Google and Newspapers: Beyond Fair Use to Fair Share
Important Details: The title of Eric Schmidt’s talk spoke volumes: “Entertain Me.” When the Google CEO addressed newspaper publishers in San Diego at the annual Newspaper Association of America conference, many eyes – in the room and throughout the news and blog cosmos – were on him. In the days leading up to the talk, AP and several leading newspaper publishers had made reinvigorated points about better protecting and monetizing web news content.
So Schmidt’s talk was widely anticipated and well-covered. The title, though, immediately displayed the disconnect between the speaker and his audience. News publishers will tell you that news should be interesting, even intriguing. Entertainment? That’s the rest of the world – well-produced and distributed through every digital (and non-digital) means known to humans. The deepening crisis about how to pay for the creation of journalism, though, is in the forefront of all publishers’, all journalists’, and increasingly many readers’ minds.
So “Entertain Me” mixed in “news” with the rest of what makes the digital revolution so interesting.
His talk broke little new ground, but gave publishers a good expert view of the digital landscape:
- On mobile: “It isn’t obvious, but it represents a fundamental change – all in a local context. If you like history, you can walk down the street in San Diego, and the phone can tell you the history of every building. We never had these kinds of tools before to use, and perhaps, misuse. [The ultimate goal is] to get one billion people with this kind of power in their hands. It is easy. That many mobile phones are being built in the next couple of years with this kind of capability. The underlying platform has now been built, and all the mobile operators are now building services with the kinds of capabilities I am describing.”
- On business models: “I think you’re going to end up with all three [models]. An analogy I would offer is television. There’s free television, over-the-air television, there’s cable television and there’s pay television. And they have smaller markets as you go from free to more highly paid. And that structure looks to us like roughly the structure of all of these businesses…The reality is that in this new model, the vast majority of people will only deal with the free model. So you’ll be forced, whether we like it or not, to have a significant advertising component, as well as a micropayment and an additional payment system. The technology around micropayments is getting to be possible now. The transaction costs were so high before, you couldn’t do the 1 cent, 3 cent kind of a model, but it looks like the new technologies around aggregation will allow that at the payment level.” He proposed three layers of revenue for news content, similar to that of the TV business: a free model which would make up the bulk of a news website, a subscription model which would allow access to all articles, and a micropayment system for specific articles, priced at a few cents.
- On smarter publishing: “Why doesn’t the newspaper know what I read yesterday? It is easy to remember this kind of thing. The new model is knowing you have already read this…you can tell me what has changed.”
Of course, Schmidt reinforced the belief that advertising would remain the dominant web news monetization money; that’s a model that contributed 97% of Google’s $21.7 billion revenue in 2008. He also said that current law, especially “fair use,” supported Google’s business model, and in interviews after his talk, indicated no need to signficantly change Google’s business relationships with news publishers.
Implications: As Outsell suggested a month ago (Insights, “Amid New Paid Content Schemes, It’s Time for a Google Reckoning,” March 5, 2009), it’s time to move on. It’s time for a new conversation, a new relationship, a new business model. Eric Schmidt is not wrong in his media landscape assessment. He’s clear-eyed about the developing digital world, and Outsell believes news publishers can apply real-life lessons from his talk. The talk, though, was out-of-sync. This is a time of press emergency, with the industry hit by five recent bankruptcies, news staff down more than 20% and no better end in sight, even if a recovery offers a reprieve.
Outsell believes the industry must move the thinking beyond “fair use” – is search engine and other usage “legal” or not? – to “fair share.” In basic business terms, the news industry is a supplier – and an important one – to Google and the other search engines. While a handful of key suppliers – AP, CP, PA, AFP – have secured Google licenses and are getting paid for their content, individual newspaper publishers are not. They need to band together, testing here not just “fair use” but “anti-trust” (a concept that seems out of another newspaper age at this point) – and act like suppliers, demanding a fairer share of the pie.
