Thursday, September 8, 2011

Morning Brief: The TechCrunch M&A lesson; Daily Herald becomes first Chicago paper to go behind paywall

The soap opera that is AOL continues. Fortune's Dan Primack says that TechCrunch founder Michael Arrington will be fired.

It is a strangely written story, the lead is in the sixth paragraph:

Instead, Fortune has learned that AOL executives have decided to terminate Arrington. It is unclear how this will officially occur. Maybe a pink slip. Maybe Arrington submits a (public?) letter of resignation. Maybe Tim Armstrong simply gives Arrington a phone call, and he quickly dashes off a note to TechCrunch employees on his iPad.
Frankly I don't really want to dwell on the details of the story so you dan click the link for what Primack has to say. But I think there is a major lesson to be learned from the TechCrunch saga, and the story of nearly all new media acquisitions: you can measure the value of the acquired asset in the traditional way media companies do.

In general, a media company acquiring another media asset looks at two factors: earnings and revenue. But with new media acquisitions the media company often brings in other factors like the amount of traffic the website generates (thinking that the audience size is being under exploited) and the segment the media target attracts, or as an alternative to its own print product (think CareerBuilder).

The problem is that sometimes these sights are more like acquiring a mid-sized radio station. Think of the scene in Working Girl where the buyer is informed that a hot DJ may leave the properties and that his deal might be worthless if they can't resign him to a contract. The inference is that the talent is what makes the property valuable.

This applies to many new websites, as well. That is why the New York Times acquisition of the blog FiveThirtyEight was essentially a contract deal with Nate Silver. No Nate, no deal.

This is also one reason I have been a big advocate of newspaper and magazine companies making acquisitions of app development start-ups: they don't need the revenue and income of the company – there is probably very little of that – but they need the development teams. This would be a true investment, something that can bring value to all the company's other properties, not just a blip on the P&L.

“It is our intention that no one without a subscription will have ongoing access to the Daily Herald newspaper content, or any other Daily Herald digital platform,” said Douglas K. Ray, chairman, publisher and CEO of Paddock Publications.

And with that lead paragraph, the Daily Herald, a Chicago area daily newspaper announced last week that it would go behind a paywall. In fact, unlike other newspapers that are offering print readers free access to digital content, the Daily Herald will be charging print readers as well – $1 per week. Non-print subscribers will be charge $19.99 per month for digital access.

“As many newspapers are starting to understand, we cannot afford to give away our content any longer online,” Ray said. “The reason is simple, unavoidable economics. Newspapers all over the country are realizing that they cannot rely solely on the income from advertisers to create and sustain the kind of journalism the community deserves, as new media have taken an increasingly larger slice of the available marketing dollars.”

In no other market can I recall a business using its own deficiencies as a reason for pricing its products. Imagine for a second if we had a company that makes widgets. It has been producing these widgets for years but now finds itself in a situation where fewer people want those widgets, and a similar product has come out that is giving the same thing out for free. In response to the situation the widget maker decides that he can't stay in business in this environment so what does he do? He increases his prices!

This is why the "other guys is doing it, too" line is always included in these announcements. See, the publisher says, this may seem like a strange idea but everyone else is doing it, too. In their announcement, the Daily Herald talks about the paywalls constructed by the New York Times and other papers, as if readers in suburban Chicago have been comparing the Daily Herald to the Times.

The good news is that the announcement generated plenty of web traffic, with over 1,400 comments on the story so far.

"This isn't the New York Times or the Wall Street Journal," says one commenter. "I get home delivery and I'm not about to pay for online viewing. That's what really gets my goat. Looks like I need to reconsider my home delivery, too."

Another: "With all the "Patch" news and community sites out there, DH basically will drive the nail in the coffin. Might as well have changed your name to Netscape or AOL."

Ouch, that one hurt.