A Harvard graduate student recently went to a job interview at The New York Times and was asked why she would want to pursue a career in an industry that probably would not survive the decade. The message she walked away with was clear: The Internet is killing the print newspaper.

As the Internet has developed into a ubiquitous source of news and information, many observers and industry professionals have openly questioned the long-term viability of printed newspapers or network television news programs. Such fears are supported by statistics like a staggering 1.9 percent drop in newspaper circulation in the six months ending March 30, 2005 and a decline in total circulation of more than 15 percent since 1984. Television network evening news viewership has fallen 37.8 percent during this same period. The audience for local TV evening news has also slipped from 76 percent in 1993 to 59 percent today.

With dismal numbers like these, it is not a surprise that a February 2005 story appearing on the front page of The Washington Post’s Sunday business section concluded, “The venerable newspaper is in trouble,” and The Wilson Quarterly recently dedicated an issue to “The Collapse of Big Media.” But to paraphrase Mark Twain, reports of their death have been greatly exaggerated.

Unconventional Wisdom

In an extensive analysis of the impact online media is having on its traditional print and television counterparts, we found little evidence to support the claims that the latter are facing annihilation. In fact, there is a great deal of information suggesting that most news consumers prefer to use new media as a complement to print and television rather than as a substitute. This is good news for well established media brands that can leverage their visibility to expand both audience and revenues online. When we went on to examine the degree to which not just consumers but advertisers have substituted new media for traditional news outlets, the results again suggest an encouraging economic outlook for print and television news.

The idea that the rise of the Internet spells the end of print and TV news stems from the popular sense of the Internet as a disruptive rather than a sustaining technology. As described by Clayton Christensen of the Harvard Business School, sustaining technologies are those that change an industry through incremental improvements, while disruptive technology creates a new playing field, knocking down traditional barriers to entry and transforming an industry or market completely. The Internet certainly has the appearance and characteristics of a disruptive technology, but its impact on the news industry has been far less profound than anticipated.

Traditional media’s high overhead costs have always been outweighed by high profit margins. But with the U.S. Department of Commerce estimating, for example, that 30 to 40 percent of newspaper production costs go to printing and delivery, there are clearly powerful economic advantages favoring online media where these costs are near zero. Thus we’d expect to see online media, with its decisive cost advantages in duplication and distribution, gain market dominance at the expense of print and television. In theory, these cost differences between the traditional news media and the online media should be passed on to the consumer, causing news consumers to substitute the lower cost online media for traditional media. News producers, in turn, should seek out lower-cost means of duplication and delivery, pushing consumers to the online distribution channel much the way banks encourage customers to use ATM’s. But the reality is that these competitive advantages are simply not as great as they appear, and they have not led to the predicted wholesale substitution of online media for off-line alternatives. What follows are some reasons—economic and psychological—that help to explain why:

  • The cost of news to consumers is typically heavily subsidized (an average of 85 percent in the case of newspapers) or completely subsidized (as in the case of television) by advertisers. So despite the economic advantages inherent to online media, there is little pass-through benefit to the consumer from these cost savings and therefore little financial motive for consumers to actually substitute one form of media for another.
  • There is strong evidence that news consumption habits are hard to break absent a major price benefit of switching. The major decline in newspaper readership is actually due to a generational gap rather than to a switch in behavior from established newspaper readers. It is attributable to the fact that young adults, ages 18-35, are not adopting the newspaper readership habit in the first place. In 1972, 42 percent of people under 30 read a newspaper daily, but now, only 23 percent of adults under 30 read a newspaper yesterday. This is in contrast with the older age cohorts where 52 percent of people aged 50-64 and 60 percent of people who are 65 or older read a newspaper yesterday.

