Online News as a Disruptive Technology

In my last post I promised to consider how online news organizations can produce expensive content like reporting from Iraq.

Sites wanting to produce high-quality, expensive content face a chicken-and-egg problem. If you have a large audience, you can spread the costs of producing high-quality content over a larger base of readers. And if you have have a lot of high-quality content, that content will draw large numbers of readers. But if you have neither a large readership nor a lot of high-quality content, how do you get there?

The answer, of course, is that you bootstrap the process with cheap, sensationalistic content. You serve up smut, inane lists, and unpaid punditry. This kind of content is extremely cheap to produce and it draws a lot of readers.

But precisely because these kinds of content are so cheap, they attract a lot of competition and don’t stay profitable for very long. And so to keep growing, the largest and most successful sites move “up market” by hiring actual reporters who can produce original, non-sensationalistic content—the kind of content that smaller competitors can’t easily duplicate. The largest sites are in the best position to do this because they can spread the fixed costs of having a salaried reporters over a larger number of ad impressions.

This process shouldn’t surprise us, because it perfectly fits Clay Christensen’s model of disruptive innovation. Consider this example from the steel industry, drawn from the Christensen paper I wrote about last month:

Minimills first became technologically viable in the mid-1960s. The quality of the steel that minimills initially produced was poor because they melted scrap of uncertain and varying chemistry in their furnaces. The only market that would buy what the minimills made was the concrete reinforcing bar, or rebar, market because the specifications for rebar are loose. Once rebar is buried in cement, you can’t verify whether the steel has met the specifications. Rebar was therefore an ideal market for low-quality steel.

As the minimills attacked the rebar market, the integrated mills were actually happy to be rid of that business. Their gross profit margins on rebar often hovered near 7 percent…

All was well in this relationship until 1979, when the minimills finally succeeded in driving the last integrated mill out of the rebar market. Historical pricing statistics show that the price of rebar then collapsed by 20 percent. Why? A low-cost strategy only works when there are high-cost competitors in your market. After the last integrated mill had fled up-market and the low-cost minimill was only pitted against other low-cost minimills in a commodity market, competition quickly drove prices down to the point that none of them could make money.

The minimills soon looked up-market, and what they saw spelled relief. If they could just figure out how to make bigger and better steel—shapes such as angle iron, rails, and rods—they could roll tons of money again because the margins there were 12 percent. As the minimills extended their ability and attacked that tier of the market, the integrated mills were again relieved to be rid of that business because it just didn’t make sense to defend a 12-percent-margin business when the alternative was to invest to gain share in structural beams, where margins were 18 percent…

Peace characterized the industry until 1984 when the minimills finally succeeded in driving the last integrated mill out of the bar, rod, and rail market, which caused the minimills to reap the same reward for their victory: With low-cost minimill pitted against low-cost minimill, prices collapsed by 20 percent.

The minimills had to move up-market again.

The story ends with the minimills driving most of the integrated steel mills into bankruptcy.

Of course news isn’t steel. But I think this analogy helps us understand the extremely long chart that accompanies Nate Silver’s post about the NYT paywall. It shows which news outlets are most often credited with breaking news stories. The top 50 slots are dominated by traditional news organizations. Online-only websites are much further down the list, and they produce a trivial fraction of the overall reportage. But the distribution of topics among those sites is interesting. Most of them fall into a handful of categories: tech and gadgets, celebrity gossip, and politics. The web increasingly dominates these categories of news.

The disruptive technology of the web is busy devouring the rebar market of the news business. The most successful sites are getting tired of the thin margins at the lowest rungs of the latter and have started looking upward. The New York Times alone generated $387.3 million in digital revenue last year. That might not seem like a lot of money to the grey lady, but it looks like a huge jackpot to a still-small company like the Huffington Post. They—and dozens of their competitors—are working hard to find ways to take a piece of that pie.

Now obviously this isn’t an explanation of how web-based sites will produce high-end reporting. I’ve suggested a few possible strategies in previous posts, but I think focusing too much on the specifics will miss the broader trend. Without the technological and cultural baggage of a print past, web-only publications inherently have lower overhead. And the smaller average size of web-based publications means that the rate of experimentation is much higher. It’s only a matter of time before somebody figures out how to apply the low-costs tools of the web to high-value reporting. And the nimble, collaborative nature of the web means that successful models will be copied rapidly.

