Friday, August 08, 2008

Matt Welch takes media reformistas to task for hypocrisy

Matt Welch, in a post at Reason, pinpoints the hypocrisy of the media reformistas movement. Given what Welch documents they are on the record as lamenting—-the faceless corporate control of newspapers, the cost-cutting pressures that come with being a publicly traded newspaper company, the lack of local ownership (and concern with local affairs that comes with it) and, above all, the trend of media companies gobbling up ever more media companies—-they should be applauding the new ownership of the Tribune Co. by its employees and Sam Zell—a mensch with a face.

But, Welch continues, they have dissed Zell as well. That’s because, as I add in a comment to Welsh’s piece, it is increasingly clear that the leaders of the movement have a real agenda that can be gleaned from the writings of Robert McChesney, the academic who mixes their Kool Aide. In his book Rich Media, Poor Democracy McChesney holds that you cannot have a democratic society so long as the media—no matter how many firms—are privately owned, profit-seeking and supported by American commercialism. So long as the choice is from privately run media companies no number of providers is acceptable.

Media reform, McChesney contends, is prevented because the people think there is diversity and that the media “give people what they want.” That’s a far more condescending attitude than even Newton Minow might have pinned on the mass audience. The reformistas, of course, are smart enough to see behind this illusion—-but not the rest of us constituting the great unwashed. How imperious!

Friday, March 28, 2008

It took too long, but Justice understood Sirius-XM market perfectly

A few months back I was visiting with my sister-in-law in Western Missouri. I offered to tag along as she drove for a few errands. I also wanted to get a feel for her spanking new Hyundai. While waiting in the car I fiddled with the radio that included an XM Satellite Radio. I couldn’t tune in anything except the conventional local stations.

As we continued on to the next stop I ask her why she apparently was not subscribing to the service that came with the car. She explained that it really wasn’t worth the expense to her. She listened to some programming during the initial three month trial and liked some if it. “But I have plenty to listen to from the local stations. And I like to listen to books on tape [actually CDs these days] I get from the library.”

And that, at the very micro level, is why the Justice Department was on target in its ruling that XM and its perceived rival, Sirius, could merge without damage to the competitive landscape.

When the $13 billion merger was first announced last February, I wrote here that “such a merger reduces competition less than it first seems." A few days later I referenced a letter to the editor of The Wall Street Journal from a former XM user who had his own personal take on how broad the competition for subscription radio was at ground level.

With 96% of Americans listening to free, local radio once a week and three-quarters tuning in daily – and satellite radio, at $12.95/month, occupying less than 1% of the market—it’s hard to argue that the “public interest” is ill-served by the demise of one of two players in that space.

The Justice Department took much too long to get to their end point, longer than ruling on the $80 billion merger between Exxon and Mobil in 1999, but it was, in the end, quite succinct with its findings:

  • The key conclusion was that “the [Antitrust] Division found that the evidence did not support defining a market limited to the two satellite radio firms that would exclude various alternative sources for audio entertainment.” That is, the relevant market is not satellite-delivered radio signals, but the full range of delivery mechanisms for audio. These include the well-established legacy radio stations, of which there are 20 to 40 available to most Americans; the CDs players that are in most autos and homes; the iPods and MP3 players that are ubiquitous, so much so that new autos include USB or docking mechanisms for them; Internet radio, giving consumers access to thousands of programming choices globally, and budding technologies such as HD radio and wireless Internet that can provide mobile access to “radio” programs, Podcasts, and the like. For example, Figure 1 shows specifically that in the youth market, radio is a declining medium, at the expence of MP3.
  • There is little likelihood of future competition between XM and Sirius. Although the two initially vied for differentiation by signing up big name exclusives (e.g., Howard Stern for Sirius, Oprah Winfrey for XM), the two have found the larger challenge was to convince consumers that they should be willing to pay for any sort of “radio” service. Both services get the bulk of their subscribers through car radio use. Each has exclusive contracts with auto manufacturers, running through 2012. As the two services are technologically incompatible, Justice’s analysis is that few users of one service go to the expense of ripping out one services radio to install the other, even if the subscription price of one would a few dollars lowers.
  • Both XM and Sirius have been losing hundreds of millions of dollars annually. The Justice Department “estimated the likely variable cost savings – those savings most likely to be passed on to consumers in the form of lower prices – to be substantial.” Given the extent of competition for users’ ears—and the reality that much of that is free—Justice rightly implies that a healthy surviving competitor is best than two hobbled ones.

As I wrote in my analysis last February, one of the most significant pieces of evidence that the satellite radio providers were correctly viewed in a broader competitive landscape than just satellite was the loud and well-funded opposition of the National Association of Broadcasters, representing terrestrial radio stations. They understood that XM and Sirius were direct competitors. They would prefer two weak competitors over one strong one. The NAB spent $4.3 million on lobby in the first half of 2007 alone (on a variety of issues beside s the XM-Sirius merger).

Members of Congress who quickly criticized the Justice Department decision either did not read it or do not understand economics or are pandering populists. Or maybe they are bending to the lobbying of the NAB. Sen. Herb Kohl, chairman of the Senate Antitrust Committee, said “We believe the elimination of competition between XM and Sirius is contrary to antitrust law and the interests of consumers.” How does he define the audio market?

