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From AJR,   October 1997  issue

Dancing With The Devil   

Should newspapers enter into online partnerships with Microsoft or go it alone?

By John Morton
John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

Ten years from now, when local Web sites likely will be big businesses, many newspaper publishers will think back to the time when Microsoft's Bill Gates tried to gull them into buying the Brooklyn Bridge.

That's a metaphor, of course. What Gates really did earlier this year was to try to persuade newspaper people (while speaking at their annual convention in Chicago) that Microsoft's forays into local Web sites around the country pose no threat to local newspaper franchises.

ýicrosoft's sites do not offer local news or classifieds, Gates said, and newspapers should not be concerned about Microsoft's or other non-newspaper sites unless they start hiring away local reporters. Microsoft merely wants to see "where this technology can go," Gates was quoted as saying in Editor & Publisher.

ýell, where this technology can go is right to the heart of the newspaper industry's most profitable revenue streams – classified and retail advertising. Newspapers are expected to capture about $36 billion in local advertising revenue this year, and that is an attractive target even for a company as large as Microsoft.

Microsoft now makes its money by developing and selling software, and the company's computer operating system essentially has a stranglehold on the personal computer industry. But lately the company has been covering other bases with investments in cable, in technology that marries computers with television sets, in online entertainment and an online magazine, and in alliances with NBC and other companies. It is as if, since the future is unknowable, Microsoft wants to be moving in every direction information technology could possibly go.

Moreover, it surely has occurred to Microsoft that what drives money-making in the media business is not operating systems or software but advertising. Just as developing and selling software proved to be a better business than making and selling computers, so will selling advertising be a better business than developing the systems for presenting advertising on the Internet.

Today, the typical local daily newspaper – by a vast margin – provides more news and captures more advertising revenue than all other local media outlets combined. What could change this dominant position is the emergence of the Internet as a substitute source for the information – news and advertising – now appearing in newspapers.

How are newspapers responding to this potential threat to their information franchises? So far, many newspapers are doing nothing. Of 1,500 or so dailies, only about 500 currently have Web sites, although this number is rapidly growing.

Some are succumbing to Microsoft's entreaties to join forces by providing information to Microsoft's Sidewalk online city guides in a revenue-sharing arrangement. William Dean Singleton, head of MediaNews Group and its more than two dozen papers, is among those favoring this approach.

The rationale for Microsoft is that obtaining information already gathered by newspapers is relatively cheap when compared to the expense of assembling local staffs and eliminates the local newspaper as an online competitor. For newspapers, an alliance precludes the prospect of Microsoft moving into a market as a full-blown rival while maintaining a newspaper's local hegemony.

Other newspaper companies aren't so sanguine about linking up with Microsoft because it means giving away a significant part of what a newspaper now has exclusively. According to this view, a newspaper should develop its own Internet site, reinforcing the newspaper's brand name and its role as the principal information supplier to the market.

Knight-Ridder is a leading proponent of going it alone. At a recent conference, Robert Ingle, Knight-Ridder's new-media chief, was quoted as saying, "You dance with the devil and you pay the price. Bill Gates is one smart and persistent businessman, and it seems very clear that he believes the newspaper business model and revenue sources to be vulnerable." Ingle suggested Gates is being disingenuous when he says Microsoft does not seek classified advertising, noting that the company last year ran an advertisement in Automotive Week asserting that a car dealership could put its entire budget on Microsoft's CarPoint Web site for less than the cost of a single newspaper advertisement.

Whether newspapers decide to join or oppose Microsoft, it is clear the company has its eye on some, perhaps virtually all, of the newspaper industry's revenue sources. Those who believe otherwise truly are likely candidates for buying that bridge in Brooklyn.