But for me, the kicker is this data point from slide #3:

Subscriptions account for 3% of revenue on average

Editorial expense is 14%, so subscriptions don’t even cover the cost of news gathering. Production and distribution (mostly the stuff related to atoms) is 52% of expenses.

Can we finally put the myth that “consumers pay for news” to bed, for once and for all?

Also, newspapers accounted for slightly more than 35% of all media ad dollars in 1949. By 1989, that was down to about 25%. In 1992, TV (network and cable) finally caught up and then passed newspapers. The other big challenge? Direct mail. Makes sense — and we can argue in another post about unintended consequences of federal legislation that makes direct mail (junk mail) dirt cheap, so to speak.

More evidence that the Internet is not the beast that killed newspapers (although an argument could be made about straws and camel backs): newspaper circulation peaked in 1990 but circulation per capita has been on a steady decline since at least 1960 (since 1950 per household), which reflects competition from other media, particularly television.

Varian, Google’s chief economist, was the keynote speaker earlier today at the Federal Trade Commission’s second round of hearings on the future of journalism. The Federal Communication Commission is also studying the issue. More from PaidContent.

A year ago yesterday I wrote “No More Free Content” in response to repeated chants by old school journos that all would be fine if people would just pay for online news like they always had paid for news.

030910 Hal Varian FTC Preso

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Free Press’ mobile phone campaigns fly under a “Free My Phone” banner and feature a cell phone angelically equipped with white wings. For this specific campaign, though, the phone has been retouched with an angry facial expression and the indecorous exclamation “ETF, WTF?” The ETF stands for the “early termination fees” charged by cell phone carriers. And you know what the WTF stands for.

Free Press is fuming that “carriers still force us to pay outrageous penalties — up to $350 — if we cancel our phone service or switch carriers. There’s one question on everyone’s mind: WTF?” (Not everyone may phrase it that way, but it’s certainly a good question why termination fees are so high. After all, if you want to cancel your cable service, providers don’t hit you with exorbitant fees.)

Apparently, the FCC is asking the same question (though, perhaps, without the “WTF?”): “After Washington threatened to investigate its activity, Verizon began pro-rating its ETF (so you would owe less for every month of your contract). Google and T-Mobile also lowered the combined ETF on the Google phone from a whopping $550 to $350 — still obscene — after a FCC letter of inquiry about their behavior.”

In their letter appealing to the FCC, Free Press makes it case by saying that “for millions of Americans, mobile devices represent the future of the Internet. Mass adoption of new ‘smart’ phones is sparking online innovation and blurring the lines separating the wired and wireless Web.”

More and more consumers are certainly starting to use mobile phones to access the Web, and early termination fees are unreasonably high. This is all true enough. But do early termination fees really block access to information? Do they have any impact on the quality of the media broadcast through mobile platforms?

I sympathize with the urge to reduce termination fees and applaud Free Press for lobbying the FCC. But what remains unmentioned in this campaign is that these fees are symptoms of a monopolistic power play by carriers and device makers like Apple. What really will “free my phone” is to take players vying for dominance in the smartphone market to task when they create closed platforms with consumers locked into services and subscriptions, whether they want to or not. Even if AT&T would let iPhone users walk away from their service, they still can’t take their iPhone and use it on a different network, or sell it to a friend for use without voice or data services (as an iPod touch).

Perhaps this is beyond the scope of the current Free Press campaign, but the focus on early termination fees seems like a populist cheap shot, narrowly missing the real target: open platforms and full consumer ownership of smartphones.

This post was first published, in slightly longer form, on the blog @peterlux.

Peter Luyckx is the Managing Editor at Flip the Media. Recently, he worked as a Web Producer and Editor at Microsoft’s MSN Health & Fitness and MSN Shopping (now Bing). He co-founded and published the environmental newsletter The Frugal Environmentalist. He is a graduate student in the MCDM program and can be followed on Twitter @ peterlux.

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I’ve been wrong. At least in the short run.

Not wrong about the difference in distribution costs. That’s a no-brainer.

