Mainstream media meltdown! Newspapers will never be the same. But what happens to democracy if the Web business model can't fund journalism?

The decline of journalism over the past generation, which has accelerated in the last decade, would be a less pressing concern if the existing news media were making a successful digital transition, or if the Internet was spawning a credible replacement. The evidence suggests on balance that emerging digital news media are hav­ing a negligible effect upon the crisis in journalism. It certainly is not due to a lack of effort, as commercial news media have been obsessed with the Internet since the 1990s; they understood that it was going to be the future.

For traditional news media, it has been a very rocky digital road. A 2012 report based on proprietary data and in-depth interviews with executives at a dozen major news media companies found “the shift to replace losses in print ad revenue with new digital revenue is taking longer and proving more difficult than executives want and at the current rate most newspapers con­tinue to contract at alarming speed.” For every seven dollars of print advertis­ing lost there is only one new dollar of Internet ad revenues; the executives said it “remains an uphill and existential struggle.” The newspaper indus­try’s percentage of overall Internet advertising fell to 10 percent in 2011, an all-time low; it had been 17 percent in 2003. “There’s no doubt we’re going out of business right now,” one executive said. By all accounts, the “clock continues to tick” for old media to find a way to survive online in the inexo­rable transition to the Internet.

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It is both tragic and pathetic to see dedicated journalists obsessing over how to keep their newsrooms alive. “We have to find a business model that works—we have to,” Christian Science Monitor editor Marshall Ingwerson told NYU media scholar Rodney Benson. “This is the word I hated but in the last five years has become universal—we have to monetize. How do we monetize what we do? Same as everybody else.” Journalists have been in­undated with lectures that they “require an embrace of new technologies and a ruthless but necessary shedding of the old ways of doing business. It should have happened already. It must happen now.”

The assumption is that there has to be a way to make profits doing digi­tal journalism if journalists and owners simply wise up and get with the program. Over the past few years, many American newspapers have been purchased on the cheap by hedge funds—nearly a third of the twenty-five largest dailies are now so owned—the subtext being that these business ge­niuses can generate profits where dummkopf journalism industry types have failed. As John Paton, the journalist-cum-CEO for a newspaper company purchased by the Alden Global Capital hedge fund in 2011, put it: “We have had 15 years to figure out the web and, as an industry, we newspaper people are no good at it.” Apparently, neither are the hedge fund managers. David Carr wrote in July 2012 that “hedge funds, which thought they had bought in at the bottom, are scrambling for exits that don’t exist.”

Few wish to consider the obvious question: what if it is simply impossible to generate commercially viable popular journalism online, let alone jour­nalism adequate for a self-governing people? What then?

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In the meantime, news media corporations work furiously to find their digital Shangri-La. The primary course for traditional news media has been to pursue digital advertising dollars, with disappointing results. Most websites for publishers and broadcasters primarily run generic banner ads, “among the least trusted sources of commercial information,” according to consumer surveys. These are rapidly falling out of favor with advertisers. Digital news sites have been laggards in “using technology that would cus­tomize ads based on their users’ online behavior.” Moreover, as much as 80 percent of digital newspaper advertising is placed through networks that take a 50 percent cut of the action. This means a paper’s revenues for a thou­sand viewers (CPM in industry parlance) can be as little as 2 or 3 percent of its CPM for print readers. Worse yet, much of local marketing—once the bread and butter of news media—as it goes digi­tal does not support media content sites or independent content sites of any kind. “A consensus has emerged that website advertising,” a respected 2011 industry report said, “its rates driven down by massive available inventory, will probably never sustain a comprehensive daily news report.”

However, digital advertising provided newspapers over $3 billion in rev­enues in 2011, far exceeding all other forms of Internet revenues. It is not going to be abandoned even if no one expects it to grow very much.

