Selective Cuttings

The publishing business model (Graphic paper #2)

August 8, 2014

Continuing the discussion of the Canadian graphic paper sector, we explore an important concept: why the fates of all graphic paper grades are fundamentally linked. The key idea is that graphic paper is used for the production of printed communications technologies for two purposes: 1) to provide news and entertainment services (generating revenue from newspaper and magazine subscriptions, books, etc.) and 2) to connect people who want to sell things to the pool of subscribers (generating revenue through classified ads, flyers, directories, etc.). With this in mind, the business model of publishers becomes clear: use the large up-front costs associated with building a printing press to limit competition while leveraging the low marginal costs of production to establish and defend a strong brand identity based on reputation, editorial angle, market coverage (etc). This sort of business model favors market domination by a relatively small number of large players focused along brand-identity lines, and a host of smaller competitors competing at a regional level. Consider Canada’s newspaper market for the past 20 years: most consumers have the option of choosing between the Globe and Mail, the National Post and a Sun media production, and then one or two local papers that compete on editorial angle, language, politics, etc. This business model generated high profits for established publishers for centuries.

Critically, in today’s world, starting a website, such as a blog, has a very low up-front cost. However, the development of the internet in and of itself did not challenge graphic paper for communications technology supremacy. It has been well established that four other key technologies were necessary:

  • the development of online classified ads (such as Craigslist)
  • the development of page-rank online searching by Google founders Larry Page and Sergey Brin,
  • the development of key-word bidding auctions (by Goto.com)
  • the integration of online advertising revenue splitting between key-word auctioneers and blogs (think, "Ads by Google")

These four uncoordinated events (though Google appears at several points in the chain) allowed websites to break into both the advertising and news/entertainment markets by enabling users to access content (online ads/information) quickly and easily (page-rank searching), trusting that they will arrive at high-quality sites (key-word bidding auctions) while providing the revenue to sustain all of the above (ad revenue splitting).

These innovations unleashed millions of new competitors against the traditional print media. Most of the new market entrants never made any money, and went out of business relatively quickly. However, many survived, and (again, using those four innovations) have roundly out-competed traditional publishing because of their lower marginal costs. That is, even though the cost of printing one additional newspaper is low, the cost of one more link is even lower, not to mention the costs of distribution, the benefits of user-characteristic tailored advertising, the faster news cycle, etc.

Now, one could (and should, if one were writing a book) complicate this picture further, by discussing the public and private investments in telecommunications that made web-connectivity widely available, the technical developments that lowered the costs of computing power, the public policies that lower the cost of electricity, and the globalization of labour and capital flows that have simultaneously made the low-cost manufacture of portable web-connected devices possible while creating new markets for them several billion people strong, among others.

That is to say, it is a confluence of four (or dozens, or hundreds, depending on the scope of inquiry) uncoordinated developments that created the decline in traditional print media, and with it, demand for graphic paper. Fundamentally, this occurred through opening up what had been two markets with high barriers to entry to a large volume of low-cost competition. This has had an enormous impact on demand for graphic paper the subject of our next post.