Why Jeff Bezos bought the Washington Post

In two words:  paywall consolidation.

Of course there’s no way to know for sure what he has in mind, but the potential should be obvious.  There’s a business opportunity here and the analysis behind it is very similar to the analysis that led him to create Amazon in the first place.

Consider the situation we currently have.  People who want to read the contents of the WSJ, the NYT, the WaPo, and other publications that have paywalls have to sign up separately and pay for all of them individually even though that involves ridiculous duplication of content and redundant expense.  Most customers don’t want more news. They typically have only a certain, very limited, amount of time for reading news.  What they want is more choices and better quality.

So this is not about spending more to increase consumption, this is about spending more to increase choice and most people are very resistant to doing that.  How many people do you know who would be willing to pay for access to the news behind ten paywalls?  Twenty?  Thirty?  Very few, I’ll wager.  In fact, most people refuse to subscribe at all, because the cost of a subscription is not justified by the limited selection of news it provides.

People resent being forced to overpay and they resent having their choices artificially restricted.  Subscribing to the NY Times is like having to sign up for a year’s worth of spinach salad, lemon sole, and chocolate mousse.  No matter how much you like those things, you don’t want that to be your only choice for a year.  Nor, if you want a lot of choices, do you want to have to pay for a year’s supply of every one of them, because you know you’re only going to use a small fraction of what you paid for.

The Amazon Model

When Jeff Bezos looked at the bookstore business, he saw that people went to a bookstore and typically had a choice of a few thousand books.  In a large bookstore, there might be ten or fifteen thousand books available, selected by the chain or store owner from well over a million books.  Out of that tiny selection – less that 2% – the customer then tried to find a suitable book (with, incidentally, utterly pitiful search resources; simply by wandering around and, maybe, asking clerk who might be able to help them).

Bezos realized that the value that the internet offers is the difference between a bookstore with 10,000 books and a bookstore with over a million books.  It’s the difference between physically wandering around, hoping to stumble on something that seems appealing, and then gambling that it will live up to the cover and blurb, versus a very efficient computerized choice and evaluation process, with reviews, with comments, with user ratings, with a recommendation engine that uses your entire buying and satisfaction history, and with all sorts of other auxiliary information at the customer’s fingertips

The advantage that Amazon has over a brick and mortar bookstore chain is not cost, per se.  It may or may not be cheaper to buy a book from Amazon than to by it from your local bookstore, but that’s almost irrelevant as long as the prices are reasonably close.

What the customer gains by shopping at Amazon is choice, convenience, and confidence.  The customer’s not necessarily going to spend more money, though in general when people have more choices and more confidence, they will spend a little more.  But, as with news, most people have a limited amount of time in their lives for books.

The real value is choice itself, the wide range of alternatives that a person can sample and explore.  And that’s what’s needed in the news business – not little ghettos that have to be paid for one at a time.

The Paywall Model

Let’s do a simple thought experiment.  We have 100 newspapers, all with paywalls, all charging $100 a year.  Each provides exclusive coverage of routine local news, along with some “feature” articles, some original coverage of national and international news, and basically the same AP feed that every other paper has.  For simplicity, let’s say each has 100,000 subscribers, but there are only 8 million total readers, not 10 million, because a quarter of the readers subscribe to two paywalls each.

This means 8 million customers are paying a total of $1 billion a year and are getting access to only 1-2% of all the original content produced by the papers.  And let’s stipulate that there are an additional 16 million potential readers who rely on the open web and other sources for news, because the paywalls seem like such a bad bargain to them.

Now let’s consolidate all the papers behind a single paywall, charging $150 per year for unlimited access to every story produced by every paper.  And let’s assume that only half of the tightwads and freeloaders are willing to pay this much for vastly greater access.

Now we have 16 million customers paying a total of $2.4 billion for news.  What’s more, they are much happier about it.  For about $3 a week, they get access to an unlimited smorgasbord of news.  They only have one account to manage and one password to remember.  It’s simple, convenient, cheap, and a tremendous bargain.

Total income more than doubled.  Did costs go up?  No.  One paywall is a lot cheaper to run than 100.  There’s no need for each paper to do its own editing of the AP feed.  And inevitably there will be some reduction in the amount of duplication of reporting efforts.  (Do we really need a hundred reporters cranking out nearly identical stories about every routine political press conference?  Probably not.)

On the other hand, feature reporting will probably increase.  Papers will still be competing for readers, and readers will look for familiar brands and bylines that have provided good writing, accurate reporting, and thoughtful analysis in the past.

From the customer’s point of view, this means not just vastly more choice, but more substance and higher quality.

Notice how close this is to the Amazon model:  if you take an industry and reorganize it so that the value the customer receives is enormously increased, then volume and profits will follow.

Of course, these numbers were completely made up, purely for the convenience of doing the arithmetic, but they illustrate the essential principle quite well.  The reality is a lot more compelling.  Only a handful of papers currently have anything like a viable income from their paywalls, and the total number of paywall subscribers is now much lower than I indicated.  Most papers are, like the Post, losing money.  On the other hand, the total worldwide customer base for an inexpensive all-access subscription is potentially much larger than 16 million.  So the current situation is worse than I indicated in the model and the potential gain is far higher.

The Details

There are lots of possible business models, and many ways in which the funds within a paywall collective might be collected and disbursed.  The simplest model is for one person or company to start buying up money-losing papers until there’s a critical mass that becomes attractive to subscribers even outside the local coverage areas of those papers.  At that point, most of the remaining big city papers will be forced to sell out or close down.

Call this the monopolistic model.  No accounting is necessary, because there’s a single owner, but that owner will still want to know which writers, which editors, which brands, and which local news teams are getting the most readers, so we can assume that there will be internal record keeping of which content generates how many clicks and reads.

The second alternative is the service bureau model, like ASCAP or BMI, in which the papers remain independent, but sign up with the consolidated paywall bureau. Each paper hustles to sign up subscribers and gets a certain percentage of each annual subscription it sells.  In addition, each paper gets a tiny amount each time any subscriber reads a story submitted by that paper.

I’m sure there are other possibilities, but I suspect that we are headed for one of those two, and probably fairly soon.  And I suspect that it will be Jeff Bezos himself who decides which model we’re going to follow.  The first would take much more capital, but capital markets would probably be willing to fund it.  It would also inevitably lead to Bezos being cast as the rapacious capitalist and enemy of press freedom and diversity.

The second approach would be both cheaper and friendlier.  Bezos would end up being cast as the savior of the big city newspaper in a digital age.  It would also be much more of a headache and would produce significantly less profit for Bezos himself.  Which he chooses to do is almost certainly going to be a personal decision, not primarily a financial one.

But I strongly suspect that he will do one or the other, or something similar.  That’s just the kind of mind he has.  He can’t look at a pre-digital industry and NOT see how much more value it could provide for the customer if it were reorganized from scratch.

It’s been intriguing to watch the speculation about why Bezos bought the Post.  I thought from the very beginning that this answer was obvious.  I have been very surprised to see that, after more than four months of speculation, no one has suggested it.  It’s going to be interesting to see how it works out.

And if this isn’t what Bezos had in mind when he bought the Post, it’s still what he ought to do with it.  As a news junky who refuses to pay paywall prices for access to a tiny slice of the news, I really want this to happen, and I’d be delighted to fork out the money to subscribe.

And I don’t think I’m the only one!


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