But I was wrong to expect an immediate drop in monthly (or annual) subscription fees. I was unconsciously holding constant the advertising revenue side of the equation. Let me explain.

Let’s imagine a (very simplified) budget for a newspaper that looks like this (roughly based on data from Media Economics):

• Revenue: 70%, advertising; 30%, subscriptions
• Costs: 40%, printing/distribution; 20%, overhead (administration, advertising, circulation); 30%, taxes, profit, interest; 10%, editorial

In this model, if subscription income went to zero and advertising income stayed constant, theoretically the shift from print to all-digital would result in savings that should mean the organization could break even. But in the interim — or maybe for the foreseeable future — there will be demand for a printed product. So we have to add costs — the web server, bandwidth, employees to manage the web. The ideal model might look like this:

• Costs: 45%, printing/distribution/web; 17%, overhead (administration, advertising, circulation); 30%, taxes, profit, interest; 8%, editorial

But we know that operating margins are down. So a more realistic model might be:

• Costs: 50%, printing/distribution/web; 20%, overhead (administration, advertising, circulation); 20%, taxes, profit, interest; 10%, editorial

We also know that advertising revenue is down-down-down. So today that revenue model might look like this:

• Revenue: 40%, print advertising; 15%, online advertising; 45%, subscriptions

In other words, subscription income becomes more important as advertising revenue falls.

I’m pretty sure that the demand for core newspaper subscribers is inelastic: that means that a 1% increase in subscription prices will yield less than a 1% decline in subscribers*, but it will yield a decline. Each time there is a drop in print subscribers, the per unit cost of an individual newspaper rises, as the product is characterized by high fixed costs: the cost to create the content is the same for 100 as it is for 1 million copies. This model reflects what economists call public goods; it is a characteristic of any information good, from software to TV shows, from music to movies.

That’s why I think that traditional magazines or newspapers delivered via the iPad or Kindle must be more “costly” than they would be if they existed solely in a digital form. So don’t be surprised to see a digital subscription equal the print one. I don’t like it — especially since I hold a bias that a handful of executives drive up overhead costs and that the relatively modern goal of 20+% ROI is not only unsustainable, it’s unreasonable.

I am not saying that I believe the iPad and Kindle will “save” newspapers. I think a break up of the news media monopoly in the U.S. would be a good thing. I’m saying that I think I understand why subscription fees are going to be relatively high in the short-run. Remember, every time print subscriber numbers fall, the per unit price of the printed paper goes up for everyone else.

This back-of-the-envelope analysis also helps explain why small(ish) companies are able to launch successful online-only news products: limited overhead, limited distribution costs, and access to advertisers that were priced out of the daily newspaper market. Finally, this analysis could also be used to support various (generally unpopular) proposals that Congress throw a bone to the newspaper industry.

Somebody please show me that I’m wrong.

*It also means that a 1% drop in subscription rates will yield less than 1% increase in number of subscribers. See this paper from 1976 (pdf).

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But when I tried to watch Part 1 of the Opening Ceremonies, up came this message, along with a sign-in screen:

“You have selected a premium video (e.g. live stream or full-event replay).”

So I played along, and selected my HOME provider as Comcast.  Unfortunately, I had audaciously canceled my cable subscription a few months back, because (a) I wasn’t watching that much TV; (b) My $10 antenna was pulling basic network channels in pristine HD; (c) I could stream Netflix, Hulu, Amazon, etc. to my PS3 via an inexpensive add-on called PlayOn.

I still pay $100 a month for internet and phone, but that wasn’t enough for Comcast, or NBC.  “It appears you don’t have a Comcast Video Subscription” declared the passive-aggressive pop-up.  Thanks to IP blocking, I wasn’t able to watch any of the Canadian broadcast coverage online from CTV.  So I was relegated to the lame highlights reel.  As one blogger commented: “Those whom don’t pay for cable — SOL.”

