MacroScan - The Threat from the Internet

Indian public sector majors BSNL and MTNL have promised to deliver a New Year gift to those subscribing to their internet services. Bandwidth on entry level ADSL broadband connections provided through telephone lines are to be raised from 256 kbps to 2 Mbps at no extra cost to the customer. If implemented successfully, the scheme would enhance connectivity in thousands of homes and offices to levels where users can access text, data, voice and video with ease. This trend is bound to accelerate as private ISPs would be forced to match the public sector offer.

Increased access to cheap bandwidth would undoubtedly have wide ramifications, some of which would be positive external benefits for many sectors. But one industry that may have to sit up and take note is the print media in India, which along with the media in some other Asian countries, has remained unaffected by the global trend of decline in print media circulation, especially that of daily newspapers. India on the contrary is witnessing a circulation and readership expansion that has made nonsense of predictions that television, especially cable television, would spell the death of print.

But there is no guarantee that this would be true of the threat from the internet as well. Though internet use in India is still limited, cheap bandwidth is bound to increase the subscriber base. And, the overlap between homes that subscribe to newspapers and homes with internet connectivity is bound to be substantial. Unlike television, the internet provides news in the form that newspapers deliver, often from the same source, for free. While the pleasure of browsing newsprint may be missing, the cost factor may play a role.

If the experience in the US is anything to go by, the effects can be significant. According to data collated by the Newspaper Association of America (NAA), the daily circulation of newspapers on weekdays has fallen from 62.3 million in 1990 to 53.3 million in 2005. And much of this fall, argue analysts, is the result of competition from the internet.

However, there are two reasons why the threat to newspapers may be exaggerated. First, as former No. 2 editor of the San Francisco Chronicle argues in his blog (http://www.newsosaur.blogspot.com), some of the decline is because newspaper managements have curtailed promotional distribution or discounted sales to bulk purchasers who supply the paper free to hotels and airports. Secondly, the decline in circulation is not necessarily a reflection of a decline in aggregate readership, since online readership of newspapers is on the rise. According to the spring 2006 Newspaper Audience Database report of the NAA, online readership of newspapers is rising fast, pointing to a possible increase in aggregate readership. Unique visitors to newspaper Web sites jumped 21 percent from January 2005 to December 2005, and page views increased by 43 percent over that same period. More recently the NAA reported that during the third quarter of 2006, 57 million people visited a newspaper Web site, an increase of 24 percent over the period a year ago.

While this points to the persisting credibility of the newspaper as a source of news (as compared with blogs and other information sources on the net), it does not help strengthen the bottom line. While most newspapers have a presence on the web, they get little of the growing advertising revenues being garnered by web players. On the other hand, the combined competition from television and the internet is eroding the advertising revenue base of American newspapers.

Advertising revenues garnered by newspapers, which rose from $31.9 billion in 1992 to $48.7 billion in 2000, subsequently experienced a sharp fall followed by a recovery which brought the figure back to $49.4 billion in 2005. That implies stagnant or falling revenues. Broadcast TV too is experiencing advertising revenue stagnation in recent years. On the other hand, the internet which garnered a measly 600 million in ad revenues in 1997, experienced a rapid rise in that figure to $7.8 billion in 2005. Though this was a mere 3 per cent of US advertising volume, the rapid expansion of internet advertising is forcing newspapers to rethink their web strategies.

Some such as the New York Times and the Financial Times have signalled that their original decision - partly driven by the fact that in a digitised world, establishing a web presence is not expensive - to offer free access to the newspaper on the web was wrong. It helps retain and expand readership but not revenues, they have, therefore, moved to a subscription-based model for sections of the paper and the archives made available through the Internet.

Others have decided develop a revenue model that relies on material that does not come from the newspaper itself. The New York Times Company has recently acquired Baseline StudioSystems, an online provider of information about the movie and television industries, for $35 million. It expects this foray into the entertainment world to strengthen the newspaper as well add a source of subscription income to its Internet operations. This was the company's second such acquisition. It had earlier bought About Inc. and its website, About.com, from Primedia Inc. for $410 million. The site relies on a network of experts to provide specialist articles on a range of topics, varying from personal finance to fly-fishing. That acquisition too was intended to diversify the company's Internet advertising revenue through a scheme of ''cost per click'' advertising, in which advertisers pay when readers click on an ad. There are many others that have similarly bought their way into what they hope would be a profitable net presence: Murdoch's News Corporation, for example, acquired social networking site MySpace. And Time Warner is still unclear about which media space it primarily occupies after its commercially questionable merger with AoL.

The problem of course is that for the print media industry looking to keep revenues rising to cover rising costs and more, a web presence is still small consolation. Even though some companies claim significant, even if small, revenues from their Internet operations, only a small part of that comes from their strength in the print media. The latest effort to change this is a decision to join hands with successful web companies-principally the Search engines-either to retain at least a part of the advertising revenues that are migrating to the web or to use the internet to increase advertising revenues.

In a recent experiment initiated more by Google than the newspapers, many of the largest newspaper companies, including Gannett, the Tribune Company, The New York Times Company, the Washington Post Company and Hearst, are testing a system in which the web company will help newspapers extend their reach to new advertisers such as small and remotely-located businesses. The idea is to find potential standby advertisers willing to buy into unused space at a discount.

Under the scheme, newspapers list the sorts of advertising spaces that are available, in terms of size, days of the week and section and a list price for each in the Google's main advertising system, AdWords. Potential advertisers check out the list and enter a bid for a certain type of advertisement on specified dates. Newspapers need not commit to selling them the space but can accept as many or as few bids as they want. This helps them fill space available at the last minute, which can vary depending on other news and advertising on that day.

In another instance, seven newspaper chains representing 176 daily papers in the US have announced a partnership with Yahoo to share content and advertising. Initially, the newspapers will begin posting their employment classifieds on Yahoo's classified jobs site, HotJobs and use HotJobs' technology to run their own online employment advertisements. Overtime, the local content of these newspapers would be referenced and formatted for search through Yahoo. It is unclear whether this would neutralise what is the greatest threat from the Internet at present, the loss of revenues from the lucrative employment classifieds. Employment ads accounted for more than 10 oer cent of the close to $50 billion ad revenue garnered by newspaper in 2005. But according to Borrell Associates, an independent market research firm quoted by Mutter, in 2006 employers spent more money on Internet recruitment advertising than in newspapers, making it the first year when any of the traditional newspaper ad revenue sources had been surpassed by the digital media.

These trends are not restricted to the US alone, but are visible in most developed country markets and in some developing countries as well. China too is seeing the beginnings of a tussle between print and the Internet. In a first-of-its-kind law suit filed by The Beijing News, one the largest newspapers in the country, the management is demanding $400,000 in damages from popular Internet site Tom.com, on the grounds that it has copied and republished more than 25,000 articles and photos without authorization since 2003.

Does all this hold a lesson for the Indian print media? Not as yet it seems, since the diffusion of the internet is still limited. But, available estimates on internet use vary widely - from 13 million (clearly an underestimate by the 2006 National Readership Study) to an unsourced 60 million (reported by Internet World Stats). A survey conducted jointly by the Internet and Mobile Association of India and IMRB International has put the number of internet users in urban India in September 2006 at 37 million. That is indeed large when compared to the circulation of English language newspapers in the country placed at 27 million. And the figure could increase rapidly if moves such as the one initiated by BSNL and MTNL expand broadband connectivity in the Year of Broadband. Perhaps it is time newspapers in India began reworking their strategies for the Web.