The Economics of Information and the Newspaper Merger

The economics of information shows that whatever happens, the solution our ailing newspapers to the digital revolution will not be a perfect one. 

An important notion in economic analysis is of a ‘public good’ (which may be a service). Not THE public good (a.k.a. the ‘common good’), which is shared and beneficial for all or most members of a given community. A public good in this narrow sense has two key features: it is ‘non-excludable’ and it is ‘non-rivalrous’. Non-excludable means that non-paying consumers cannot be prevented from accessing it. Non-rivalrous means that it may be consumed by one consumer without preventing simultaneous consumption by others.

Sorry about these tricky definitions, but they are really important for some purposes – such as understanding the proposed merger of the two newspaper chains. So on with the exposition.

The standard economic example of a public good is a lighthouse. You cannot exclude non-payers from using it; one using it does not prevent others from using it too. It is difficult for a commercial market to supply a public good in adequate quantities. As a result, lighthouses are usually paid for by a public agency. Neoliberals tend to get tetchy because public goods are a justification for government – bother!

Perhaps the most important public good is information. In principle you cannot exclude people from using it; my using the information does not prevent anyone else from using too.

Even so, information is likely to require a resource cost for its production and delivery. At which point there does not seem to be any simple solution to organising information for the public benefit.

To give a couple of practical examples. It was a long struggle by writers to get secure payments for their efforts. Essentially copyright allows the author (the producer of the information) to charge for its use. The right to charge is limited (usually to 50 or 70 years after death – don’t ask me why such a long term).

Without a copyright, it is argued, authors would have no incentive to write. (I am not sure that is true, but certainly there would be less incentive.) So the purchase of a book by a recent writer includes a royalty to reimburse her or him for the cost of writing, even though welfare economics says that is sub-optimal because the higher price discourages the purchase of the book and the access to the  public good of the information. (It does say, however, that the purchaser should pay for the resource cost of the artefact/book which delivers the information.)

A second example is a pharmaceutical which is a molecular encapsulation of a piece of information. The cost of producing that information is horrendous, particularly because there is a testing process to ensure that the drug is safe. The cost of the molecule itself – the drug – is negligible in comparison. Yet typically pharmaceuticals whose patents have not expired are very expensive because the drug company is trying to recover the cost of developing the medication.

The complexity of the issue was well illustrated by HIV-Aids drugs whose prices were out of reach of the poor nations where the disease was rampant. The compromise was to charge poor and rich countries differently (and hope there was no too much smuggling from one to the other).

The commercial market provides many goods and services with a reasonable degree of efficiency and equity (providing certain conditions are met). But there is no such easy solution where information is involved. The ideal is that it should be provided free with only the delivery system being charged for. But what about the costs of creating the information?

Newspapers devised an ingenious solution to pay the costs of their producing information (news). Generally media subscriptions (we meet them again as pay-walls) prove to be insufficient to produce the required information. So the surplus from advertising revenue funded the production; while advertisers got the audiences they sought, attracted by the news.

Regrettably the solution has broken down under the digital revolution. One fundamental change has been that the costs of delivery have reduced, because of news websites and because the costs from copy to print have gone down as ‘middlemen’ have been eliminated.

But the bigger change is that advertising has been decoupled from news, partly following the shift of small classifieds to the web, to sites like eBay and Trademe. Commercial advertising remains but that too is down as advertisers shift to web-based sites.

The industry says that only half of their advertising is effective but they do not know which half. The success proportion is probably really much smaller, but the web offers opportunities to better target relevant audiences at lower cost. The opportunities include non-traditional ones such as search engines and the social media.

The collapse of newspaper advertising revenue is not being covered by subscription revenue. Even the website of the Financial Times with 550,000 plus subscribers is struggling to generate enough revenue to fund its news-teams. Moreover the walls leak – the FT has one of the ‘hardest’ pay-walls (i.e. difficult to get around without payment). Economic analysis should welcome the leaks – information should be free – were there not a cost of producing it.

Had advertising revenue held up, newspapers could probably have coped with the digital revolution with much the same difficulty as many other industries, switching over to websites as alternative news delivery, perhaps slowly losing audiences as the young turned to other sources.

With the fall in advertising revenue, the challenge became much greater, if near impossible to overcome. Among the alternate producers of news is commercial broadcasting where the advertising fall-off does not seem to have been as great. There may be state funded providers such as the BBC and RNZ. Another possibility is trust funds – London’s Guardian is a notable example ,although it reserves are not unlimited and falling. Donations contribute but only to a small extent.

A New Zealand response is for the two main paper chains to merge. Does this reduce competition? A silly argument – which has not prevented it being put forward – is that individual newspapers are already monopolies in individual regional markets. But their news websites are national and competing.

Presumably a merger means the Stuff and New Zealand Herald websites will be merged with some cost savings. Perhaps a paywall will be introduced although the charge will have to be low given there are alternatives such as those provided by RNZ, TVNZ and TV3. (Blogs which focus on opinion provide low quality news. The legendry editor of The Guardian, C. P. Scott, wrote ‘comment is free, but facts are sacred’. His almost as eminent successor, Alan Rushbridger, editing in a more commercial age might have said ‘comment is cheap, facts are expensive.’.)

Presumably the merger of the two chains will result in a merger of newsrooms. Fairfax may not deliver much in Auckland but it currently has a newsroom there; APN maintains a presence in Wellington, home of parliament; both could be consolidated into one. Less news will be produced and there wont be the competition that occurs between existing newsrooms. Arguably though, without some rationalisation there could be even less news produced.

The merger has to go before the Commerce Commission. Approval will depend upon interpretation of the law, but underpinning it will be issues of analysis and fact. A key fact in all mergers is the definition of the market. The above analysis suggests there are at least three distinct markets. One is characterised by the public demand for information/news. A second is the market for advertising – although not all advertising is relevant to the news market. A third is the production of news. A nice issue might be whether it would be better to have less news from competing producers rather than more by a monopoly.

The Commerce Commission will be greatly challenged by the ending of the symbiotic relationship that has traditionally existed between advertising, delivery systems and the production of news. Whatever its decision it will be an imperfect one; the peculiarities of information as a public good ensure that.