The news industry is a two-sided market, meaning that it requires two different groups to purchase the product for two different reasons, in this case, advertisers and readers. You can’t get advertisers without readers and you can’t make a product for readers without advertisers.
In the pre-internet age, advertisers and audiences lacked information about each other, alternative news sources and alternative products. As a young boy, getting my monthly National Geographic was exciting. As far as I knew, it was the only way to learn about the exotic world beyond the oceans. Of course there were other publications, but learning about them required a special effort beyond my means.
Advertisers, in turn, had few methods for reaching people interested in the broader world back then. So, the few advertisements NatGeo carried were for cruises and other travel services. Maybe there were other advertising outlets, but were any as convenient as placing one ad in National Geographic?
And then the internet came, and we all know what happened next.
The result of the internet’s information explosion is often talked about in terms of information availability, but to understand the new reality of the news business, it’s probably more appropriate to talk about information arbitrage. The most compelling news comes from arbitrage: You are providing information to people who desire that information. The higher the demand, or the lower the availability, the more compelling (or valuable) the news.
In large markets, news tends to be a low barrier to entry business: There are lots of experts and out-of-work reporters available to gather news. The reason is that lots of people want to live or work in these large markets. For example, lots of people want to live and work in New York, Chicago, Los Angeles. As a result, there’s lots of high quality people available to report and produce the news. In Chicago, a significant news event might attract eight local news cameras, four news radio mics, and three or four digital/print news outlets. Smaller events will attract maybe a quarter of that, but still four outlets is nothing to sneeze at.
In Rochester, New York, four news outlets would be a huge turnout.
Which market has more opportunity for arbitrage?
This is exactly what Warren Buffett is talking about when he talks about his purchase of General Media, which mostly consists of small market newspapers:
If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job.
The context here is important: In small markets, Buffett says there no other good way to learn about what’s happening in your community, at all.
His is a tricky distinction, since news of all kinds tends to have a great deal of indirect competition. City Hall news bleeds into neighborhood news bleeds into prep sports news bleeds into city sports news. In a major market, the lines tend to blur and everyone becomes a competitor at some level (basically what Patch and DNAInfo are counting on). But in smaller markets, there are fewer distinctions and thus less competition.
Many, many news startups miss the concept of information arbitrage: What new information are they providing that no other outlet is not already? Worse yet, there are many large news organizations that continue to miss this distinction too, believing that by simply building up a big audience, they can make the big bucks. For instance in 2010, Business Insider had over 6 million monthly uniques with only $2,127 in profit for the year. Sure they’re in growth mode, but when does the money really roll in?
Henry Luce famously soaked up red ink from Sports Illustrated for ten years before it became profitable, and a five year runway was de rigeur for most magazines before they became profitable back in the day: But once print magazines found an audience, they were expected to coast along profitably for 20-30 years. But that model is out the window now; how can anyone plan for more than two years at a time?
Another example, Huffington Post, has a reported 45 million monthly uniques but hasn’t made a profit since 2010. Sure it’s a huge audience, but from an advertiser’s perspective, so what? With today’s ad exchanges a buyer can order up any audience desired with just about any demo/psychographic imaginable. What is Huffington Post arbitraging for advertisers? Nothing.
The simple question of, “How are you going to make money?” keeps getting avoided. And the list of offenders is getting longer: AOL with HuffPo and Patch.com, Joe Ricketts with DNAInfo, Chris Hughes with The New Republic, Sam Zell with Tribune. Billionaire backing is not the same as a business model.
If you’re running a news operation, if you know what you’re arbitraging, then you know how you can make money. That’s what Warren Buffett was talking about.