House Telecommunications & Internet Subcommittee chairman Ed Markey issued a statement that said in part, “The Bush administration has apparently never seen a telecommunications merger it doesn’t like." Having followed Mr. Markey’s congressional career for 25 years, I could easily turn this around: It seems that he has never seen and such merger that he did like.

Ultimately, subscriber radio needs to convince consumers to pay for something for which there are near-substitutes for free. Howard Stern may be unique, but there many other radio voices—think Imus—who are free. A station of all Mozart all the time may be unique, but it can be replaced by a half dozen CDs in the car’s player. Or maybe 200 Frank Sinatra tunes on the MP3 player that can be carried around as well as plugged into the car audio system.

Satellite radio has to overcome the Penny Gap hurdle I wrote about recently here. I’d say my sister-in-law saw the market just about right. Justice could have just spoken to her and made the same ruling.

Friday, March 21, 2008

Why Cable Prices Seem To have Increased So Rapidly

When a candy bar manufacturer has higher costs it can raise prices by giving less. The 3 ounce bar becomes the 2.75 ounce bar. This in effect is an 8% price increase. But the increase is not as painful because our expenditure stays constant.

The print media can do the same to a point. They can reduce the news hole (ratio of editorial content to advertising), even reduce the number of pages, while keeping price the same. It may take time before consumers realize they are getting less. But as long as out-of-pocket prices don’t increase, the pain seems minimal.

The cable business has a different model and consumers have different expectations. Since towns, then cities, started being wired for cable, the providers have been giving us more—like a bigger bar, fatter publication—and been increasing prices commensurately. At first the increases in programming were very visible. In the 1970s and especially in the 1980s, cable subscribers went from having four or five channels to 10 or 20. Starting from such a small base, it was simple to have 100% and 200% increases in channels. First it was the “superstations,” such as WTBS and WGN. These were FCC licensed broadcast stations serving Atlanta and Chicago, respectively. They were among the first to use satellite to get national distribution. Then came cable-only networks, such as CNN and ESPN. It was explicit that there was far more choice even as the price went up.

To continue the junk food analogy, it was as if a candy bar went from 2 ounces to 4 ounces and from $.50 to $1.00. On a per ounce basis it is the same price. Just as crucial, it felt heftier in the hand. Now, consider further small increments in the candy bar, adding an additional quarter ounce each year. The larger the bar, the less physically obvious the change appears. Customers might not realize that it went from four to four and a quarter ounces. A 6% price increase would seem to be just that—-more money, though the cost per ounce stayed the same. Indeed, when the candy bar got to a certain point, many buyers might yell, “Enough. I don’t need so much chocolate.”

Much the same in the cable biz: Despite the apparent hikes in the cost of cable, the cost per ounce- er, ah-- the cost per channel has actually slightly trailed the cost of living index for the industry as a whole, as seen in the accompany chart, from the FCC’s report on cable prices released 15 months ago.

Still, adding a channel to the 40 or 50 that populate the more prevalent basic tiers is less obvious than it was in 1985 when there were far fewer. And, though many subscribers may see not benefit in adding, say, the Fine Living Network it may be quite welcome in a few hundred thousand households.

So, like the consumer pleading for no more increases in candy bar size, even at the same per ounce price, some consumers might prefer to see a halt in adding channels if that could moderate price increases. Here is where my analogy breaks down. Whereas more candy may not be so healthy, having access to more choice on cable could be. Or at least not unhealthy. Just as having access to the seemingly limitless diversity of material available now via the Internet, the availability of so many channels on cable provides opportunity for access even if, as individuals, we rarely take advantage of all that’s there. Even within a household, the bundle of channels each member uses may have little overlap (if my family is close to typical). While a la carte selection—unbundling—may seem attractive, there are many good social, cultural, not to mention economic, reasons while there is less there than may seem obvious. I’ve taken on the bundled/unbundled issue previously.

Like many of you, I’m a bit resentful when, like clockwork, Comcast notifies me of another 6% price hike. But unlike the folks who scream about the greed of media conglomerates, I checked out Comcast’s latest financials. Last year it had an 8.3% profit on revenue—good but certainly not obscene monopoly profits. It has $30 billion in long term debt. The few shares of Comcast stock I own (a legacy of some old AT&T stock, which spun off its cable holdings, which were acquired by Comcast) are worth today less than five years ago. So much for big fat greedy media companies. I’ve already looked at switching to satellite, but I’ll wait for Verizon’s FiOS to come to my neighborhood and decide who will get my business.

Either way, it will be a big candy bar at the same old price per ounce.

Thursday, January 31, 2008

Is it a "Confidential" or "Free and Open" Society?

Though a bit off-topic from the usual subject matter of this Blog, I couldn’t resist highlighting the following statement from Martha K. Levin, executive vice president and publisher of the Free Press, which published James Risen’s 2006 book, State of War.

Mr. Risen, a reporter for The New York Times, was issued a subpoena by a federal grand jury apparently to try to force him to reveal his confidential sources for material in the book about the Central Intelligence Agency.

