The economics of the press

By R.A. | LONDON

THIS week's Free exchange column looks at the work of economist Matthew Gentzkow, of the University of Chicago. Mr Gentzkow was recently named the latest winner of the John Bates Clark medal, given each year to a top American economist under the age of 40. He earned the honour by turning the tools of economic analysis on the news business, with fascinating results:

As Mr Gentzkow points out in recent research, newspapers’ woes are not due entirely to readers’ defection to free alternatives online. Time spent reading newspapers did indeed fall by half between 1980 and 2012, but most of the drop came before 2000, while the web was in its infancy. From 2008 to 2012, as time spent on the web as a whole soared, time spent reading newspapers fell much more slowly. Enchanting cat videos, in short, do not seem to have crowded out much news consumption.

Rather, it is a plunge in advertising that has hit newspapers hardest. Their ad revenue, adjusted for inflation, is back to the level of 1953. From 2008 to 2012 the revenue for every hour readers spent perusing a printed newspaper fell by almost half, as the web provided advertisers with an exploding supply of alternatives. The news is not all bad, Mr Gentzkow reckons: online ads can be better targeted to readers and are increasingly valuable to advertisers. Ad revenue per hour spent looking at newspapers’ online editions actually rose from 2008 to 2012. But readers spend vastly less time with online news stories than with their print counterparts. The web, in other words, is squeezing revenues where attention spans have proved durable and is boosting them where attention is fleeting.

Early in the web era publications needed to decide whether online news would cannibalise their existing business or complement it—and could therefore be given away. Many papers bet that online consumption might whet readers’ appetites for news, much as free airtime on the radio boosts rather than undermines album sales. Some enjoyed a brief rise in profits as a result, as fast-growing online-ad income supplemented earnings from print.

Yet in an analysis in 2007 of an earlier survey of the news market of Washington, DC, Mr Gentzkow found that this symbiosis was superficial. Some voracious readers reacted to free online news by consuming much more news overall. This helped total reading to rise, obscuring a shift among the majority of readers away from paid products towards free ones, Mr Gentzkow found. Had more newspapers charged for online content (as growing numbers, including The Economist, have since opted to do), print readership and profits might have been higher.

The piece goes on to discuss another thread of research, in which Mr Gentzkow examines how reader preferences and competition influence bias and information transmission.

I was unfortunately unable to get into the column a mention of some of Mr Gentzkow's historical work: like this paper, in which he and his co-authors examine whether the identity of the party in control of the local government influenced the contours of the local media market. Americans often worry that the press is becoming increasingly partisan. But consider:

In this paper, we study government influence on the US press from 1869 to 1928, a time when the tension between forces supporting and undermining press freedom was especially strong. All newspapers were privately owned, and newspaper markets were intensely competitive: 470 cities had two or more daily newspapers in 1928, and 25 cities had five or more. Expanding advertising markets, falling costs, and growing literacy created potent commercial incentives...

Yet legal and institutional constraints on government influence remained relatively weak. State officeholders supported loyal newspapers with printing contracts and provided editors and publishers with patronage jobs...Politicians contributed money to start new newspapers and bailed newspapers out when they were in financial trouble...Half of US daily newspapers maintained explicit affiliations with political parties into the 1920s...Whether market forces succeeded in restraining government influence remains a point of contention among historians.

They conclude that market forces mostly did restrain government influence, despite the absurdly deep ties between politics, party, and press. Past performance may not be predictive, of course, but it is at least encouraging to see that the republic can survive such things, or has in the past.