I’ve been saying this for months, but now it seems to be coming true: the powers-that-be do not want the web to disrupt the lucrative world of cable fees.  Hulu is next: I predict you’re going to need a cable subscription to watch content on this still-free streaming video site.  Advertising (”digital pennies”) isn’t enough to cover the costs of big-budget broadcast’s production and distribution (”analog dollars”).  NBC owns half of Hulu, and Comcast will soon own NBC — do you see where this is going?  And what does this mean for the future of free broadcast TV, which we’ve had since the 1940’s?

Obviously, we should acknowledge that these are for-profit companies that need to monetize their content.  NBC has had a stranglehold on the Olympics for years, delaying coverage into prime time in order to maximize its massive payout to the International Olympic Committee (it’s said the network will lose $250 million on the Vancouver games).  As I write this, we’re watching NBC (on TV) as it plays up the drama of Apolo Ohno’s race for the gold in 1500m speed skating (pre-recorded), while Ohno has already declared his feelings via Twitter about how things ended:

Wow…historical night for me…I have absolutely NO REGRETS…thank you all for supporting me…I’m on cloud 9…skated a brutal hard race!

The Internet is clearly harder to control, hence a recent, increasing propensity for platform “lock-up” (NBC.com’s use of Facebook Connect), and potentially the next chapter in the story of the web with the emergence of a new order in dominant players (what is Apple’s iPad but a really sophisticated, consumption-friendly content appliance?).  The Wild West of the Internet is quickly becoming suburbanized.

Originally posted to Storyteller Uprising.

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NBC Uses Facebook Connect As An Exclusive Login

I won’t be commenting on any NBC Olympics blog posts, or giving them a thumbs-up. That’s because the only option for commenting voting is Facebook Connect.

Unlike the federal government, which has also privileged Facebook Connect upon occasion, NBC is a corporation. It has no “taxpayer public interest” that should mandate the option of an open — non-proprietary, non-commercial — platform such as OpenID. But it should have advocates on its web dev staff who can convince their bosses that consumer choice in matters like this is in the corporation’s best interest.

NBC is telling its web audience that it only wants to hear from people who are part of the Facebook ecosystem. I believe that is short-sighted. I know that Facebook may be the 800-pound social networking gorilla, but not everyone in the U.S. — or the world, for that matter — has opted in. Moreover, many people who do have Facebook accounts choose to use the service minimally.

And given Facebook’s change-of-heart on which information it will decide tomorrow should be public (even though it was once-upon-a-time private or controlled by the individual), why would I entrust it with additional information about my digital meanderings?

Maybe that’s why the comments seem sparse in the “Get In The Games” blog — the one that has as its subtitle “Share your thoughts on all the action at the 2010 Olympic Winter Games.” I checked out today’s post (no comments) and Friday’s (only 14). There’s a thumbs up (but no thumb down) button — but no indication that anyone has actually endorsed either post. It was clicking the “like” link as a test (I wanted to see what I’d need to do regarding registration) that lead to the Facebook Connect popup.

Just say no to any commercial (or government!) web site that provides only one proprietary way to interact — whether it’s Facebook Connect or Twitter or Google. Well, do more than say no silently — speak up and tell them why you are saying no.

And think twice before using Facebook Connect.

This post first appeared at WiredPen

Addendum: I realized last night that I had only tried to vote, not comment. The login set my teeth on such edge that I forgot to double-check the comment rules. Who in their right mind makes it harder to vote than to comment? To vote, you have to log in with Facebook Connect. To comment, you can be anonymous, which is the most harebrained system I can imagine.

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Zynga Homepage

According to my Facebook News Feed, we are facing an agricultural crisis: I have more than 20 friends whose FarmVille crops need fertilizer. However, since FarmVille’s debut last June, the popular Facebook application has done more than flood my feed with farm-related requests. It has enabled its creator, Zynga, to reportedly rake in more than $200 million in 2009. But how can such revenues be possible if social gaming is supposed to be free? The answer lies in the sale of virtual goods and the games’ use of compulsion loops.

