AJR  Features
From AJR,   April/May 2009

A Costly Mistake?   

When the Associated Press decided a decade ago to sell its news content to online portals, it may have hastened the decline of the daily newspapers that own the wire service.

By Paul Farhi
Senior contributing writer Paul Farhi (farhip@washpost.com) is a reporter for the Washington Post.     

When Jim Brady went to work as America Online's news director a decade ago, he knew he was joining one of the most important and powerful news organizations in the world. It's not that Brady was commanding an army of journalists and a network of news bureaus. Far from it. AOL's news staff consisted of fewer than 20 people. At the time, the online service generated almost no original news.

But AOL did have something else: access to the Associated Press and that may have been plenty. Throughout the 1990s, millions of AOL subscribers got their daily news fix from its package of wire copy. In time, AOL touted its massive news audience to attract other providers, including ABC News and CBS News, to provide content. But its success was built off of the AP.

AOL wasn't the only online service that was generating giant traffic flows on the diverse news offerings of the AP. For many of the early portals and mass-market hubs of the Web CompuServe, Prodigy, Excite the AP was the go-to news source. Later, it would become a primary news provider for many of today's biggest online "news" giants, such as Yahoo!, MSN.com and Huffingtonpost.com. Even Google, the world's foremost aggregator of Web content, pays for the AP's work and hosts it on its site, instead of merely providing links that send readers to other sites. Hundreds of sites, most of which have no substantial internal newsgathering capability, are in the news business because of the Associated Press.

What's wrong with that picture? Possibly this: All of these sites compete for traffic and ad revenue with Web sites run by the nation's newspapers. Those newspapers, in turn, have owned the Associated Press as a nonprofit news cooperative since 1846. In fact, some of the stories the AP sends out to its digital customers each day are rewritten from newspapers. All of which means that, for years, newspapers have effectively been handing their online competitors one of their chief weapons in the fight for the news audience, the AP wire.

As the financially battered newspaper industry considers various schemes for charging for its digital content (see Prime Time, February/March), some look back ruefully on what news industry blogger Alan Mutter refers to as "the Original Sin" the more or less collective decision to offer free access to news online. The obvious difficulty in all of these newspaper pay proposals is that news has become a commodity, widely and freely available just about everywhere on the Web. The simplest and most persuasive argument against charging for news is this: If you won't offer it to me for free, another site surely will.

Some of this transformation certainly by no means all has been facilitated by the AP's highly successful marketing efforts over the years. No news organization on earth is as extensive or as extensively positioned on the Web. With some 3,000 journalists in 243 bureaus around the world, and thousands of clients, the sun never sets on the Associated Press' newsgathering machine. The organization's own boilerplate description of itself says its text, video, photos and graphics reach more than half of the world's population in a given day.

The implications of the AP's reach in the debate over free content are fairly obvious. Why buy a copy of the New York Times, or bother going to its Web site, when the AP's versions of the same national and international events are available just about everywhere? Who needs the Washington Post's take on politics when the AP's generally comprehensive and thorough reporting suffices? For that matter, why bother with your local paper, or its Web site, when it contains the same generic AP content available in thousands of other places? This thought has already occurred to some newspapers; the recent rash of intent-to-cancel notices submitted by newspapers to the AP has been driven both by displeasure with the cost of AP service and by frustration with the ubiquity of its content.

But what if this genie had stayed contained? What if the AP had just said "no" to the AOLs and Yahoo!s at the dawn of the digital age and in subsequent years? What if the world's largest news organization had decided to limit the distribution of news to its newspaper owners and its longstanding radio and TV clients? What if, in short, the AP had stayed "within the family" and not helped build traffic for the digital upstarts that have contributed to the demise of the traditional media?

Brady, who eventually left AOL to run washingtonpost.com, thinks newspapers "would have stood a better chance" if it had. "For years," he says, "all the [portals] had was AP. It's an intriguing question."

In fact, some people did fight against extending AP content to online competitors. Walter E. Hussman Jr., the feisty owner-publisher of the Arkansas Democrat-Gazette, was a vocal opponent of the practice when he became a member of the AP's board in 2000. By then, he was too late; the board had voted unanimously in 1998 to sell AP content to Yahoo!, its first open Internet customer. (Until then, the AP was available only on services that charged subscription fees, so-called "walled garden" providers such as AOL, CompuServe and Lexis-Nexis.)