This news-consumer generation gap exists online as well. Survey data show that only an average of 5 percent of adults over the age of 45 use the Internet as a source for national news, whereas 22 percent of adults 18-24 and 14 percent of adults 25-34 use the Internet to get news. This data show that few existing newspaper readers are switching outright to online media, but the younger age group is gravitating to using online and offline news media in roughly equal proportions as they become news consumers (23 percent reading papers and 22 percent going online for news). This gives us reason to believe that the vast majority of newspaper readers will not change their news consumption habits in the near future. But it also raises long-term concerns (15-25 years out), when the younger age cohorts begin to replace today’s older newspaper reading generations. This same trend holds true for TV network news for which the median viewer age is 60, with only 18 percent of adults under 30 watching.

Another factor in understanding the psychology of news consumers is the widespread perception that online and offline media are largely complementary rather than competitive. While industry-sponsored research tends to view the audience as monolithic consumers of one media at the expense of others, the reality of the dynamic “multichannel” media user is very much the norm.

A study by Frank Magid Associates for the Online Publishers Association found that 51 percent of users of online news Web sites identified themselves as multichannel users who actively seek out news through a variety of media, for instance using the Internet to find more information about a story first seen on network news. For such individuals, the broad spectrum of online and offline media is used as a kind of information buffet from which they sample according to appetite and interest. Among those who are younger and those with more online experience can be found a large and growing number of “multitasking” users, comfortable consuming news from several media sources simultaneously.

As the use of multiple media channels has become the dominant strategy for news consumers, credibility and public profile, established via the offline media, can provide tremendous leverage for an online presence. And a strong online audience can translate into better sales at the newsstand as brand preferences are carried offline.The Magid study also found strong evidence of overlap between users of online and offline news sources, with 70 percent seeing the two as complementary and only nine percent suggesting that online and offline media were in direct competition. Among users of online news sites, 64 percent reported that they also use the corresponding offline media property (i.e., NYTimes.com and The New York Times) either frequently or occasionally.

Conclusions can be drawn from this that in a rich world of media choices, the majority of Americans choose “all of the above.” This suggests that brand identity and reputation could play a decisive role in shaping consumer choices. As the use of multiple media channels has become the dominant strategy for news consumers, credibility and public profile, established via the offline media, can provide tremendous leverage for an online presence. And a strong online audience can translate into better sales at the newsstand as brand preferences are carried offline.

The Internet’s Impact

So how big of an impact is the Internet having on the traditional news media? The Magid study showed that only 29 percent of news Web site visitors were “online-only” news consumers. This translates to only 12.2 percent of the adult U.S. population. Another 21.5 percent of this group are multichannel news media users, as described above, so this leaves two-thirds of the population as offline-only news consumers or as “dabblers,” who are people who go online for news very infrequently in response to high profile events.

From this data we can see that roughly 12.2 percent of the U.S. population substitutes the online news media for offline news. For another 21.5 percent, the online news media acts as a complement rather than as a substitute. And 66.3 percent of Americans have shown no change in their news consumption habits. A 12.2 percent shift is significant, but it scarcely represents a disruptive migration to online media.

But what about the future? Does this shift represent the entire impact or is it just the beginning of a mass migration? Long-term trends can be inferred by looking at the media mix of experienced Internet users. Those with six or more years online report spending three hours per week reading print newspapers, which is 14.3 percent less time than new Internet users and 25 percent less than nonusers. The experienced users spend an average of 45 minutes per week reading news online. Notable in these numbers is that even for long-term Internet users, there is only a fractional reduction in newspaper readership.

The resounding implication is that generational news-consumption patterns are of far greater significance to the well-being of the industry than competition from the Internet.

To properly assess the future of the news media, it is necessary to acknowledge that the news business serves two interrelated markets—consumers and advertisers. Though declining circulation and ratings figures tell us that print and television have undoubtedly lost a share of their audience, they’ve not experienced a corresponding drop in advertising revenues. Despite increasing fragmentation of the market, advertisers have not found any suitable substitute for the exposure generated by traditional media.

Tracking Advertising Dollars

Between 1998 and 2004, news media advertising revenues have increased by a total of 15 percent despite a major advertising recession in 2001-2002. In the case of newspapers, ad revenues have grown at an inflation-adjusted 6.24 percent during the past two years and will return to prerecessionary levels by the end of this year. Analysts have projected continuing growth for newspapers at a compound annual rate of 5.3 percent through 2008.

