The era of the Web browser’s dominance is coming to a close. And the Internet’s founding ideology—that information wants to be free, and that attempts to constrain it are not only hopeless but immoral— suddenly seems naive and stale in the new age of apps, smart phones, and pricing plans. What will this mean for the future of the media—and of the Web itself?
By Michael Hirschorn
Image credit: Jason Schneider
As Chris Anderson pointed out in a moment of non-hyperbole in his book Free, the phrase Information wants to be free was never meant to be the rallying cry it turned into. It was first uttered by Stewart Brand at a hacker conference in 1984, and it came with a significant disclaimer: that information also wants to be expensive, because it can be so important (see “Information Wants to Be Paid For,” in this issue). With the long tail of Brand’s dictum chopped off, the phrase Information wants to be free—dissected, debated, reconstituted as a global democratic rallying cry against monsters of the political, business, and media elites—became perhaps the most powerful meme of the past quarter century; so powerful, in fact, that multibillion-dollar corporations destroyed their own businesses at its altar.
It’s a bit of a Schrödinger’s-cat situation when you try to determine what would have happened if we had not bought into the IWTBF mantra, but by the time digital culture exploded into the mainstream with the introduction first of the Mosaic browser and then of Netscape Navigator and Internet Explorer, in the mid-’90s, free was already an idea only the very old or very obtuse dared to contradict. As far back as the mid-’80s, digital freedom was a cause célèbre on the Northern California–based Whole Earth ’Lectronic Link (known as the WELL), the wildly influential bulletin-board service that brought together mostly West Coast cyberspace pioneers to discuss matters of the day.
It gives you a feel for the WELL’s gestalt to know that Brand, who founded the WELL, was also behind the Long Now Foundation, which promotes the idea of a consciousness-expanding 10,000-year clock. Thrilling, intense, uncompromising, at times borderline self-parodically Talmudic, the WELL had roots in the same peculiar convergence of hippiedom and techno-savantism that created Silicon Valley, but it also called out, consciously and un-, to a neo-Jeffersonian idea of the digital pioneer as a kind of virtual sodbuster. The WELL-ite Howard Rheingold, in his 1993 digital manifesto, The Virtual Community: Homesteading on the Electronic Frontier, described himself as being “colonized” (in a good way) by his virtual community. The libertarian activist John Perry Barlow, an early member of the WELL’s board of directors,was a co-founder of the Electronic Frontier Foundation, a digital version of the ACLU.
At the WELL, the core gospel of an open Web was upheld with such rigor that when one of its more prolific members, Time magazine’s Philip Elmer-DeWitt, published a scare-the-old-folks cover story on cyber porn in 1995, which carried the implication that some measure of online censorship might not be a bad thing, he and his apostasy were torn to pieces by his fellow WELL-ites with breathtaking relentlessness. At the time, the episode was notable for being one of the first examples of the Web’s ability to fact-check, and keep in check, the mainstream media—it turned out that the study on which Time’s exclusive report was based was inaccurate, and its results were wildly overstated. In retrospect, what seems notable is the fervor with which digital correctness—the idea that the unencumbered flow of everything, including porn, must be defended—was being enforced. In the WELL’s hierarchy of values, pure freedom was an immutable principle, even if the underlying truth (that porn of all kinds was and would be increasingly ubiquitous on the Web, with actual real-life consequences) was ugly and incontestable.
Digital freedom, of the monetary and First Amendment varieties, may in retrospect have become our era’s version of Manifest Destiny, our Turner thesis. Embracing digital freedom was an exaltation, a kind of noble calling. In a smart essay in the journal Fast Capitalism in 2005, Jack Shuler shows how similar the rhetoric of the 1990s digital frontier was to that of the 19th-century frontier era. It’s a short jump from John L. O’Sullivan in 1839—“The far-reaching, the boundless will be the era of American greatness. In its magnificent domain of space and time, the nation of many nations is destined to manifest to mankind the excellence of divine principles”—to Kevin Kelly, the pioneering conceptualizer of the “hive mind” and a founding editor of Wired, writing in Harper’s in 1994, “A recurring vision swirls in the shared mind of the Net, a vision that nearly every member glimpses, if only momentarily: of wiring human and artificial minds into one planetary soul.” Two years later Barlow, a self- described advocate for “online colonists,” got down on bended knee, doublet unbraced, to beseech us mere analog mortals: “Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone … You have no sovereignty where we gather.”