"If you go back in time..the conventional wisdom was, 'Gee, this is going to be extra revenue for AP. It's not going to hurt anything,' " says Hussman, who remains on the AP's board. "There was a lot of debate on the board at the time. Some saw it as a problem, some didn't... Well, it is a problem. It's not that the AP [alone] is the problem. But it's part of a bigger problem. When you give away the news, it becomes a commodity. When something becomes a commodity, you lose your pricing power. And that's where we are today" on the Web.

This isn't exactly how people at the AP view the matter. Jim Kennedy, one of the principal architects of the AP's new-media efforts over the years, says the organization resisted selling to open sites for years in deference to its traditional clients. Eventually, however, resistance became futile. As the AP stood by, other news services, principally Reuters, began to establish a presence among the Web's pioneers.

"When the Internet came along, [Reuters] was everyone's news source," says Kennedy, who is the AP's vice president and director of strategic planning. "We were very concerned about that, as was the board. I suppose the objection was that we were creating other points of access to the AP news report. But it was mitigated by the fact that [online sites] had Reuters news. It was a question of substitutes. You weren't keeping news off those Web sites. If we let Reuters have it, we would never have been able to harvest that revenue stream."

There's no question that Reuters, Agence France-Presse or some other wire service would have filled some of the digital news vacuum had the AP refused to play with the portals. But Reuters or AFP clearly weren't adequate substitutes for the AP. Why else would Yahoo! and its brethren come knocking on the AP's door in the first place? "Are [other wire services] really set up to deliver the same depth of national, statewide and local content that AP is?" asks Randy Siegel, president and publisher of Parade magazine, the Sunday newspaper supplement.

Siegel frames the question this way: What would the portals' homepages look like, and their traffic statistics be, if the AP had chosen to refuse "and not help cannibalize an entire generation of newspaper audiences by giving away for free online what newspaper companies are still trying to charge for in print?"

But others say selling AP content was no worse than what newspapers themselves gave away online. "I don't think papers shot themselves in the foot by collectively making AP material available," says Neil Reisner, an associate professor of journalism at Florida International University. "I think they shot themselves in the foot by making themselves available to any news aggregator who tipped its hat their way." When newspaper publishers decided they couldn't charge for content, Reisner says, they started giving it away, and wound up "being sluts who'd put out for any old Google that came their way."

Interestingly, the question of selling the AP report to new competitors has a long history. The AP's newspaper owners resisted the nascent radio industry's attempts in the 1920s and '30s to gain access to the wire; newspapers were adamant about denying news to radio stations, which they saw as a threat. But in 1935, the AP's rival, the United Press, began selling to radio stations, reaping a windfall. The AP eventually dropped its ban in 1941, just in time for radio stations to offer its breaking bulletins about the Japanese attack on Pearl Harbor.

Similarly, the AP's board concluded a decade ago that the cooperative would lose revenue and market share if it continued to refuse to serve the growing Web market a situation that would only get worse. But there was also a self-serving aspect to the decision. Three companies with representatives on the AP's board Tribune, Gannett and now-defunct Knight Ridder owned a portal of their own, Topix, which wanted access to AP material, according to Jay Smith, a former member of the AP board and the recently retired president of Cox Newspapers. Smith says he was supportive of the decision to sell then and now. The policy has been revisited repeatedly by the board since then, adds Tom Curley, the AP's president and chief executive, but has been upheld each time. "If you don't fill the void in the market," Curley says, "someone else will. Your competitor is enfranchised."

Serving the emerging digital competition has proven to be a financially savvy move for the AP. Over the past decade, digital clients have grown from almost nothing into one of the AP's largest revenue sources. Fees from online customers now account for about $125 million annually, or about 17 percent of the $748 million the AP collected from all sources last year. The digital segment has already shot past another of the AP's traditional customers, U.S. broadcasters. It's a key reason why the AP's revenue has tripled during the past 20 years.

All those digital dollars are good for the AP's newspaper owners, argues Jay Smith. At a time when some editors have called for lower rates, these funds have helped the AP reduce its charges to its members, he says. "Rest assured, newspapers would not want to bear the full, 100 percent cost of funding AP," Smith says. "And they would be appropriately upset if AP were to reduce its coverage on top of the coverage reductions...that newspaper members have already made."

