Specialists, newspapers, and dinosaurs
The first was represented by the merger of the New York Stock Exchange (NYSE) with the Archipelago electronic exchange. 21 years ago I worked with the NYSE to analyze electronic exchanges such as Telerate, Quotron, and Bloomberg. I know that some at the NYSE have been worried literally for decades about how its system of trading specialists could survive the efficiency benefits of information technology. But with the Grasso scandal and the continued loss of market share to electronic exchanges, the dam finally burst for the NYSE. And its CEO, John Thain, was able to jolt the NYSE into the 21st century through today’s merger. It now seems inevitable that the NYSE’s specialists will go the way of the Triceratops.
While the NYSE/Archipelago merger gained the biggest share of media attention, a far more profound leap towards extinction took place on the pages of the very medium whose extinction was advanced – newspapers. Specifically, today’s Wall Street Journal reported that Google’s “quarterly advertising revenue now outstrips the advertising revenue of most major newspaper publishers, including New York Times Co., Washington Post Co., Knight Ridder Inc. and Dow Jones & Co., which publishes” the WSJ. Advertising on Google's own Web sites represented 52% of revenue. Google brokers ads that appear on other Web sites, taking a commission on that ad revenue, which averaged about 21% during the quarter.
These simple sentences should strike fear into the heart of every newspaper shareholder and employee. With Google doubling its revenues every year, it is not hard to imagine a time in the not too distant future when newspaper advertising will shrink so much that newspapers will either need to raise their subscription fees dramatically or run out of cash. Consider the Q1 2005 results of the papers mentioned above:
- The New York Times’ ad revenues, which represent 65% of total revenues, were flat and were it not for a non-recurring gain it would have made a very slim profit;
- The Washington Post’s ad revenues, which represented 64% of its 2004 newspaper revenues, actually grew 5% over the year. But The Washington Post is far more diversified in its revenues than the New York Times, relying on newspapers for a relatively paltry 29% of its corporate sales and 25% of its operating income;
- Knight Ridder’s ad revenues, 78% of revenue, squeaked up a mere 3%; and
- Dow Jones’s ad revenues, 53% of sales, shrank 4%.
In short, Google is eating these newspapers’ lunches. And even as their businesses are imploding, some of these family owned dinosaurs are entrenching themselves in complicated Class A and B share structures which protect the founding families’ power – this week Dow Jones approved a measure that would allow members of its founding Bancroft family to maintain voting control of the company even if they sell part of their holdings. Meanwhile their founding business models crumble under pressure from Google, Yahoo! and their Internet peers.
These newspapers’ shareholders might benefit from thinking about the trends that their reporters do such an excellent job of analyzing. The NYSE’s merger with Archipelago and Google’s explosion of advertising revenue offer a stark lesson – the progress of technology can be held back only so long – and when the dam breaks, the damage can be devastating.