Here’s the newest part of my interview with Jay Hamilton, author of this month’s Nieman Journalism Lab book club selection, All the News That’s Fit to Sell. Here we’re talking about Chapter 7, which focuses on what we can learn from the economics of online news around 2000. Our topics include:

— How the power-law graph explains Internet distribution patterns;
— The importance of audience scale for Internet advertising; and
— Why Google ads for “stocking stuffer” have replaced George W. Bush belt-buckles.

As always, there’s a full transcript below.

Josh: All right, we’re back with Jay Hamilton. We’re at Chapter 7 of his book, which is “News on the Net.” As we mentioned earlier, your book was first published in ’03, and then in paperback in ’06, I believe.

Jay: That’s right.

Josh: I must say, this is the one chapter where it kinda — you’re talking about Lycos search results, things that are from an earlier era of Internet research. I’m curious from what you’ve seen, since this is the chapter of the book that has seen the biggest changes in its environment since then, is there anything in particular that you’ve noticed that you thought was happening back then that isn’t happening? Or that is happening more or less than you thought was happening? Or have any of the motives changed?

Jay: It’s interesting. I still think that people have four information demands: producer, consumer, entertainment, and voter. And a lot of times when people saw the Internet as free information, free search, they thought: “Well, this market failure is going to go away, because if people want to know about government, they can find out.” And what I used the search information data in the book to look at was: “Well, what do people actually look for, and what are the advertising returns for that?”

If you look at search patterns, people are much more likely to search for entertainment information than government information. I think I showed in the book at the time, when I took a snapshot, people were much more likely to search for James Brown than the Supreme Court, for instance. And if you look at the advertising returns, what people were willing to pay to be associated with a search — so if you think about Google today, if you type a search term on Google, you see on the right-hand side these mini ads. If you click through that, then the people who placed the ad pay a price, and they were bidding for your attention. And again, there’s a lot higher return if you’re making a consumer search, because people think: “This person is about to buy something and I can benefit from that.”

And ironically, when you look at some of — when I initially wrote the book, if you looked at political terms, often times what the ads would be would be T-shirts for that person. So if you typed in “George Bush,” it would be a George Bush belt-buckle, rather than somebody trying to get your attention to a policy issue. But as things have evolved now, the campaigns are using search as a way to target people. So one of my favorite examples of this was that, in December 2007, Emily’s List, a liberal group that tries to support female candidates, set up a website, “You Go Girl,” that was meant to help women in Iowa learn how to caucus — aimed at those first time caucus-goers, with the caucus in early January 2008. So what they did is they went to Google, and they bid on the words “recipe,” “stocking stuffer” — things that they thought in December, women in Iowa would be searching for. And they got 20,000 people in Iowa, in many different towns, to click through — searching for “recipe,” they see the “You Go Girl” site about caucusing, and that was a way to use your consumer interest to re-direct your attention to political interest.”

Josh: Let me ask you about one thing that is sort of a hobbyhorse of mine that seems to fit into your research, although I don’t think you get into it in the book. One reason why newspapers in particular — the medium I’m most familiar with — have historically created stories the way they have is based on their publishing cycle. You publish a newspaper once a day. You have a story that is reduced to that one-day unit, and it is meant to be disposable because the next day there would be another newspaper coming along. I’m curious with the shift online, if you see an environment that would encourage different kinds of content being produced by news providers — in that it might encourage investment in longer-term content that might have a shelf life that is longer than one day, that isn’t just the snapshot style that newspapers have traditionally produced, since there would be more of an economic opportunity for that story to have value over time.

Jay: Sure. It’s very interesting that some of the database journalism — computer-assisted reporting — is justified on the fact that once you create, pay the fixed cost for the creation of the database, it’s going to be around and can be used.