I take you on this quick tour not to make fun of futurism past (I have only slightly less-purple skeletons in my closet), but to point out how an idea that we have largely taken for granted is in fact the product of a very specific ideology. Despite its Department of Defense origins, the matrixed, hyperlinked Internet was both cause and effect of the libertarian ethos of Silicon Valley. The open-source mentality, in theory if not always in practice, proved useful for the tech and Internet worlds. Facebook and Twitter achieved massive scale quickly by creating an open system accessible to outside developers, though that openness is at times more about branding than anything else—as Twitter’s fellow travelers are now finding out. Mainframe behemoths like IBM wave the bloody shirt of Linux, the nonprofit open-source competitor of Microsoft Windows, any time they need to prove their bona fides to the tech community. Ironically, only the “old” entertainment and media industries, it seems, took open and free literally, striving to prove that they were fit for the digital era’s freewheeling information/entertainment bazaar by making their most expensively produced products available for free on the Internet. As a result, they undermined in little more than a decade a value proposition they had spent more than a century building up.
But now, it seems, things are changing all over again. The shift of the digital frontier from the Web, where the browser ruled supreme, to the smart phone, where the app and the pricing plan now hold sway, signals a radical shift from openness to a degree of closed-ness that would have been remarkable even before 1995. In the U.S., there are only three major cell-phone networks, a handful of smart-phone makers, and just one Apple, a company that has spent the entire Internet era fighting the idea of open (as anyone who has tried to move legally purchased digital downloads among devices can attest). As far back as the ’80s, when Apple launched the desktop-publishing revolution, the company has always made the case that the bourgeois comforts of an artfully constructed end-to-end solution, despite its limits, were superior to the freedom and danger of the digital badlands.
Apple, for once, is swimming with the tide. After 15 years of fruitless experimentation, media companies are realizing that an advertising-supported model is not the way to succeed on the Web and they are, at last, seeking to get consumers to pay for their content. They are operating on the largely correct assumption that people will be more likely to pay for consumer-friendly apps via the iPad, and a multitude of competing devices due out this year, than they are to subscribe to the same old kludgy Web site they have been using freely for years. As a result, media companies will soon be pushing their best and most timely content through their apps instead of their Web sites. Meanwhile, video-content services are finding that they don’t even need to bother with the Web and the browser. Netflix, for one, is well on its way to sending movies and TV shows directly to TV sets, making their customers’ experience virtually indistinguishable from ordering up on-demand shows by remote control. It’s far from a given that this shift will generate the kinds of revenue media companies are used to: for under-30s whelped on free content, the prospect of paying hundreds or thousands of dollars yearly for print, audio, and video (on expensive new devices that require paying AT&T $30 a month) is not going to be an easy sell.
Yet lack of uptake by young people will hardly stop the rush to apps. There’s too much potential upside. And with Apple in the driver’s seat, the rhetoric of “free” is becoming notably more muted. In rolling out the iPad, Steve Jobs has been aggressive and, to date, unapologetic about policing apps deemed unacceptable for the iPad store (or apps whose creators hold opinions that are anathema to Apple’s corporate interests or sense of universal order). And Apple has so far refused to enable Flash, the Adobe technology that runs 75 percent of all videos seen on the Web, and is launching its own ad-sales platform, presumably to control and monetize traffic on its devices.
On a more conceptual level, the move from the browser model to the app model (where content is more likely to be accessed via smartly curated “stores” like iTunes, Amazon, or Netflix) signals the first real taming of the Wild Digital West. Apple’s version of the West has nice white picket fences, clapboard houses, morals police, and lots of clean, well-organized places to spend money. (The Internet, it seems, is finally safe for Rupert Murdoch.) These shifts are seemingly subtle, but they may prove profound. Google, which built its once monopolistic position by harnessing the chaos of Web search, has been forced to move aggressively to preserve its business model against this new competition: it has teamed up with the Apple-scorned Flash; is making conciliatory gestures to the content owners it once patronized; has reached a deal to purchase a mobile ad-sales platform; and is promoting its own vision of the future based on cloud computing. Phones using its open-source smart-phone operating system, Android, are outselling the iPhone. Even so, Google still needs for the Web, however it’s accessed, to remain central—because without contextual search advertising, Google ceases to matter. Smart phones in general, and the iPad more pointedly, are not driven by search.
