Nathan Myhrvold, former CTO of Microsoft and perhaps the smartest guy around, gives his take on the future of newspapers. From Bloomberg. 

Deadline
Approaches on Survival of Newspapers

By Nathan Myhrvold
– Jan 22, 2012

These days, one of the
saddest stories on Page 1 is about newspapers themselves. All over the country,
venerable old dailies are shedding reporters, editors and other workers.

In my hometown, the Seattle
Post-Intelligencer
stopped its presses for good in 2009, as did the Rocky Mountain
News, in Denver. In the past few years, major papers have gone bankrupt in
Philadelphia, Minneapolis
and other cities, as circulation and advertising revenue have plummeted. Even
the proud New
York Times recently needed a $250 million loan from Carlos Slim, a Mexican
multibillionaire.

Just a decade ago,
newspapers were still the primary conduit for local information. Where else
could the neighborhood furniture store advertise a sale; the local factory
attract new workers; or town residents sell their used cars or sofas? The paper
used to be dropped daily on almost every stoop in town.

For much of the early 20th
century, the newspaper business was both profitable and competitive. New York City still had seven dailies in 1960, spanning a full range of
political philosophy and journalistic style. Movies such as “Citizen Kane”
and “The
Front Page” portrayed an era when driven newspapermen would do anything to
get a story. The U.K.’s rough-and-tumble Fleet Street remains something of a
throwback to that era, as demonstrated by the recent phone-hacking scandal —
which led to the demise of yet another century-old paper, the News of the
World.

Selling the News

The great winnowing of the
industry began slowly, as the rise of television siphoned off much of the
national advertising business. Even then, most cities retained one or two
papers operating profitably as monopolies or duopolies. Newsrooms took this
privileged economic position for granted; they began thinking of themselves as selling
news rather than ads. Competition based on journalism, they rationalized, would
drive readership, and ad revenue would follow.

In market research I did at
Microsoft Corp. in the early 1990s, I estimated that the Wall Street
Journal took in about 75 cents per copy from subscribers, $1.25 at the
newsstand and a whopping $5 per copy from ads. The ad revenue let them run a
far bigger newsroom than subscribers were paying for. It was a bargain for
readers and a boon for journalists, who were able to travel to distant
assignments and do in-depth reporting.

The trouble was, the tie
between excellent journalism and revenue worked only so long as the ads did.
New online formats gutted the newspaper-ad business. Why pore over tiny print
looking for a job in the want ads when you can tap a few keywords into
monster.com, then click through and apply? Why pay a steep per-character rate
for a classified when you can hawk a whole garage full of used stuff on EBay or
Craigslist for free? In so many ways, Match.com, OkCupid.com and hundreds of
others offer a better experience than personal ads can. RottenTomatoes.com
tells you what movies to watch, Fandango.com lets you book the tickets, and
OpenTable.com gets you a dinner reservation.

Newspaper websites tried
offering these services, too, but it wasn’t their strength, and they failed to
keep up. It didn’t help that online sites such as Google News could serve up
most of the news without ever hiring a reporter; they just aggregate
information from many free news sites. Newspapers’ trump card had been the
local information that they alone offered, but the Internet was simultaneously
better at both local and global information distribution.

At least when television
burst on the scene in the 1950s, it largely spared classified and truly local
advertising. It also created its own journalism; some of the revenue that
television diverted from newspapers was reinvested in TV news. In contrast, the
new forms of Internet
advertising rarely support news gathering, or content creation of any sort.
Instead, most of the ad money now goes to infrastructure technology that
connects people with ads, search
engines such as Google, or social networks such as Facebook.

Who Will Pay

The dilemma for early 21st
century journalism is this: Who will pay for the news? This column is part of
an experiment in one direction. Bloomberg makes its money providing proprietary
financial information to subscribers, and this business has not been hurt by
the Internet, so it can afford to offer a good old- fashioned op-ed page
without ad subsidy. As the saying goes, it’s nice work if you can get it. But
this model won’t extend very far because there aren’t a long list of similarly
situated data providers dying to support journalism.

Filmmakers and book
publishers have never relied much on advertising revenue; when we want to read
“The Girl With the Dragon Tattoo,” or watch “Avatar,”
we know we need to pay without an ad subsidy. Would the public be willing to
pay full price for journalism, too?

A few newspapers — the Economist, the Wall
Street Journal, the New York Times — have started selling digital-only
subscriptions. It’s a first step, but they still plainly consider their print
editions to be the gold standard, so they generate little unique digital
content and fail to tap the full potential of online news. Tellingly, their
current web revenue falls far short of what it would take to support their
newsrooms. Meanwhile, most online news sites are still free, which tends to
undercut the business model of those who charge.

The situation reminds me of
the early 1970s, when cable arrived in our neighborhood, and the adults in my
family were arguing over why anybody would pay for something they could already
get free. After all, with a set of rabbit ears, you could tune in three major
networks and plenty of local affiliates, all supported entirely by ads.

Quality Cable TV

Initially, cable providers
offered the same channels as conventional broadcasters did, so picture quality
was the selling point. Cable cut down on ghosts and snow and having to fuss
with an antenna. Once improved reception got cable-TV operators going, they
shifted their selling proposition toward quality — and quantity — of
programming. Ted Turner
started CNN. Others started HBO, MTV and Discovery, betting that
consumers would pay for a kind of television they never had before.

It took 20 years, but the
cable-TV industry prevailed. A generation grew up thinking “I want my MTV.”
Today, 85 percent of American households subscribe to cable, satellite or
telephone-company TV, paying an average of $82 a month, according to the
research firm SNL Kagan. This revenue has been a bonanza for TV production,
financing some of the best television shows ever made, all outside the original
broadcast networks.

Could newspaper journalism
likewise entice readers to pay for online news? People like quality journalism,
so I believe that, ultimately, they can be persuaded to pay for it. But as with
cable, the price will have to start low; it can then inch upward as the public
gradually accepts the new business model.

The question is whether
paid-subscription news sites can make the transition fast enough to make up for
their plummeting ad revenue. It takes time to persuade people to pay for
something they expect to get free. Ultimately, the change will happen, but
maybe not fast enough to save some of the great institutions of newspaper
journalism.

(Nathan Myhrvold, the
former chief strategist and chief technology officer at Microsoft Corp. and the
founder and chief executive officer of Intellectual Ventures,
is a Bloomberg View columnist. The opinions expressed are his own.)