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May 29, 2012, 11:30 a.m.
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Dan Kennedy: How news executives can fend off the Wolff at their door

Is Michael Wolff right about Facebook, and is online advertising doomed to fail? If so, here are a few ways news organizations could prepare.

Facebook’s disappointing IPO may be indicative of a larger problem: the declining value of online advertising, an inexorable force that will eventually destroy not just Facebook, but the web itself.

Sound nuts? Well, that’s the thesis put forth by media critic Michael Wolff in a piece he wrote for Technology Review headlined “The Facebook Fallacy.” Wolff has made his reputation as a provocateur, and his analyses often straddle a fine line between brilliant and crazy. Some might also consider him to be part of the problem facing news organizations, as his Newser.com site practices an unusually in-your-face form of aggregation.

But if Wolff has overstated the case, he nevertheless may be on to something. Indeed, his Tech Review screed carries the endorsement of Doc Searls, a respected thinker about online media and advertising.

I’ll get to what I think this means for journalism in a moment. First, though, a few words about Wolff’s argument.

Essentially, Wolff is expanding on something that we already know: the value of web advertising is low and getting lower, even as it keeps expanding. He writes:

The daily and stubborn reality for everybody building businesses on the strength of web advertising is that the value of digital ads decreases every quarter, a consequence of their simultaneous ineffectiveness and efficiency. The nature of people’s behavior on the web and of how they interact with advertising, as well as the character of those ads themselves and their inability to command real attention, has meant a marked decline in advertising’s impact.

Wolff’s insight — again, not particularly original except for his eagerness to pick it up and run with it — is that Facebook is just another website. According to Wolff, Facebook’s current revenues are unlikely to grow all that much. And the situation is only getting worse as mobile becomes a bigger part of the mix, since Facebook has said it doesn’t know how to make money there.

The only company making money from online advertising, Wolff argues, is Google, because it’s the middleman of last resort. Essentially Google is the company that finds itself in the enviable position of selling Levi’s and pickaxes to the hapless gold miners.

People in the news business have been sweating out the reality Wolff describes for some time. How will we pay for the journalism we need? The answer to that is far from clear — and, of course, it’s also far from clear that the public is even willing to pay for what we’re selling, either directly or indirectly.

But here are four partial answers that get us beyond the conundrum of relying on Internet advertising whose quantity keeps expanding but whose value keeps shrinking.

Newspapers should keep printing.

Print is doomed — if not in the short-term, then certainly in the medium- and long-term. But that doesn’t mean it’s going away entirely. It’s just too valuable, as online advertising is worth scarcely a fraction of its print counterpart.

The most recent example of a newspaper company trying to adjust to that reality is the New Orleans Times-Picayune, which is cutting back its print edition to three days a week. The idea is to squeeze seven days’ worth of print advertising into three, saving money on printing and distribution costs while holding onto the most lucrative part of its revenue stream.

As Nieman Lab columnist Ken Doctor notes, if the Times-Picayune move is successful, then the paper will keep some 80 percent of its print advertising revenues while saving a lot of money. By contrast, dumping print entirely would be disastrous.

Move to the flat-fee ad model.

With regard to online advertising, Wolff describes a never-ending spiral to the bottom, as prices for CPM advertising (that is, the cost of a thousand impressions) keeps dropping.

News sites are getting killed by this model, which is based on the notion that advertisers should pay only for the number of times someone sees their ads, with a premium if someone clicks through. (Reality check: No one clicks on ads. No one. Not. Ever.)

Some successful sites have moved away from this model, simply charging a flat fee — what might be called the sponsorship model. One of those is The Batavian, a for-profit community site in western New York. Publisher Howard Owens runs all of his 100-plus ads on the home page, rotating them from bottom to top throughout the week.

As Lisa Williams, founder of Watertown’s late, lamented community blog H2otown, and now the head of a venture called Placeblogger, told me: “I think a lot of people will buy a sponsorship on a local blog for the same reason that they put their name on the back of Little League shirts.”

Expand nonprofit journalism.

Local foundations, community institutions, and wealthy philanthropists, not to mention readers, are contributing to nonprofit local news sites such as the New Haven Independent, Voice of San Diego, MinnPost, and the Texas Tribune just as they do to public television and radio stations.

Unfortunately, the nonprofit news movement has failed to take off, in part because the IRS has held up applications for new nonprofits as the agency ponders whether journalism is an activity that deserves such status. That’s one reason the Chicago News Cooperative died earlier this year.

Although there’s an argument to be made that IRS officials simply could (and should) change their minds, it’s possible that we need legislation explicitly recognizing journalism as an activity covered by the regulations governing nonprofits. Maryland Sen. Ben Cardin proposed such a bill several years ago, but it hasn’t gone anywhere.

Experiment with flexible paywalls.

There’s much that has been said and written about paywalls, so I won’t belabor the point. But smart, flexible systems such as those put in place by The New York Times and The Boston Globe, which allow for free sharing via blogs and social media, are worth exploring, even if they never amount to more than a minor revenue stream.

Michael Wolff’s analysis of Facebook’s problems, and of any website depending on advertising, should be must reading for news executives. Perhaps they won’t learn anything they don’t already know. But it might give some of them the impetus to stop pursuing strategies that are bound to fail, and instead to seek new ways of paying for the news.

Dan Kennedy is an assistant professor of journalism at Northeastern University and a panelist on Beat the Press, a weekly media program on WGBH-TV Boston. His blog, Media Nation, is online at www.dankennedy.net. His book on The New Haven Independent and other community news sites, The Wired City, will be published by the University of Massachusetts Press in 2013.

Photo by Scott Beale/Laughing Squid used under a Creative Commons license.

POSTED     May 29, 2012, 11:30 a.m.
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