With the possibility fading for digital advertising to serve as a panacea, at­tention has returned to making people pay for their news online.This has worked for a handful of prominent newspapers like the Wall Street Journal and Financial Times, with well-heeled readers and specialized business con­tent. The New York Times has also done well, enrolling nearly four hundred thousand subscribers since it introduced its pay system in 2011. The Wash­ington Post, on the other hand, dismisses paywalls as “backwards-looking.” CEO Don Graham claims they can work only for papers like the Times and the Journal that have paid circulation spread across the nation. Pay-walls have been a flop otherwise, and a study of three dozen papers that at­tempted to do so found only 1 percent of users opted to pay. Nevertheless, by 2012 some 20 percent of America’s 1,400 daily newspapers were planning to charge for digital access, and some firms, such as Gannett, claimed they were generating significant revenue. They are inspired by the success of dailies doing so in places like Finland and Slovakia. The key, apparently, is to be able to offer a lot of content at a low price—ideally by numerous news­papers combined—which might be easier in a small nation with a distinct language than in the United States, where English-language material grows like kudzu online. Whether there is an endgame is unclear—subscribers have never provided sufficient revenues for news media—and it appears as much an act of desperation as vision. Of course, there is no time to be con­cerned with the externality that paywalls invariably cut many people off from access to the news, with all that suggests about their undemocratic character.

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The latest hope is that the rapid emergence of mobile communication will open up new ways to monetize content. But the point of professional journalism in its idealized form was to insulate the news from commercialism, marketing, and political pressures and to produce the necessary information for citizens to understand and participate effectively in their societies. In theory, some people were not privileged over others as legitimate consumers of journalism. That is why it was democratic. It was a public service with an am­biguous relationship with commercialism; hence the professional firewall. Journalists made their judgment calls based on professional education and training, not commercial considerations. That is why people could trust it. The core problem with all these efforts to make journalism pay online is that they accelerate the commercialization of journalism, degrading its integrity and its function as a public service. The cure may be worse than the disease.

So it is that top editors at the venerable Washington Post “have embraced the view that studying [Internet user] traffic patterns can be a useful way to determine where to focus the paper’s resources.” They are desperate to find the content that will appeal to desired consumers and to the advertisers who wish to reach affluent consumers. In this relationship, advertisers hold all the trump cards, and the news media have little leverage. In the emerg­ing era of “smart” advertising, this means shaping the content to meet the Internet profiles of desired users, even personalizing news stories alongside personalized ads. The best stories for selling tend to be soft news. “The chal­lenge,” Joseph Turow writes, has been “trying to figure out how to carry out editorial personalization in a way that wouldn’t cause audiences to freak out.” He points out that all the logic of the system points to advertisers de­manding that they get sympathetic editorial mention as well. Research shows that that makes for a far more successful sales pitch. As one frustrated editor put it, “This crap may be groovy, but it still stinks.”

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Nothing much changes when one looks at the new companies that have emerged to use the Internet as a battering ram to enter the news media in­dustry. “All these people who forecast the end of newspapers because of the decline in advertising and users being unwilling to pay for content can’t explain how the new Internet journalism websites are going to survive or even thrive—since most of them, too, need paid ads and/or subscribers,” said Greg Mitchell, the longtime editor of Editor & Publisher. “I just don’t get it.”

The new commercial ventures range from “content farms” to apps to major efforts to establish newsrooms and re-create a sense of news media online. The content farms, like Demand Media and Associated Content, have “embraced the attrition of the church-state boundary and turned it into a business model.” These firms hire freelancers to produce articles quickly and cheaply to respond to popular search terms, and then sell advertising to appear next to the article. The needs of advertisers drive the entire pro­cess. The key to commercial success is producing an immense amount of material inexpensively; the leading content farms can generate thousands of pieces of text and video on a daily basis.

Pulse has emerged as one of the leading commercial news apps, with 13 million smartphone users who get it for free. Pulse aggregates other firms’ news and makes its money working with advertisers and merchants. It is moving into “branded-content advertising,” by which ads get slotted next to appropriate stories for individualized users. The outstanding question is whether Pulse will generate a workable business model and then can estab­lish a monopoly position due to its scale and network effects, like Twitter. By 2012 it moved aggressively to provide local news—with the ability to place advertising in real time that addresses one’s exact location—and become a global operation; the service is already available in eight languages. Pulse does not generate original news, and its founders concede that they don’t know much about journalism. Nor do any of the other mobile aggregators generate any original journalism, but some of their revenues will probably end up in the hands of other news media and may eventually contribute to paying actual journalists.