In social games, users are encouraged to enhance their farms or strengthen their mafias through the purchase of virtual goods. These can include fanciful structures (Ferris wheels), seasonal items (mistletoe-shooters) or tools (tractors) that enrich gameplay. Such goods allow users to customize their profiles, advance more quickly in the game or “keep up” with other players. In short, virtual goods are a graphic extension of common user behaviors such as self-expression or competitiveness.

For users who are patient, some of these goods can be earned after long hours of play and hoarding in-game profits. However, most are only available in exchange for a large quantity of the game’s virtual currency, which the player can buy for real money. For instance, for $5 Zynga will provide a user with 7,500 Farm Coins. Now, if you think it unlikely anyone would pay for such intangibles, you’d be wrong: TechCrunch reports that Americans spent nearly $30 million on virtual goods in November and December of 2009.  Again, why would so many players, who would never describe themselves as gamers, make such a purchase?  It is because they have fallen into what is known as a compulsion loop.

Venture capitalist Tim Chang described how a compulsion loop works in an interview with GamesBeat in October 2009:  “You get your users addicted. You start annoying them with how long it takes to get something done. That triggers impulse buys of [virtual] goods that will save them time.” Virtual goods and compulsion loops are not unique to social gaming on Facebook.  For years, gamers have used similar systems to purchase cooler weapons or stronger armor in MMORPGs (massively multiplayer online role-playing games) such as World of Warcraft (WoW). But there’s a difference in scale; thanks to the wide reach of free-to-use social networks, Zynga’s FarmVille reached 11 million daily active users (DAUs) two months after its release, whereas it took WoW four years to reach that many subscribers. Zynga CEO Mark Pincus sees his games as ongoing services that users pay for in small increments: “Our story has been about finding games people could play forever and giving them a reason to do it.”

Zynga is cashing in on what Chang describes as the k factor, or the “inherent virality of the application,” that makes all the micropayments add up to millions of dollars in company revenues. As of this writing, Zynga has reportedly over 66 million daily active users (DAUs), and although it is difficult to determine how many of those users are purchasers, consider this: If 1% of Zynga’s DAUs spent $5 each, the total amount would be $3,300,000.  Now, whether such profits are truly sustainable remains to be seen. However, with other game companies such as Electronics Arts (developers of The Sims and Rock Band) investing in social gaming, the virtual goods market is likely to stay open for business.

Megan Jeffrey is a graduate student in the MCDM program at the University of Washington. She has a bachelor’s degree in journalism and public relations from Cal Poly University, San Luis Obispo. She has worked as an account assistant for Verdin Marketing Ink, a community manager for Serra Media and as a HubPages.com columnist. Megan is currently the social media strategist for the UW School of Drama.

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Those who support the decision argue that the inclusion of Flash would make the limitations of the hardware more obvious; as a CPU hog, Flash would slow down the browsing experience of the iPhone and the iPad and drain battery life. But businesses (Apple included) make engineering trade-offs all the time. Flash’s issues in Safari hardly seem like deal breakers and would be worthwhile trade-off for the value that it brings to a media consumption platform.

I don’t think Apple decided to pick a public fight with Adobe—arguably its most valuable third-party developer—because supporting Flash was too technically challenging. Rather, it likely has to do with Apple’s relationship with the content industry. Flash is verboten on the iPhone OS for the same reason that saving MP3s is verboten. So Apple can placate content owners and maintain the viability of its iTunes business.

If Flash were enabled on the iPhone OS, how long would it take for someone to put a streaming, Flash-based player in front of a new music service? Apple is the leading retailer of music in the United States. Why should it enable competition in a business where it has no peers and on a platform it has no reason to cede?  It simply doesn’t make sense for Apple to undercut its iTunes business and jeopardize its special status among content owners. It’s even possible that Apple’s agreements with rights holders expressly forbid it.

If user experience were the sole consideration, I’m sure Apple would gladly provide a Flash-enabled browser. While Apple may have some valid engineering concerns, they strike me as a convenient cover. Disabling Flash helps Apple control content on the platform by forcing it through iTunes or other approved software. This has to be clear to a firm who’s CEO sits on the board at Disney.

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