• by Dave Morgan , Featured Contributor, May 15, 2008

Don't blame Craig, It's not his fault.

A story in the front of the business section of The New York Times this past Monday raised once again the issue of whether Craigslist was responsible for the troubles that the U.S. newspaper industry finds itself In today. While the Times' story didn't jump on that bandwagon -- and actually presented a pretty balanced view of Craig's true impact on newspapers' recent misfortunes -- just reading about the issue once again motivated me to address it in today's column.

Craig Newmark is not responsible for the fact that U.S. newspaper companies have seen significant declines in their classified ad revenues -- and therefore, their profit margins and their ability to support robust newsrooms and carry out their historical duties as the Fourth Estate. While many in the newspaper industry point to Craigslist to explain their problems, the issue is not that simple. In my view, Craig and his list may be emblematic of U.S/ newspapers' problems, but it is not a cause and effect relationship.

In the end, the problem for newspaper companies is that their businesses and business models are not well-designed for a world where the vast majority of consumers (their readers) and marketers (their advertisers) are connected to a robust, Internet Protocol (IP)- enabled communications network. IP and business model issues are the demons here, not Craig. Here are my reasons:

The Internet enables low-cost business models. Much of the power and defensibility of newspaper franchises has been built on the huge barriers to entry in production and distribution. Content makes newspapers valuable, but distribution is the core of their business models power. If you don't have access to hundreds of millions of capital, you can't even think about launching a decent-sized newspaper. If your market already has one, then you better be prepared to lose lots of money on it for years (USA Today reportedly went more than 13 years before turning a profit).

With ubiquitous IP networks and digital content, Web-based media has virtually no cost of content reproduction and distribution. This enables digital companies to deliver content and commercial services to consumers and advertisers at very low prices -- even free -- and still run quite profitable businesses.

Thus today, we see hundreds of millions or billions of print classified revenues being turned into tens of million of online revenue. We see both consumers and advertisers get better, more robust, offerings, better service and better results. Of course, those who used to make money on print ads find themselves taking empty bags to the bank at the end of the day. The future of media is about competing with business models in markets with very low or no marginal costs. Craig didn't create this factor; he just exploited it.


Analog media business models have problems. Many media companies built big businesses and big cost structures to consume the fat margins they were creating with their distribution powers to keep out competitors. (In some ways, this is not unlike what Google is doing today with all of its "cost center" businesses, such as Google News hanging on the back of the search business.) This worked great for the big media companies when the barriers to enter their markets were high. But those big, fixed cost structures have now become anchors around their necks, as low-cost competition is now eroding their core revenue and profit bases. To make matter worse, many of these companies have taken on enormous debt loads, mistaking secular declines for seasonal ones and betting that time would make it go away. These folks now are forced to spend too much of their time with lawyers and bankers, trying to avoid blowing debt covenants -- and not enough time trying to reshape their business operations.

Marketing is changing. For more than 40 years, and probably at least since Lester Wunderman pioneered modern direct marketing with his seed company mailings, marketers have been shifting commercial communication spend away from media intermediaries and more to "marketing directly." Many marketers have long favored moving money out of "above the line" spend to "below the line," but it was hard to justify it when the world of mass media was so easy. Not so today. Not only has fragmentation and clutter made media much less effective, but the Internet has made the ability to market directly to consumers much easier. And, most importantly, it has made it much more measurable. For decades, media companies fought against the use of true effectiveness measurements in the delivery of advertising for their clients. ROI was something that direct marketers did, not media companies. Now, with digital media giving marketers what they want in measurability, and delivering low-cost media to boot, the analog media companies are left particularly unprepared.


It's all about me. Consumers want services that focus on them. Likewise, marketers want services that focus on them. The dynamic and flexible nature of Web-based services and the fact that interactivity permits you to run every service like a customer service laboratory means that while many analog media products have changed little with customer needs, Web-based services are a direct reflection of explicit customer needs. Most analog media products are about publishers 'control and their views of what consumers and marketers want, not turning control over to the market participants themselves. Thus, not only do Web-based media services have cost and business model advantages -- but for many consumers and marketers, Web services are just plain better.


Does this mean that I expect legacy media companies in the newspaper, magazine and broadcast television businesses to go away, overwhelmed by Web-based disruptions? No. Certainly not all of them. Some will, for sure. Some are too far gone and some have so much debt and have lost so much of their talent that they will never be able to navigate their way out, even if they knew how to. However, many legacy media companies will make it. Many will focus back to serving the core value proposition that their consumer and marketers have depended on for decades. They will change -- becoming different, yes, but definitely better, companies. What do you think?

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