Author Archives: Michael Griffiths

Newspapers need to stop obsessing about Google

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Matthew Ingram correctly criticizes Nick Carr’s post on Google as a middleman, but unfortunately does so from highly specious grounds. Mr. Carr conceptualizes Google as a new middleman in the news industry, and uses some elementary game theory to explain why newspapers don’t ‘opt-out’ of Google’s index. Essentially, it’s cooperate or die – the same charge Henry Porter levels at Google with a great deal more venom.

Mr. Ingram disagrees that (i) Google is a new middleman, and (ii) Google is demolishing the traditional business model of newspapers.

Does this perception of Google as middleman, stealing traffic and eyeballs from newspapers, really hold water? I don’t think so — and Nick doesn’t provide any real evidence to the contrary. After all, if you search for news about something, Google doesn’t show you anything but a bunch of headlines and excerpts from stories at newspaper websites. How can that simple act be seen as demolishing the business model of newspapers? As far as I’m concerned, if your headline and lede paragraph are the sum total of the value you are providing for readers, then you deserve to lose your business to Google.

Unfortunately, Mr. Ingram somewhat misses the point. While he is correct in saying that Mr. Carr offers no evidence that Google is a middleman, stating that Google “doesn’t shot you anything but a bunch of headlines and excerpts” doesn’t disprove it. In fact, that is precisely what a middleman would do – connect potential readers to the source material. Instead, the determination of Google as a middleman would have more to do with its popularity: how much newspaper traffic comes from Google? If newspaper are dependent on Google for traffic, then Google is a “middleman” for those sites. Google may not be a middleman for all sites, or even the entire newspaper industry; but as soon as the percent of traffic a newspaper site receives from Google reaches some critical mass, Google has “middleman power”. This is particularly true these days as Google’s market share of the search industry is well into ‘monopoly range’ (over 70%), giving Google considerably market power.

Regardless, Mr. Ingram hits the nail on the head when he says that “trying to artificially re-create the kind of scarcity that papers used to enjoy — something that was a function of the control they had over a distribution mechanism, more than anything else — is a mug’s game”.

The problem is that newspapers – each individual firm – is a market-efficient solution to the problem of news creation, aggregation, publication, and distribution before the internet. However, as I’ve pointed out previously, the cost of news publication and distribution has dropped to zero. Furthermore, the creation of middlemen like Google dramatically lowers any barriers to entry, as well as eliminating the “local” nature of news. With the internet, local news is treated no differently than national news (i.e. it’s treated the same way). These two factors implies that (i) we will see the destruction of local newspapers, and (ii) the number of news-creating agents (journalists, small specialized firms) will dramatically increase. We can see the latter with the creation of “blog networks”, which have received considerable funding and in some cases established a monopoly over their niche (e.g. TechCrunch).

As basic economic theory implies, the dramatic increase in competition lowers profits. This is not helped by the simultaneous creation of companies like Craigslist which competes with the formerly highly profitable listings sections of local newspapers, and the injection of middlemen like Google – who, as Nick Carr points out, steal some of the revenue (the advertising pie is finite).

So it’s no surprise that newspapers are struggling; the market has changed, and now newspapers have to live within the new framework. Which means Mr. Ingram’s core point – that “newspapers should spend less time trying to disempower the middleman known as Google, and more time trying to think of ways to add value to what they do” – is correct. But that’s isn’t news. It’s always been about delivering profitable value.

Fast Broadband in the USA: Population Density Matters

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The New York Times Bits blog has a post about how a Japanese company can upgrade their broadband service to 160 megabit/second broadband for $20 a home. Saul Hensell contrasts this with Verizon, who is spending $817 per home. Sadly, Mr. Hensell’s attempt to explain this difference falls short of believability. Instead of “less competition”, “no demand”, and “fear of losing TV revenue” a better explanation is “population density”. Mr. Hensell explains that the super-fast modem in Japan costs $60, up from $30; which leaves us wondering where the $20-upgrade fee comes from. One explanation is that it’s the average price per home – in Tokyo, where J:COM is based. But the population density in Tokyo is 14,410 people per sq mile; compared to 2,181 in New York City, and 409 in New York State. The infrastructure costs per home will therefore be considerably less in Japan.

