After graduating from Columbia last May, I spent the summer at the Stanford Graduate School of Business in their Summer Institute for General Management (which I HIGHLY recommend). The experience changed how I thought about the news industry, and made me realize how much journalists are poorly served by their willful ignorance of the business-side of the industry.
But first, a little explanation of the chart above: Porter's Five Forces, as they're known in B-School land, allow you to analyze and understand the dynamics of a particular industry and predict long-run profitability and ROI (Return On Investment). Here's a quick run-down:
  • Barriers to Entry: Is it easy to start a business in your industry (e.g. blogging), or do you big $$$ and lots of special skills or special permits (e.g. aircraft carriers)? 
  • Supplier Power: Do the people who supply you with the stuff you need to operate have a lot of leverage over you (ex Exxon vs the family-owned gas station), or are they numerous, divided and weak (ex farmers vs the grocery store)?
  • Buyer Power: Do the people who buy your stuff have lots of leverage over you (ex Wal Mart vs every manufacturer on earth), or are your buyers numerous, divided and dependent on you to supply them with a critical good (ex. beer consumers at a Yankees game)? 
  • Substitutes: Is it quick, easy and common for people to switch over to your competition (e.g. umbrellas), or are the switching costs––monetary or mental––especially high (e.g. PC vs Mac before you could run windows on a Mac)?
  • Competitor Rivalry: Is the competition gunning for your customers (ex Taxicabs in NYC), or are all sides happy with their current lot (ex Bodegas in NYC)? 

Ok, so how does this apply to the news industry? Well, let's take a look at the newspaper industry before the internet came around…

  • Barriers to Entry: High. You needed big $$$ to buy a printing press, pay for home delivery and special skills to gather, write and edit articles.
  • Supplier Power: Low. Lots of paper manufactures in the world, and while journos and the delivery/printing folks tended to be unionized, this fact that was mitigated by intense competition from the legions of doe-eyed wannabe writers graduating from college every year.Extremely-obese-cat
  • Buyer Power: Low. People desperately want to know what's going on the world, and before the internet, you had only two options: TV news and your local newspaper.
  • Substitutes: Few to None. If you wanted high-quality information on a daily basis, you'd be hard pressed to find it outside of a newspaper. (TV was only a partial substitute as it tended to trade depth and breadth in exchange for timeliness.) And if you were an advertiser trying to reach a certain educated demographic in specific locality, the newspaper was your only choice (think classified ads).
  • Competitor Rivalry: Medium. While newspapers would go to war every now and then to capture market share, they by and large operated on the tacit understanding that circulationwars benefitted not they the producers but the consumer. The relatively few newspapers in a given market made this tacit collusion possible

Money 5

These factors made newspapering an extremely profitable business for a very long time. Witness Rupert Murdoch and the Sulzberger family  However all this money, it seems, also made the newspaper mangement fat and lazy and incapable of altering the larger business strategy. They could have used a lesson on Strategy with my homeboy Garth at Stanford.

Ok, before we jump the gun, let's take a look at the local newspaper business as it exists now in the internets era….
  • Barriers to Entry: Virtually Non-Existent. Want to deliver news and information to millions of people instantly? Start a blog, post a video to YouTube. Want to advertise to a specific locality? Try craigslist, it's free.
  • Supplier Power: Medium, but high relative to the competition. Newspaper reporters demand a salary, whereas bloggers tend not to. Oh, and because the workers are unionized, it's much harder for management to cut labor costs, lower salaries, and combine job descriptions (although not impossible). 
  • Picture102Buyer Power: Moderate. Lots of buyers with a lot of options. The monopoly on information is over.
  • Substitutes: Innumerable. When it comes to the generic local, national and regional news that was the bread and butter of the newspaper industry, there's a zillion alternatives for the news consumer. And with these numerous portals come exponentially more advertising options for the potential advertiser.
  • Competitor Rivalry: Insane. News sources who once had comfortable margins and sustainable business models are suddenly competing for your limited attention spans not only with each other but with a multitude of bloggers just like me. Economies of scale is where is the only way to make online advertising pay, and to achieve that, you need eyeballs and lots of 'em. Enter insane-o competition.

What does all this mean, exactly? Well, in essence, it means that journalism is Ok, so now that I've laid out a framework that explains, in business strategy terms, why the newspaper industry is a horrible business, the question remains: Is there anything to be done?  

To Be Continued…