For the moment, domestic newspapers the AP's owners and original customers remain the AP's biggest single bloc of clients, accounting for about one-quarter of its sales. But this share is falling fast (it was more than 50 percent in the mid-1980s). And as the financial health of American newspapers deteriorates, providing news to non-newspaper Web sites will almost certainly become the AP's most important business before long.

Curley makes an argument similar to Smith's: The flow of revenue from Internet sources has been a boon to everyone with a stake in the organization. Over the years, he says, it has helped pay for more journalists, funded technology upgrades and kept fees "assessments" in AP-speak in check. "I don't know how you walk away from $100 million or more in revenue," he says. "If we had, we would certainly be a lot smaller."

But as Hussman and others point out, what's been good for the AP may not be so good for its longtime newspaper customers.

As the industry's troubles mount, newspaper executives have complained that the organization is devoting too much of its attention to serving the digital giants that compete with newspapers. While the AP has bolstered its coverage of international news (see "Covering the World," December/January 2008) and financial markets, for example, many small and regional newspapers would prefer that the AP supply more state and regional news, the kind that helps distinguish them from nationally and internationally focused Web sites.

Kennedy and other AP managers point out that the AP still doesn't sell its state and local wires to digital-only outfits. The state wires are packed with material the AP has rewritten from member newspapers, so that work is mostly protected from being delivered straight to portals via the AP. But some repurposed local newspaper content no more than 2 percent winds up in the mix of stories that AP licenses to portals and other commercial customers, according to AP spokesman Paul Colford.

While that sounds negligible, it can be quite meaningful if the 2 percent includes stories that are eye-catching enough. On a recent day, for example, the AP moved a rewritten account of the Atlanta Journal-Constitution's scoop about a local judge dismissing felony drug charges against the rapper Lil Wayne. The AP story promptly wound up on Yahoo!, where far more people saw it than on the Atlanta paper's Web site.

Newspaper frustration with the AP has led to grassroots efforts, such as those among papers in Ohio last year and among New York and New Jersey papers earlier this year, to form regional newsgathering co-operatives (see "Share and Share Alike," February/March). These content-sharing arrangements are essentially mini-APs except stories stay only among the co-op's members, bypassing competitors who would otherwise be able to pull it straight off the AP wire.

The co-ops also offer potential relief for newspapers unhappy with the AP's fees. Newspapers have questioned the value of paying the AP for one-size-fits-all content, especially when newspapers are demanding more local content to distinguish themselves from competitors. A handful of papers New York's Daily News and Minneapolis' Star Tribune among them have done what would have seemed unthinkable a few years ago: They've told the AP they intend to cancel their memberships in 2010 (the AP's rules require two-year's notice on cancellations).

Among the AP's disgruntled newspaper clients is Roger Plothow, editor and publisher of the Post Register in Idaho Falls, Idaho. In a cancellation letter to Curley last summer, Plothow wrote: "We want to receive about a quarter of what we now get from the AP and pay about half our current fee. A quarter of the product for half the price seems fair and doable.... While the AP's value to us has been severely diminished over the years, it still does provide a handful of services that we haven't been able to find elsewhere yet. I'm betting, however, that it's only a matter of time. More likely, we'll use that time to become essentially 100 percent local, which is probably where we're headed eventually, anyway."

"For now," continued Plothow, "the $114,000 assessment for 2009 represents the worst value for anything we purchase, since we use so little of what we're paying for. I admit that I look at that money and think of all the other things we could do with it add reporters, enhance our Web site, maybe even give a raise or two to deserving under-paid employees."

(Curley, the former publisher of USA Today, isn't deaf to such complaints; he says the AP is sensitive to newspapers' hardships and has been keeping a lid on assessments in recent years. A price cut last year, he said, will be followed by another one this year.)

In an interview, Plothow was philosophical about the AP's role in the digital era. While he still has his frustrations with the organization, he agrees with Reisner that its behavior has been no worse or more self-destructive than what newspapers have done to themselves by giving away news. Long an advocate for sheltering news content behind a pay wall (the Post Register's Web site is subscription-only), he asks, "Why should AP be blamed for giving its members' content away to Google and others when [newspapers] have been doing it ourselves? [When] we put our news online for free, we let every Web spider on the planet take that same content, aggregate it on a global scale and leach our revenues, one story at a time....