So if you talk to creators of newspapers, people who have created searchable information about elderly care in their area or hospital safety in their area — that there’s a lot of databases that are created on the idea that you can continue attracting attention and continue selling that attention. So I think you’re right that the ability for the information to live on in a searchable form is helpful. Another thing that you raise though is you use the term “story.” There’s an interesting experiment going on, I think, about what the level of information is that people want. So if you go to the wonderful site EveryBlock, funded by the Knight Foundation, founded by Adrian Holovaty — basically, you enter in your address in a two- or four-block radius. They provide you with very granular information — Flickr photos from that block area, crimes, restaurant inspections, house sales. So the idea there is that you’re pulling information and creating your own story in a sense. They give you the raw data.

Josh: There is one graph that is in this chapter where — I don’t think you actually used the phrase “power law,” although that is the phrase I am familiar with from previous iterations online — that shows that online as opposed to in print there is a greater premium for, I guess, scale — that the largest institutions have a disproportionately large share of the market compared to, say, print. The New York Times has a larger percentage of web hits than it does print publication. What is it about the Tnternet that creates that sort of environment, since it seems to pop up in a lot of different areas online, not just news?

Josh: Sure. Well, there could be a couple of things going on. Number one is that the Internet expands the choice set. So if you were growing up — or actually when I first moved to Durham, I would buy The Washington Post, which was selling for a quarter in D.C., I could get it a day late for a dollar at a convenient store that got it via the airplane.

So there weren’t that many people here reading The Washington Post, or The New York Times for that matter. Now online, if you are interested in national affairs, then you have a much easier way of reaching it. So the Internet opens up more options, and then quality can rise to the surface. That’s number one.

Number two, there are many different outlets — meaning that again since information products are experience products, you can’t know exactly what’s in them, but if you have heard of the brand name, that is a big advantage.

And then number three, some sites have network effects. They are more attractive because more people are using them — better commentary, better feedback, more interesting things. So I think those three reasons generate this higher concentration of attention.

Josh: I was at a conference at the Poynter Institute in November and Lincoln Millstein from Hearst was talking about how he felt that the newspaper business needed more scale economically — that individual newspapers in smaller cities or medium sized cites, or even some large cities, aren’t going to have enough scale to be able to compete on an advertising-even level with Google and Yahoo and Facebook and these other folks who have an enormous audience. Would that seem to play into the same sort of idea, that you need to be big online to be able to take advantage of the benefits of the scale?

Jay: Oh, it is interesting — you could think about scale in spreading out fixed costs of news gathering. But I think another thing that people are talking about there is spreading out the fixed costs of your advertising sales and your advertising force, because a lot of local news sites get a lot of attention, but they don’t get much advertising.

So The News & Observer, where I live, they have a lot of eyeballs. But the question is: How do you get the local advertisers to advertise online? And one thing that people have proposed is maybe making the local newspaper a hub for local advertisers to reach people in many different areas of the web. So, maybe for local advertisers, your newspaper sells you advertisements on the newspaper site, but also on other sites that are consumed locally.

So, in that sense, if the local newspaper invests in a sales force and the knowledge of the local area, and then can add other products that they can sell the advertising through, that’s one way to get scale.

Josh: That’s sort of like the Yahoo partnership that you’re probably familiar with?

Jay: Exactly. So Yahoo is working with companies like McClatchy, so that you could sell a local ad that would appear on a local person’s Yahoo screen, but also on the newspaper [site]. I have great hopes for that, but right now the tumult that Yahoo has made the implementation less speedy than at least some of the newspaper partners had hoped.

Josh: It is interesting to go back to what you had in Chapter 2 of the book, where you describe one of the reasons for the consolidation in the number of newspapers in the late 19th century was that advertisers didn’t want to deal with nine different newspapers in a city. They would prefer to deal with a smaller number. I wonder if a similar phenomenon that would be happening online, where someone who has a local business would rather just go to The News & Observer and have them be able to supply a broader audience — on their site and outside of their site.

Jay: That’s right. And that’s a big empirical question about what amount of local knowledge you need and local explanation and content. The more the human element is important, then the more that local newspaper site might be able to survive. If Google becomes that dominant way for local advertising, then that would potentially be bad news for the newspapers.