The Times reported that Ms. Levin’s statement said that “the ability to publish confidentially sourced information about our government’s practices and policies is one of the bedrock principles of a free and open society.”

I wonder if she is aware of the juxtaposition of “confidentially sourced information” with “free and open society.”

Thursday, January 03, 2008

Retiring WSJ Managing Editor Says High Profits Created Newspaper Industry’s “Golden Age”

Today is the last day on the job for Paul Steiger, who has been the managing editor of The Wall Street Journal, for the past 16 years. That’s an impressive run by any standard.

Last Saturday the Journal published his valedictory on the front page under the headline “Read All About It: How newspapers got into such a fix, and where they go from here.” (Sub. still required)

It is a marvelous recap of where we've been and a forthright how-we-got-here, a no-tears tree-top look at the newspaper industry. Having been writing about the industry and its love-hate relationship with technology and consolidation since 1973, I have found that journalists are often the least objective when writing about their own industry. He smartly captured the ebb and flow in a way that the vast majority of Journal readers-- who have not followed every wrinkle and trend -- would understand.

But in the midst of this guided tour guided, Steiger makes an observation that would surprise many media reformistas. First he describes what journalism was like when he started out:

As a kid reporter in the '60s, I heard tales from newsmen and photographers about how, just a few years earlier, they had sat in cars, engines running and radios tuned to police bands, trying to get an edge in covering the next murder. The national and international news would be handled by the wire services. Lurid local photographs on page one were what sold newspapers in that era.

A certain fast-and-loose, devil-may-care attitude often prevailed. I remember walking past a photographer's open car trunk and noticing that he carried a well-preserved but very dead bird among his cameras and lenses. The bird, he explained, was for feature shots on holidays like Memorial Day. He'd perch it on a gravestone or tree limb in a veterans' cemetery to get the right mood. Nowadays such a trick would get him fired, but in the 1950s, this guy said, there was no time to wait for a live bird to flutter into the frame.

But then, he says, something happened. Starting in the 1960s the industry “morphed into a series of mini-monopolies. This came about first as “mounting costs forced a shakeout -- mergers and newspaper closings that typically left one city paper preeminent in the morning market and another in the evening.’ Then the evening papers ran into troubles, “crushed by a phenomenon that can be summed up in two words: Walter Cronkite. More and more families gathered in front of the tube at the dinner hour.”

This is how Steiger characterizes the results of a newly prosperous newspaper industry:

Many of these information behemoths invested heavily in quality, expanding their reporting locally, nationally and internationally. This was good business as well as a boon to readers, because it raised barriers to entry for would-be competitors.

The result was a golden age of American journalism. In New York, Washington, Chicago and Los Angeles, of course, yet also in Boston, Philadelphia, Miami, Milwaukee, Atlanta, St. Louis, Des Moines, Louisville, St. Petersburg and more, daily papers were willing to send reporters far afield in pursuit of stories exposing corruption or explaining the world. Newspapers opened or expanded Washington bureaus and added reporters abroad. Some stationed them not just in London, Moscow and Tokyo but in places like Sydney and São Paulo.

As their financial strength and staff size increased, they became fearless in pursuing corruption.

The “golden age of journalism.” Profitable newspapers had the resources to invest more into their product. Intuitive? Or counterintuitive?

Isn't competition what we seek as the mechanism to ensure that the juices flow? Shouldn’t more competition – not less—be associated with the golden age of journalism?

Although he is not writing about competition per se, in his chronology Steiger provides some answers:

  • “The news operations of the three main television networks in those days followed a similar pattern. As profits grew, they added to staff and launched foreign bureaus and investigative projects. The Sunday-night magazine program CBS launched in 1968, "60 Minutes," set a new standard for expensively produced and deeply reported video journalism.”

  • “Cable TV added a new worry, because here was a medium that could target smaller, exclusive audiences and thus pose a greater challenge to print.”“Then in the 1990s came the digital networks and the Internet, unleashing forces that would ultimately undermine newspaper business models that had been so supportive of journalism.”

  • Finally: “The decisive blow may have been Google's, with its powerful search engine that would either give you a quick answer to a question you had or steer you to sites that could. The irony, of course, was that some of the most useful of those sites were newspapers’.”

More could be added to Mr. Steiger’s description of the forces and trends. But the basic pieces are there. So, what are the lessons learned?

First, that profitable organizations have the wherewithal to spend to maintain and improve their products or services. I've written about this before. Some may take the money and run—a short term maximization philosophy. But many—probably most judging by Steiger’s list of newspaper cities—will look for longer term profit “optimizing” strategies. And for two or three decades that worked well for the newspaper publishers and their millions of stockholders.

Second, competition works. But critics and regulators must recognize the shifting boundaries of the market. Competition for newspapers was coming not necessarily from other newspapers, but from media that were partial substitutes: broadcast television, then cable networks, then online providers. They were and are competing for advertiser revenue, consumer personal consumption expenditures—and consumers’ time. Cumulatively they have taken a toll.

(Paul Steiger is now editor in chief of Pro Publica, “an independent, non-profit newsroom that will produce investigative journalism in the public interest.”)