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The journalism company that has made the greatest impact online has been AOL, which was tenuously married to Time Warner for a decade until it went independent again in 2009. AOL purchased Patch around then, to be a “hyperlocal” digital news service, with branches in some 860 communities, supported by advertising. In other words, it would be like a digital newspaper but without the massive production expenses. A detailed and largely sympa­thetic Columbia Journalism Review account of a Patch editor in upstate New York described how the service logically focused on more affluent communi­ties. After months of keeping the editorial and commercial sides distinct, that strategy was thrown overboard as the enterprise foundered; editors worked with the ad staff, among other things “drumming up ad sales leads.” The editors were then directed to favor content that would get people to the site and also to cultivate “user-generated free content.” Patch lost $100 million in 2011, and is estimated to have lost another $150 million in 2012. As David Carr puts it, Patch “is no closer to cracking the code.” While it may eventu­ally get into the black, it will do so at the expense of sacrificing much of the journalistic vision it had at its launch.

Patch is evolving toward the Huffington Post business model: rely on vol­unteer labor, aggregate content from other media, emphasize sex and celeb­rities to juice the traffic, and generate some of your own content if you can afford to do so. As fate had it, AOL purchased the Huffington Post in 2011. An internal memo on journalism from AOL CEO Tim Armstrong at the time captured the commercial logic: he ordered the company’s editors to evaluate all future stories on the basis of “traffic potential, revenue potential, edit quality and turnaround time.” All stories, he stressed, are to be evaluated according to their “profitability consideration.” As one 2011 media indus­try assessment of the future of journalism put it, this is “good news for public relations professionals who are trying to pitch stories,” because “these sites will be looking for more content to fill their pages.”

Armstrong’s memo raises the question: What happens when a story— like that of a distant war or the privatization of a local water utility—fails to achieve proper “traffic potential, revenue potential”? What if no PR spin­meister wants to push it and provide free content? Does it disappear off the radar—and with it the ability of citizens to know what is being done in their name but without their informed consent? That might be a smooth ride for the CEOs, but it’s a clunker for a democratic society.

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Two aspects of capitalism and the Internet loom large in digital journal­ism. First, if anyone can make money doing online journalism, it will almost certainly be as a very large, centralized operation, probably a monopoly or close to it. The Internet has proven to be more effective at centralizing cor­porate control than it has been at enhancing decentralization, at least in news media. “We are probably far more centralized than we were in the past,” one executive said.

To some extent it is because human beings are capable of meaningfully visiting only a small number of websites on a regular basis. The Google search mechanism encourages concentration because sites that do not end up on the first or second page of a search effectively do not exist. As Michael Wolff puts it in Wired, “The top 10 Web sites accounted for 31 percent of US pageviews in 2001, 40 percent in 2006, and about 75 percent in 2010.” By 2012, according to the Web traffic measurer Experian hitwise, 35 percent of all Web visits now go to Google, Microsoft, Yahoo!, and Facebook. (The same firms get two thirds of online ad revenue.)

The grand irony of the Internet is that what was once regarded as an agent of diversity, choice, and competition has become an engine of monopoly. As to journalism, it is unclear if anyone can make a go of it commercially, beyond material aimed at the wealthy and the business community.

The second aspect of the capitalism-Internet nexus at the heart of the online journalism business model is an understanding that the wages paid to journalists can be slashed dramatically, while workloads can be increased to levels never before seen. Armstrong’s memo states that all of AOL’s jour­nalistic employees will be required to produce “five to 10 stories per day.” Tim Rutten of the Los Angeles Times captured the essence of this require­ment in his assessment of AOL’s 2011 purchase of the Huffington Post: “To grasp the Huffington Post’s business model, picture a galley rowed by slaves and commanded by pirates.” In the “new-media landscape,” he wrote, “it’s already clear that the merger will push more journalists more deeply into the tragically expanding low-wage sector of our increasingly brutal economy.”

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With massive unemployment and dismal prospects, the extreme down­ward pressure on wages and working conditions for journalists is the two-ton elephant that just climbed into democracy’s bed. “In the new media,” Rutten concludes, we find “many of the worst abuses of the old economy’s indus­trial capitalism—the sweatshop, the speedup, and piecework; huge profits for the owners; desperation, drudgery, and exploitation for the workers. No child labor, yet, but if there were more page views in it ...” David Watts Barton left the Sacramento Bee in 2007 to work at the Sacramento Press, a hyperlocal digital news operation. In the Columbia Journalism Review, he described the extreme difficulty of producing credible journalism based on volunteer labor. “Editing costs money. Citizen journalists are cheap and they can even be good. but even great journalists need some editing; citi­zen journalists need a lot of it. ... Without journalism jobs, we don’t have journalism.”