"Yes, the AP made similar deals with the devil, but the AP is like any elected government. It's only as good as its membership, or as the people who do the voting. I don't blame the AP's management. I blame its board, which has let us down for more than a decade now. That board generally consists of the same people who led our industry into the Internet abyss."

In a sense, the AP is now suffering from the business equivalent of an autoimmune disease, when the body turns on itself. The AP has been strengthened by customers from outside the newspaper circle. But those new customers have helped foster a competitive climate that has weakened the health of newspapers, which could threaten the newsgathering ecosystem that the AP brought into being 163 years ago.

Consider the following: While Yahoo! and its digital brethren pay the AP plenty, in a sense they don't contribute much at all. As a cooperative, the AP relies not only on its staff of reporters and editors to produce the news, but also on its member news organizations to share their reporting. Alan Mutter, a former newspaper editor, asked a sensible question on his blog, Reflections of a Newsosaur (newsosaur.blogspot.com), last year: If newspaper staffs continue to erode, thanks to the digital competition and a cratering economy, where will the AP get some of its news in the future? "It seems fair to hypothesize that AP, as structured today, won't be in the position to pick up the slack as newspaper staffs are thinned," he wrote. "Many of the kinds of stories covered by individual newspapers today simply won't see the light of day in the future."

And so, perhaps belatedly, the AP is beginning to face up to the real cost of free news. In the future, Curley says, it won't be so free.

"The readers and viewers are going to have to pay more," he declares. "Advertising is not there. Advertising will likely be contracting. So there has to be a shift."

He adds, "If I had tried to suggest this a couple of years ago, I'd be hollered out of the room. Last year the realization started to occur. I would say the conversation has now turned from a whisper into a roar. Media CEOs are saying, 'I've got to charge.'"

Curley can foresee someday offering varied levels of access to AP content. While some stories or news videos would remain universally available, others could be coded to provide intermediate access, giving a viewer a brief synopsis. And still other kinds of content could be fully protected, offering perhaps no more than a headline for free.

"It was a dumb idea to think that you could pay the rent on the Internet with advertising alone," Curley says. "Free is not a business model. The Internet means unlimited [ad] inventory, competition and a chaotic branding experience. It's a disaster for most companies."

Curley has started talking with news organizations about developing a cooperative "passport" system for online news that is, giving people access to a wide variety of content and sites for a single payment. The revenue derived from this system could then be apportioned among the members according to the amount of traffic each generates. The idea is beset by a number of questions, most pointedly: How much would advertising revenue suffer when only paying customers are allowed to enter a site and traffic inevitably falls?

Something like this is already up and running via the AP's Mobile News Network. The service makes AP content, plus the work of some 1,200 newspapers, available via mobile devices. Since the application can be synchronized to a user's Zip code, it can serve up news from the local paper, all with links to the paper's Web site. While the application has yet to produce meaningful revenue, it has given newspapers another way to deliver their work to readers.

Says the AP's Kennedy, "We think this turns the old model upside down and inside out."

More generally, such experiments suggest that it might still be possible, in an age of overabundant free news, to build pay walls around the news and derive value from it. Indeed, Jay Smith, the former Cox executive, calls the AP "the next-best solution" for newspapers. "Unlike individual newspapers or newspaper groups, it has the size and scope to take on complex and expensive technology issues," Smith says. "It also occupies the pivot point around which newspapers can work to develop special, customized content that can, indeed, be sold at a premium price to interested audiences. The possibilities, at least to me, seem among the best available to newspapers these days."

And there's a final irony. After years of sending the news everywhere, after helping to build the paradigm-shattering revolution in free news, the AP is now positioning itself as an architect of the fortress that would protect the news, returning greater compensation to the news outlets that produced it. What went around may yet come back around, and this time it might have a price tag.

Paul Farhi (farhip@washpost.com), a Washington Post reporter, writes frequently about the media for the Post and AJR. He wrote about when embattled news executives decide to quit in AJR's February/March issue.