Henry Porter: a Marxist condemnation of Google misses the point

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Henry Porter attacks Google, on the grounds that Google is an “amoral menace” that threatens “the livelihood of individuals and the future of commercial institutions important to the community”. And by that he means those group of people and companies so essential so the functioning of society, so important a private enterprise as to be equated to government – the Fourth Estate. Newspapers, in short.

Mr. Porter paints Google with the same brush Marxists paint capitalists; as amoral, brutal, and exploitative. Indeed, the language is similar; Google presents those poor newspapers and journalists as a company with which “you comply with its terms or feel the weight of its boot on your windpipe”. And that boot is, according to Mr. Porter, very heavy indeed: newspapers are forced, by those evil laws of competition so essential to capitalism, to publish their material online with only advertising to cover costs. Google is also “in the final analysis a parasite that creates nothing, merely offering little aggregation, lists and the ordering of information generated by people who have invested their capital, skill and time”. Ignoring Mr. Porter’s no doubt unintentional use of the phrase “the final analysis” as opposed to the more accurate “my final analysis”, the depiction of Google as a parasite that feeds off of productive labor is eerily similar to the charge Karl Marx leveled at capitalists.

But moving on from the similarity in the rhetoric between Porter and Marx – there’s a few more choice quotes in there, as well – Mr. Porter makes two errors.

First of all, he claims that the services which Google provides are unproductive; is worth nothing. This is an interesting claim, because what Google does today is very similar to what newspapers were created to do. Newspapers are single firms which “aggregate” a vertical content – namely, news – together and then publish and distribute it to people, making news easy to find. And newspapers make the bulk of the money off of advertising. This is, quite frankly, very similar to what Google does (with regard to news – it does a whole lot more, too). Google aggregate news content, makes it easy to find, and makes money off of advertising. In essence, if newspapers did four jobs, Google “takes over” two of the four, and pushes in on the fourth. The problem is that Google does the “aggregation” of news better (because it can take from multiple sources), takes over distribution, and muscles in on advertising revenue.

The other way to look at this is that Google interjects itself as a middleman between the consumer and the newspaper, and demands a cut for being the middleman. It has this power because Google is a popular consumer destination – or, it has access to the customers. Because Google is a middleman, it takes a share of the advertising revenue. And since the way in which Google operates as a middleman is to aggregate related content, newspapers no longer own the role of the aggregator.

However, Google’s service is worth something. I will leave this as more or less a tautology: Google makes money because Google makes money. There is very little friction online, and low barriers to entry. Google has carved out a market position because it provides a valuable service to consumers; if it didn’t, Google (News) would not be threatening the newspaper industry. People would visit newspaper sites directly. There are other arguments for this, but a neoclassical explanation seems sufficient.

Second, Mr. Porter accuses Google of making money off of the “back of the labour of others”. This is absurd.

One imagines that Mr. Porter has come to the conclusion that the newspapers, and the content they produce, is necessary for Google to sell advertising – that is, to operate as a middleman. However, he neglects to see that while it’s necessary, it is by no means sufficient. For Google to make money, it has to effectively connect consumers to the content they want – that is, it has to provide a valuable service to consumers. Google does not present the newspaper’s content on its own sites, robbing the newspapers of advertising revenue, etc. Instead, Google makes money off of its own labor – that is, the labor required to create and maintain a service which effectively and valuably allows consumers to find the news they want.

In “the final analysis”, to borrow Mr. Porter’s term, it seems as if Mr. Porter wants to divide the world into two groups: people who create content, and people who consume content. Companies like Google, who do not create content, provide nothing valuable and should make no money. While I do not particularly like middlemen myself, I believe that Google is doing more – it is providing search, aggregation, categorization, and other services which people find valuable. Indeed, there are also other solutions (search engines, specialized news sites) who offer similar services – so one cannot even claim that Google has a monopoly, except by default (or a natural monopoly – but that’s a much longer discussion).

I believe that Mr. Porter, and others, should look elsewhere to pin blame for the current malaise of the newspaper industry. As I pointed out in the previous post, there are other explanations for that malaise. And, if you buy into R. Coase’s theory on the Nature of the Firm, then it’s very likely that newspapers are no longer sustainable with their classic business model – the cost of collaboration in the marketplace has dropped to (or below) the cost of collaboration within the newspaper.