There is no doubt that Google deserves a goodly chunk of the ad revenue its search and aggregation brilliance has built (and we use Google here as a proxy for all big web aggregators of content, citing it because it is the single biggest driver of traffic to news sites). The point is that it is probably getting too fat a slice. Search and aggregation magic deserves payment, but without content – in this case, news content – it’s worth far less.
Right now, current business models disproportionately recognize that search and aggregation value. Yes, newspapers get value from the search engines (and we use newspapers here as a proxy, given their reporting weight, but any rejiggering of payment formulae should include all significant creators of news, legacy and start-up). They can monetize traffic sent.
In Outsell’s view, that value is great but undervalues news companies’ contribution to the revenue overall.
Why?
Consider a few Google data points:
- Google’s 2008 annual revenue, $21.7 billion, growing at a 31% rate. How has Google weathered the recession? Well, better than most we think. We’ll see first quarter results Tuesday. Compare that number to how much advertising revenue the US newspaper industry has lost. It pulled in $47 billion in 2005 and will come in at maybe $36 billion in 2009. Certainly, there’s not a one-to-one transfer of those dollars, but do all the forensics you want, and you’ll find dollars formerly spent on newspaper ads are now spent on Google ads. Advertising makes up about 97% of Google’s revenues.
- Google News, launched in 2002, is now a big player. No. 11 in the US, with more than 11 million monthly unique visitors, according to Nielsen. A month ago, it lit a new controversy when it added ads, for the first time, to Google News. While monetization of Google News is just beginning (intriguing idea on better monetizing Google News here), if we look at February Nielsen data, we see that Google News produced a little less than 10% of Google’s overall uniques. In time spent, though, among Google products it’s third, on average, 16 minutes, 44 seconds per person, behind Gmail and Search.
- The business value of Google News to Google…and that $21.7 billion. Google built an incredible multi-purpose brand, in which the separate pieces (Web Search, Finance, Video, Gmail, Images, Maps and More) all connect to each other, building the experience, and somehow throwing off $21.7 billion. So, clearly there’s value to Google when Google News users come to the site and then click on other Google links. How much? Google says it hasn’t calculated that impact. That seems hard to believe. Maybe Google News now provides 5%, 10% or 20% of the referring pages to Google Search or Maps or Video. Then, by traditional web economics, the referring site should derive some economic benefit, some revenue share from the ads sold on the landing pages – and that referring site, Google News, is completely populated by news content.
- Two-thirds of Google’s revenue now derives from Google-owned sites; less than a third from its partners. Not more than several years ago, those numbers were reversed. The we’re-not-a-destination portal has become a portal, driving more revenue on its “own” pages, sharing increasingly less of it with partners.
- Google’s cost of sales is remarkably low. John Battelle has pointed this out, pegging it at less than 10%. Of course its cost of sales is low; it largely doesn’t pay suppliers for the raw material enabling the business. Again, it is worth news companies thinking of themselves as suppliers. News company DNA is very product- and destination-oriented, but in the web world, everyone’s a supplier to everyone else, even as they tend their own destinations.
We can’t determine a mathematical formula from the above set of data, but we can begin to conclude that news companies deserve a new deal, a reckoning. That reckoning doesn’t slow down news companies’ own need to restructure and reinvent themselves, but could put some hundreds of millions of dollars in balm on the fresh wounds.
There are many ways a new formula could be put into place, and we won’t go into details here. Suffice it to say, royalty pools are an established way of doing business in the news world and could be applied here, matched with some good Silicon Valley thinking about what goes into the algorithm to determine payouts. If the algorithm’s not right first time around, it can be tweaked, as all are.
“Fair Share” can take us beyond the tired storylines that have consumed a decade, and they can confront the realities of the moment. Just as God didn’t ordain that newspapers should drive 25%+ profits from their daily monopolies, God didn’t set the payout rules that drive current web business models. It’s time to re-boot business models based on what we’ve all collectively learned. The two big needs remain: maintaining the free flow of global news and information and figuring out how to pay people to create journalism and other useful content we all need.