Two months ago, I wrote about Digg.com, a popular news aggregation site. Digg has just 15 employees, but last month it passed the Times in daily online traffic. Craigslist.org, a classified advertising site with just 23 employees, is the fifth most popular property on the Web. One study estimated that it costs Bay Area newspapers $50 million a year in lost ad revenue.
That's just the tip of the iceberg. The economics of social media will chip away at the newspaper business model just as readers are taking flight. The number of households in the U.S. has grown by 40 million in the last 30 years while newspaper circulation has actually declined. About half as many people under 25 read newspapers as people over 65. Readership is declining in all age groups.
A vicious circle has begun that could become a death spiral. Classified advertising, which is the profit engine of most newspapers, is rapidly moving online at little or no cost. As profits decline, newspapers will cut costs, which will drive away subscribers. Lower circulation creates more pressure to cut ad rates, leading to more staff cutbacks. And on and on.
It's no secret that the engine of growth for newspapers is online. While those revenues are growing at a 35% annual clip, it will be a long time before online advertising can sustain newspapers' heavy fixed costs. Meanwhile, new-media competition is beating newspapers with a 95% lower cost structure. Advertisers have not migrated to these sites in droves?but they will. The economics are too compelling.
History has taught us that businesses based on scarcity collapse in the face of abundance. Ten years ago, information was expensive to gather and disseminate. Today, we're overwhelmed by information. Newspapers still operate as if they were the gatekeepers of news, but that gate has swung wide open.
Over the next 20 years or so, most of America's 1,450 daily newspapers will die or be merged out of existence. They will be replaced by many thousands of special-interest online communities. The craft of journalism will change fundamentally in the process.
Gillin substantially expands on this topic in a longer article, titled "The Coming Collapse and Rebirth of Newspaper Journalism," posted at btobonline.com.