Articles

The Watchword for Media: Scarcity
A paper pinch, slower Web traffic, and striking writers make for a harsh new reality
By: Jon Fine
Article appeared in the January 14, 2008 edition of BusinessWeek

As if media companies didn't already have enough going on, now they have something else to look forward to in 2008: scarcity.

I don't mean the "scarcity" media knew in easier times, back when owning printing presses or broadcast towers gave you a stranglehold on distribution, back when there was no newfangled noisy megaphone—the Internet—through which those whom traditionalists call "nonprofessionals" could broadcast their own media.

I'm talking about a more old-fashioned scarcity of raw materials. Magazine and newspaper publishers are already feeling the pinch of steep increases in the paper prices, a quotidian item but one that represents publishers' largest nonlabor expense. Meanwhile, the time Americans spend on the Web (another finite commodity) has actually backslid in the past few months, compared with 2006's stats, according to comScore (SCOR) data, which also shows stagnation in Web traffic growth. These scarcities differ from another one—a shortage of scripted TV shows thanks to the ongoing writer's strike—in that they look more permanent than temporary.

Bear with me while I sketch out the structural changes in the paper market. In years past, publishers bought from a wide constellation of papermakers. So it was easier to play one supplier off another to get price cuts, and thus manufacturers' attempts at price increases often did not stick.

That state of affairs is over for the foreseeable future, if not forever, thanks to a wave of mergers that reached a zenith last year with the nuptials of Bowater and Abitibi Price, the top two newsprint players in the North American market. Private equity has consolidated ownership among manufacturers of coated paper, which magazines use. All these deals have dampened supply. Coated paper prices increased 10% last year, and further hikes are expected in '08. Newsprint prices will balloon 11% this year, according to industry tracker Pulp & Paper Week, although other observers are convinced prices will go even higher. The crowning irony is that this is happening even as dropping circulation has taken much demand out of the market, and thus the suddenness of the increases has surprised many.

This lashes another lead weight onto publishers already struggling through choppy waters. (Pundits, including myself, have for years expected more magazines to close; higher paper prices may accomplish what years of sluggish advertising did not.) It also leads to a raft of not-good implications. Publishers will be tempted to shrink circulation (since marginal circulation just got much more unprofitable), and magazines will consider cutting back on the size and quality of paper. If, like me, you believe the physical attributes of print lure readers and advertisers, this is a bad road to go down. It will also accelerate the move online, assuming media executives still need a shove.

But, as comScore's data show, even growth on the Web has its limits. It is becoming clear—at last!—that there are limits to how much media the average human can consume. So the battle for the same eyeballs will intensify. "People are not going to spend that much more time in front of their PCs," says an executive at a top Web property. "The big growth is over."

That sounds a touch dramatic to me. Many have it worse than the Web. The big sites continue to ring up truly staggering stats, and there's a huge difference between stagnating traffic growth and disappearing audiences, which virtually all other media face. But the new reality will nonetheless reshape online media. Look no further than the big portals, which are already shifting focus to monetize the traffic they've got—think of Microsoft buying digital advertising and technology firm aQuantive—rather than just chasing after more eyeballs. Meanwhile, it won't be long before media sites are forced to grow by poaching rivals' traffic. Should The Wall Street Journal go free on the Web under News Corp. (NWS) ownership, for example, an especially tasty tit-for-tat traffic battle will doubtless ensue with The New York Times (NYT).

A more far-fetched scenario is painted by an online executive, who suggests that sites may start trying to lure users with cheap premiums like those employed by gas stations during the price wars of the early 1970s. (But perhaps he and I are the only ones who remember the "collectible" football stamps Sunoco (SUN) gave out back then.) Look, also, for sites that tally lots of steady traffic from the same loyal users—a description that works for both the Times and TMZ.com—to loom as more valuable destinations for advertisers, since they're better bets to avoid traffic erosion, and steadiness is a virtue in an environment of scarcity.

Which brings us back to the broadcast networks' current battle with strike-induced scarcity. They may be temporarily immune to many of these challenges since, even as overall Web traffic growth slows, Web video growth still skyrockets. But I can't help thinking that the networks' best move would be to cough up some concessions to placate the writers and get back to the way things were. Traditional TV arguably has weathered the stampede online better than any of its media peers. There is still scarcity that comes with being just about the only venue that can reach more than 10 million people at once. Preserving that is worth a modestly generous settlement, so long as it comes before viewers flee TV for other entertainment options. Just ask the publishers, who now face scarcity of a much different kind.

For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia.

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