Network TV morning news shows were scarcely affected by the recession, with revenues growing at an annualized rate of 10.6 percent since 2001. Local news broadcasts accounted for 46 percent of station revenues in 2004, up from 39 percent in 1999. And ad revenue for the cable-TV news channels grew 39.4 percent from 2000 to 2004 despite the advertising recession. This leaves only the evening network news broadcasts having yet to return to prerecession revenues, but even they have rebounded substantially.

While virtually all segments of the offline media were hit with recessionary declines in revenues in 2001-2002, the online advertising market also saw a similar drop at this time (26 percent decline between 2000 and 2002). This suggests that the decline in traditional news media ad revenues during this period (10 percent) was due to a pullback in total advertiser spending rather than a shift to advertising online. As advertisers returned to the market in 2003-2004, offline news media has seen overall ad revenues increase by 7.15 percent annually. Advertisers are showing no real signs of abandoning newspapers or TV news in favor of the online media.

Just as online news media have siphoned away a small but not catastrophic share of the offline audience, so too have some ad dollars migrated online. But again the percentages are not the stuff of doomsday predictions. In 2004, all online advertising accounted for 3.61 percent of total U.S. advertising spending versus 17.5 percent for newspapers and 25.4 percent for television.

Findings by the Interactive Advertising Bureau and Pricewaterhouse-Coopers show that online advertising continues to be the fastest growing sector of the advertising market. In 2005, online advertising is expected to grow at a rate of 22.4 percent while newspaper ad revenue growth is projected to be 5.13 percent. But behind these numbers is the simple fact that even at the slower growth rate, newspaper ad revenues will grow substantially more in actual dollars than online advertising. And even when we look forward, projections for 2008 show 94.3 percent of total advertising dollars still going to offline media; hardly the stuff that industry collapses are made of.

The one area that has seen direct online competition growing significantly is classified advertising, particularly for cars, real estate, and employment. With classified ads contributing 35.5 percent of total newspaper ad revenues, newspapers have been hardest hit as 9.1 percent of classified advertising has moved online ($1.73 billion in online classified advertising versus $17.3 billion in newspaper classified advertising). Jupiter Research projects that online classified advertising will more than double to $3.7 billion by 2009. This increase of two billion dollars in less than five years is a staggering compound annual growth rate (CAGR) of 16.4 percent. But it is still less than the $2.5 billion growth that the newspaper classified business will produce at a puny 2.67 percent CAGR.

In numerous cases, publishers have responded by going online themselves to recapture lost revenues and leverage their ability to reach consumers both on and offline. From 2002-2004, Knight Ridder’s online classified revenues doubled to $83.3 million, or 10.67 percent of their print classified revenues. Knight Ridder also owns Cars.com and in partnership with Gannett and Tribune Company owns CareerBuilder.com, an online employment service. Similarly, The Washington Post Company recently purchased Slate, and The New York Times Company acquired About.com.

Such ventures are among the ways for established media entities to leverage their brand and customer base online. Extending their brand presence online provides companies with the opportunity to capture new audience and new advertising markets. For example, Knight Ridder’s 2004 results show that online earnings contributed just 3.78 percent of total revenue, but because of high online profit margins, these earnings contributed 5.7 percent to total operating income.

While initial reports of Mark Twain’s death were greatly exaggerated, eventually they were proven to be merely premature. The same prospect exists for the traditional media entities that fail to understand and explore the complementary nature of online and offline media and take steps to attract the next generation of news consumers. Doing so will allow them to capture an ever larger audience and increase ad revenues. If they fail to do so, early reports of their death might be issued with little exaggeration after all. n

Douglas Ahlers, who was a founder of Modem Media and a pioneer of online advertising and electronic commerce, was a spring 2005 fellow at the Shorenstein Center on the Press, Politics & Public Policy, where he examined the intersection of online and offline news media. He is now at Harvard’s Belfer Center for Science and International Affairs. John Hessen is a communications consultant based in Silicon Valley. He specializes in the fields of media, technology and politics.

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