People look at today’s Huffington Post and conclude that the web can only do cheap, sensationalistic content. But in 1980, people looked at the minimills (and the microcomputer) and dismissed them as curiosities that could only serve the lowest rungs of their respective markets. But that was a misunderstanding of the economics of disruptive technologies. They always start at the low end of the market, but they rarely stay there.

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6 Responses to Online News as a Disruptive Technology

  1. Mike says:

    An even closer parallel might be made if you emphasize the true “customers” of publishing: paying advertisers. In that view Craigslist and spam poached the real low margin stuff very early — classifieds and the rest of the stuff sold in black-and-white at the back of the magazine. Everything else is following. Consumer electronics are probably already dead from an off-line advertising point of view. What’s left? Real estate for retirees and funeral services?

    And from that point of view, the NYT is probably doing the right thing: the idea of paying the NYT is at least within our society’s memory. No one has EVER really paid for online content. The question is, do consumers see nytimes.com as the newspaper or a website? Bet we can guess…

  2. Bill says:

    Interesting analogies. However, I think you need to consider that steel and computers
    are produced by machines (with the help of humans) while news is produced by humans
    (with the help of machines). In modern times, machines keep getting better and better. People do not. I love Christensen’s work on the innovator’s dilemma, but
    I’m not aware of any examples where the ‘good’ was inherently the result of human
    mental activity rather then physical processes.

  3. Kirk says:

    The first microprocessors were produced by humans without microprocessors. We built the machines that built the machines. But this was originally an improvement in human aided intelligence. Sure, the technium is awesome but the dependance on human imagination cannot be dismissed. Until the Singularity the machines depend on meat puppets.

  4. Francois Nel says:

    Interesting perspective. And, in the case of the Huff Post, it’s already happening. Flush with investment from AOL, Huffington Post recently announced they’ll be hiring ‘professional journalists, not bloggers’ /a>.

  5. Matt J. says:

    With a huge amount of guilt, I visit the Huffington Post each day. It’s addictive for all the reasons you spell out above: a diverse mix of aggregated hard news, fluff pieces, gossip, and comedy in the form of Jon Stewart and Bill Maher clips. In order to get this wide-ranging content otherwise, I’d have to go to the New York Times site and wade through local news and other content that might not interest me, then go to a comedy site, then a tech news site, etc ad nauseum.

    I see the Huffington Post as entertainment with a sliver of news (I suppose the Drudge Report tries to do the same thing for those with a rightward bent.) In a way, I view visiting the Huffington Post as headline skimming: I get a broad overview of what’s going on in the world. If I want more depth on a particular issue, I head to the New York Times, TPM, TechCrunch, etc.

    Where we used to skim headlines in a single newspaper and then (if we were interested) read the entire article, now we skim headlines on one site with broad content, then head to more in depth sites for deeper content. The whole internet, not just one site, is our newspaper now.

    The fallacy of the NYTimes strategy to me is misunderstanding how the internet is used. People don’t go to one site and stay there for an hour reading every article. They migrate around many sites looking for information. I often go to three sites in five minutes to glean info on a topic. On heavy news days (say, the Egyptian revolution) I might go to five or six sites in five minutes. The NYTimes might hold my attention for two minutes while I skim their article on the issue before moving to Al Jazeera, the Guardian, and so on.

    Additionally, though the NYTimes has a veneer of respectability in its design (all typography black and white) Huffington Post appeals to our human need for variety through differently colored and sized headlines with sensationalist phrasing. It reminds me of shopping. They’ve created a form of news-shopping—bold, garish colors vying for our attention.

  6. Randy Smith says:

    The media changes the course of industries and the nation, the question is will they continue to report the news that is interesting and being made by incumbents or will they embrace technology solutions like MyCreditVault that will disrupt industries and solve problems. Solutions to our country’s problems are simply a matter of people not knowing that solutions exist. This is the mantle of responsibility of the media and journalists. We need you to step forward to support good ideas that can transform a nation and solve problems.

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