Commercial media’s attitude toward journalism labor became apparent in the Journatic brouhaha following a whistleblower’s exposé aired on public radio’s This American Life in the summer of 2012. Journatic is a shadowy “hyperlocal content provider” that reportedly eschews publicity to the point where its site contains code that lessens its appearance in Google search results. It contracts with dozens of U.S. commercial news media to provide local coverage, including Newsday, the Houston Chronicle, the San Fran­cisco Chronicle, and the Gatehouse newspaper chain. The Journatic busi­ness model is premised on the idea that doing routine local news with actual paid reporters is no longer a viable option for many American news media, so it provides a discount alternative.

Journatic’s local coverage is provided by low-paid writers and freelancers in the United States and, ironically enough, the Philippines, where Jour­natic hires writers “able to commit to 250 pieces/week minimum” at 35 to 40 cents a piece. Journatic CEO Brian Timpone says that the compensation was “more than most places in the Philippines.” They produce stories under bogus “American-sounding bylines” that make it seem as if they are based in the local community running the stories. Part of the reason aliases are used is that it would be suspicious to readers and other journalists if they saw the number of articles a single writer produced, not to mention the importance of maintaining the illusion that these are local reporters.

Not surprisingly, these stories are “little more than rewritten news re­leases,” as the whistleblower put it. They also contain a considerable number of errors, fabrications, and instances of plagiarism. But to the casual reader of a Journatic client, it would seem the newspaper or website was chock-full of original local material.

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The Tribune Company, which owns the Chicago Tribune, invested in Journatic in April 2012 and outsourced coverage for the Chicago area’s ninety TribLocal websites and twenty-two weekly editions to it. TribLocal laid off half of its forty staffers when it contracted with Journatic, and its output tripled. When word got out, ninety members of the Chicago Tribune newsroom presented a petition protesting Journatic’s role. On July 13 the company indefinitely suspended use of Journatic in its papers, but the hyper-local content provider is still very much in action in other markets, waiting for the bad publicity to blow over.

This is hardly the end of the story. A Pasadena publisher, James MacPher­son, stated he wanted to “defend the concept” of outsourcing, claiming that “Journatic has done it quite shabbily.” His firm had begun outsourcing journalism to India in 2007, but the program was postponed soon thereafter as he was apparently ahead of his time. Macpherson uses Internet software developed by Amazon in 2012 to contract with freelance reporters all over the world and says, “I outsource virtually everything. I am primarily looking for individuals who I can pay a lower rate to do a lot of work.” He concedes there are limitations: “There is no way someone in Manila can possibly un­derstand what is happening in Pasadena.” But the economics are such that Macpherson argues outsourcing is inevitable:

As journalism becomes increasingly rote, the logical question becomes who needs human labor at all? StatSheet, a subsidiary of Automated In­sights, uses algorithms to turn numerical data into narrative articles for its 418 sports websites. Automated Insights now also computer-generates ten thousand to twenty thousand articles per week for a real estate website, and the emerging computer-generated content industry is convinced that algo­rithms will become a key part of writing news stories in the near future. “I am sure a journalist could do a better job writing an article than a machine,” says a real estate agency CEO who contracted with Automated Insights, “but what I’m looking for is quantity at a certain quality.”

In short, the Internet does not alleviate the tensions between commercial­ism and journalism; it magnifies them. With labor severely underpaid or unpaid, research concludes that the original journalism provided by the In­ternet gravitates to what is easy and fun, tending to “focus on lifestyle topics, such as entertainment, retail, and sports, not on hard news.” As traditional journalism disintegrates, no models for making Web journalism—even bad journalism—profitable at anywhere near the level necessary for a credible popular news media have been developed, and there is no reason to expect any in the future.

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There is probably no better evidence that journalism is a public good than the fact that none of America’s financial geniuses can figure out how to make money off it. The comparison to education is striking. When manag­ers apply market logic to schools, it fails, because education is a cooperative public service, not a business. Corporatized schools throw underachieving, hard-to-teach kids overboard, discontinue expensive programs, bombard stu­dents with endless tests, and then attack teacher salaries and unions as the main impediment to “success.” No one has ever made profits doing qual­ity education—for-profit education companies seize public funds and make their money by not teaching. In digital news, the same dynamic is producing the same results, and leads to the same conclusion.

Excerpted from "Digital Disconnect: How Capitalism Is Turning the Internet Against Democracy" - Copyright © 2013 by Robert W. McChesney. Reprinted by permission of The New Press. www.thenewpress.com