By Leslie Walker
Washington Post Staff Writer
Thursday, February 3, 2000; Page E01
Irony abounds today in the newspaper industry. I am convinced that its ink-on-paper product – the one you are likely holding in your hands now – is doomed. Yet this is hard for most people in my business to imagine, because net profit margins are running at a healthy 10 percent and ad revenues are booming.
Ah, I say, that's the Internet sucker punch: The dot-coms are fattening their flat-land cousins for eventual slaughter with the ads they are buying.
While mine remains a minority view, I believe it is only a matter of time before Internet news services grow so big they displace their print counterparts. It starts with a siphoning of newspaper classified ad revenue into searchable online databases. It may take 20 years – and may not even be what most readers want – but newspapers on newsprint will die.
From my admittedly biased viewpoint (I spent two decades as an ink-stained scribe and nearly two years editing the ink-free washingtonpost.com), I detected new urgency about the fate of newspapers last week in two news items. First was the New York Times Co.'s decision to sell stock in its Internet operation. Second was Washington Post Publisher Donald E. Graham's decision to relinquish day-to-day management of the newspaper in part so he could spend more time on Internet strategy. I perceived both as signs that the newspaper industry is struggling hard to reinvent itself in cyberspace.
Even if paper products are doomed, of course, that does not mean the same fate will befall their owners. Newspaper companies are working hard to ensure that if digital products do cannibalize newspapers, they themselves own those Internet cannibals. They are pouring money into their own electronic news services in an attempt to re-create online their core mission of providing information. They are trying, too, to find digital tools they can rent or sell to local merchants. The hope is that the print and Web products will complement one another.
The threat newspapers are facing, though, will intensify as next-generation portable computer devices and screens hit the market, making reading online more convenient and easier on the eyes. That will spawn more competition from Web upstarts and may accelerate the shift of ad revenue to digital media. The weak spot for newspapers is their classified ads, which make up 40 percent of the industry's revenue. It also doesn't help that most Web content is free.
That's the backdrop for the Times' announcement last Friday that it will issue a tracking stock for its Internet division, allowing the public to buy shares in Times Company Digital, its new-media subsidiary. Unfortunately for the Times, the attempt to mine dot-com gold on Wall Street comes as investors are growing more selective and many Internet stocks have fallen dramatically from initial offering prices. Falling farthest have been "content" sites – those whose main stock is news and information. Their stocks have underperformed Web retailers and portals. Financial news site TheStreet.com, along with Web zine Salon and women-centered iVillage, are but a few of the content sites trading near or below their offering prices.
I believe this is partly because the Internet transforms editorial content less than it does commerce, although the economics of both change online. Content and commerce are more integrated on the Net; you can read about almost any product and be one click away from buying it. The adjacency of content and commerce explains why Web content sites are adding commercial links, and commerce sites are adding editorial content. Just last week, eToys.com snagged the print editor away from a leading children's magazine.
Judging by stock prices, Wall Street seems to be giving the edge to e-tailers in the race to marry content and commerce. And content sites face thornier ethical issues because their primary mission is to inform the public, not sell products. Content sites that take commissions for selling products also risk being perceived as biased, especially if they aren't careful about how they integrate commercial links.
Neither the valuation nor ethical challenges, however, are stopping traditional media companies from seeking to capitalize on their Internet ventures. Indeed, the Gray Lady of journalism joins a parade of old-line companies that have issued – or plan to soon issue – tracking stocks. Knight Ridder Co. and Discovery Communications Inc. are among those that announced steps recently to prepare for Internet stock offerings.
For the New York Times, the hope is that its Internet shares (reflecting operations of the New York Times on the Web, Boston.com, New York Today and more than 40 smaller Web sites) will be perceived as having more value than they currently are contributing to the parent company's stock. Times Co. Digital plans to use the new shares to reward Web employees, buy other Internet companies and expand as nimbly and as fast as Internet start-ups.
There are trade-offs, though. Most media companies (The Washington Post Co. and Dow Jones Co. included) have been consumed with internal debate over the wisdom of giving their online operations the extra degree of separation tracking stocks create. Unlike spinoffs, which give a new company independence and shareholders full voting rights, tracking stocks give shareholders limited voting rights and vest control with the parent company. For newspapers, any separation is sensitive because their print and online operations are so intimately intertwined. The core content of most newspaper Web sites is still produced inside print newsrooms, despite efforts to forge outside alliances to expand their Web content (the Times has such alliances with ABC News, TheStreet.com and Cnet; The Post recently allied with NBC/MSNBC).
"We have been thinking hard about it and haven't come to a conclusion yet," says Alan G. Spoon, president of The Washington Post Co. "We will certainly be studying the Times's proposed approach to see how it might suggest alternatives for our growth."
The Times stock filing offers a snapshot of its strategy for making the print empire more digital. In a nutshell, the Times contends it has one of the richest and smartest news audiences in the world; it aims to create new ways for those affluent readers to communicate electronically with one another and with advertisers. The Times hopes to use that communication to amass user profiles and make money through direct marketing – a whole new line of business that carries unknown risk for a newspaper company. Times execs declined interview requests, citing the "quiet period" before a stock offering.
It is too early to draw conclusions from any of the numbers they disclosed. More than anything, the heavy spending by both the Times and The Post should tell you how important the cyber-game is to them. In its federal filing, Times Company Digital said it spent $35 million in the first nine months of last year, but that doesn't include all of its digital ventures. The Post Co. spent a total of $85 million during the full year, including spending to create an Internet-only law school and participate in several classified ventures with other newspapers.
Each collected less than $20 million in revenue from its online activities last year, but both have said that near-term revenue isn't the goal; they are focused on building audience for the long term.
Both are trying to diversify. The Times reported that it is creating a network of Web sites that will drive traffic back and forth, as Microsoft is trying to do with MSN.com and its car, home and financial sites. The Times already has WineToday.com, GolfDigest.com and a local New York entertainment guide.
Times Company Digital paid $30 million to acquire personal profiling technology that debuted last month at Abuzz.com. You can ask questions at this site and, based on a profile you create, have your query automatically routed to someone the database thinks will have an answer. Soon there will also be an instant messenger and a special tool bar linking all the Times' Web sites. The idea is that readers of the Times will want to talk to one another using these tools as they travel the Web.
Frankly, I think it sounds like a stretch, but I applaud the Times for experimenting. It's the only way to find out what works on the Web. Ultimately, these are risks newspapers must take to preserve their core product – which after all is ideas, and not the forms (digital or paper) in which they are expressed.
Send your thoughts to Walkerl@washpost.com
© 2000 The Washington Post Company