical paper is based on the costs of physical production. The costs of creating the ideas, the stories don't matter.

        Who pays for the costs of producing the ideas, the stories, the funnies? Advertisers. They need this good content around their ads or you won't ever look.

        That's the simple case. You might stop here, since this is the most common.

        The reason it works this way is this:
        -The publisher has certain costs that are fixed costs: the plant the printing press. He needs to make a profit to pay back on this investment, but it figures little in his day to day price/quantity decisions.
        -The publisher has medium term costs that are fixed such as the staff. This cost is the same on any given day whether he prints 10 papers or 1,000,000. Thus, these costs figure little in his day to day price/quantity decisions.
        -He makes revenue on each paper, the price. He has costs on each paper. Giving away 10 $1 papers wouldn't matter much, but this scales poorly. If he wants to circulate 1M, he needs to make sure he doesn't lose a buck on every copy.
        -His advertising revenues are directly related to his circulation.
        -Now note this reality: advertisers will pay more for circulation than people will pay for content.

        Now, let's say his starting point is selling 10 papers a day for free. What should he try to do with price and quantity? Answer: maximize quantity (without losing money) such as to maximize ad revenue so that he can pay the staff. How do you maximize quantity without losing revenue? Charge P=MC of REproduction.

        In more complex cases, it's true that the dividing lines aren't that precise. Often, the papers are sold at a price BELOW their cost, because the increase in circulation causes a bigger rise in ad revenue than loss in paper revenue. I've seen publishers print papers that just get destroyed (but they claim it as circulation). In these cases, absolutely all of the "subscription and newsstand fees go to printing and distribution" - as well as some of the ad revenue.

        In very rare cases for periodicals, such as Consumer Reports, publications are sold with reduced or zero advertising. These publications need to charge the reader for the content production. I can't think of a newspaper that does this model.

         

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          Bruce Boyden, Jul 28th, 2009 @ 10:31am

          Re: Re: Re: Attributing the revenue

          This is all sort of odd. The advertisers are not just paying for content, they are paying to have their ads seen by actual people reading the content in physical newspapers. Likewise, the readers are not paying for paper to wrap their fish in, they're paying for paper with content on it. Both are paying for both. The price for yesterday's newspaper, or a newspaper from some random date in the past, if there was a market for such a thing, would be pretty near zero, even if it was delivered right to your door. The price for inserting an ad in a physical newspaper that is not delivered or put on newstands or made available for pickup anywhere is similarly zero.

           

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    LaFade, Jul 24th, 2009 @ 10:24pm

    The Philadelphia Inquirer recently celebrated its 180th anniversary and included a reproduction of the very first issue from June, 1829.

    It's full of ads.

    Fun to read if you can see the type, these advertisers so politely requesting your attention:

    http://www.philly.com/philly/multimedia/45262177.html

     

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    SteveC (profile), Jul 25th, 2009 @ 2:49pm

    An interesting take on this subject

    There is an interesting and concise take on this issue by a very respected Mac blogger that I follow. Seems like an odd subject for a Mac blogger to talk about but he cuts to the heart of the matter and is worth a read over at Daring Fireball.

    http://daringfireball.net/2009/07/pay_walls

     

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