A good read from 1995

Thanks to Steve Yelvington for unearthing a prescient piece by Philip Meyer.

In AJR, back in 1995, Meyer predicted much of the disruption now shaking the news industry. Reading it today is fascinating, both for what he hit and what he missed.

First, a quibble.

Meyer talks about newspapers as high-turnover operations, similar to supermarkets, and suggests that high-turnover businesses should typically expect lower margins — unless they have a fortified (monopolistic) market position. So newspapers, he said, should get used to single-digit margins, say 6 or 7 percent instead of the 20 or 30 percent once common. And he suggests that new owners would be happy to step in to operate newspapers returning 6 or 7 percent.

I’m not so sure. I think turnover is less determinative than operational leverage, capital requirements and profit variability. Unlike supermarkets, newspapers have high operational leverage, with substantially fixed costs in production and distribution. They also have to make huge, lumpy capital investments in everything from presses to front-end systems. And, Gannett’s profit smoothng aside, profits can be highly variable. Even if circulation revenue is fairly stable, or at least predictable, advertising revenue swings with the fortunes of advertisers, and newsprint costs can quickly eat profits from the other side as the newsprint companies gain pricing power.

(A tangent: I’d love to see a chart comparing the profitability of newspapers and newsprint manufacturers over time. I’ll bet it looks a lot like the famous charts of the wolf and moose populations on Isle Royale.)

For newspapers, all of those factors mean risk, and with risk comes the need for higher margins to compensate. Ten percent is probably a more realistic minimum return to run a newspaper comfortably.

But that quibble aside, Meyer was right on the mark on so many points that his article still makes great reading:

He did a great job of explaining the trap imposed on current owners by high valuations, with his golden goose analogy. It’s the difference between a good business and a good investment.

He laid out the existential choice publishers faced, and largely failed, between squeezing their geese or accepting lower margins and investing in the future. (Of course, in fairness, it’s never been very clear exactly where one should be investing for the future.)

He emphasizes the importance of the virtuous circle, where dominance in an information marketplace leads to greater dominance. (I also find it helpful to think about this dynamic in terms of network externalities and lock-in, phenomena explored by Brian Arthur and many others.)

And he identifies trust as the key to maintaining dominance in an information marketplace, which is a great insight.

Unfortunately, I don’t think he or anyone else could foresee how effectively new, Internet-based businesses would slice up the newspaper business model and take over revenue streams like classifieds.

And it’s hard today to echo his confidence in trust as the critical monopoly-building asset. As we navigate a world of blogs and social media and channel proliferation, trust seems like a much more contested asset, and one that people are doing more to define on their own terms.

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