All of this suggests that the era of browser dominance is coming to a close. Twitter, like other recent-vintage social networks, is barely bothering with its Web site; its smart-phone app is more fully featured. The independent TweetDeck, which collates feeds across multiple social networks, is not browser-based. As app-based usage climbs at the expense of the browser and as more content creators put their text, audio, and video behind pay walls, it will be interesting to see what happens to the Twitterverse and blogosphere, which piggyback on, and draw creative juice from, their ability to link to free Web content. If they don’t end up licensing original content, networks such as Twitter and Facebook will become purely communication vehicles. At first glance, Web sites like The Daily Beast and The Huffington Post will have a hard time once they lose their ability to hypertext their digests; on second glance, they will have an opportunity to sop up some of the traffic that once went to their now-paid rivals. Google, meanwhile, is hoping to find ways to link through pay walls and across platforms, but this model will clearly not be the delightfully free-form open plain of the early Web. Years from now, we may look back at these past 15 years as a discrete (and thrillingly indiscreet) chapter in the history of digital media, not the beginning of a new and enlightened dispensation. The Web will be here forever; that is not in question. But as Don Henley sang in “The Last Resort,” the Eagles’ brilliant, haunting song about the resortification of the West, “You call someplace paradise, kiss it goodbye.”
Which brings us back to manifest destinies, physical and digital. As Patricia Limerick has argued in her reconsideration of frontier ideology, the moonstruck rhetoric of Manifest Destiny in the 1800s, though it may have been sincere, neatly papered over a host of less enlightened agendas. The surge west was a critical driver of economic growth, allowing the growing republic to harness vast amounts of natural resources and create new markets. The high-flown ideology of Manifest Destiny was, in short, a cover for a massive land grab (not to mention the slaughter of the Indians). The same is happening online. Now, instead of farmers versus ranchers, we have Apple versus Google. In retrospect, for all the talk of an unencumbered sphere, of a unified planetary soul, the colonization and exploitation of the Web was a foregone conclusion. The only question now is who will own it.
It's easy to shrug off the kooky world of apps. The bite-size software programs people load onto their mobile phones or tap into on the Web seem mostly to be silly games and pointless novelties. But look past the beer-drinking apps and flatulence programs and you'll see something significant taking shape: a bustling app economy that's creating new fortunes for entrepreneurs and changing the way business gets done.
It's happening with dizzying speed. Just two years ago, almost none of this existed. Apple's (AAPL) App Store, the most popular destination for mobile-phone programs, was launched last summer. Now there are more than a dozen rival stores, and at least 100,000 apps have been created. Some startups that staked their claim in the app economy have become large, lucrative businesses in just a few months. Two-year-old Zynga, which makes popular game apps, is already profitable, with more than $100 million in revenues. By comparison, Google (GOOG) didn't start making money until its third year—and still had less revenue.
There are serious business tools among the thousands of new apps. Salesforce.com's (CRM) programs let executives manage customer relationships from an iPhone or BlackBerry. Oracle (ORCL) apps let managers check inventory or get a snapshot of a business unit's performance. The computing that people used to do at their desks increasingly can be done on devices they can carry anywhere.
Early Days Apps will help determine technology's next big winners. The success of Apple's iPhone is due in large part to the fact that the company can offer customers more software choices than any rival. Research In Motion (RIMM), maker of the business-oriented BlackBerry, has scrambled to catch up and has made progress. But established giants such as Nokia (NOK) and Microsoft (MSFT) are struggling to get traction, raising questions about their prospects.
These are such early days, no one knows exactly how big the app economy is. Companies make money from selling apps, from ads within apps, and from selling digital goods used in apps. Add it up and analysts figure it's at least a $1 billion market today, headed for $4 billion by 2012. Not bad for a brand-new business.
True, much of the money these days comes from goofy games. One popular app is I Am T-Pain, named after the performer, born Faheem Najm. Fans can download software to their iPhone and mimic his robot-like voice. But it's time to heed the opportunities in this fast-evolving world. The $2.99 T-Pain app has put its creator, a year-old startup called Smule, on track to pull in $3 million this year. "Apps have moved into the mainstream. The world's changed," says Jeff Smith, Smule's chief executive.
Zynga's Zing
Revenues are soaring on the success of 'Social Game' Apps like FarmVille
Early this year, Mark Pincus, founder of the tech startup Zynga, huddled with staffers in his company's San Francisco offices to brainstorm new product ideas. Zynga develops game apps that can be played on social networks such as Facebook or mobile phones like the iPhone, and Pincus needed a follow-up to a popular poker app. One employee suggested a farming game, where players could grow digital crops and sell them to make virtual money. Pincus liked the idea and gave it the green light. Four months after its launch, FarmVille is one of the most popular apps in the world, with 60 million people playing it in the last month. "It just exploded," says Pincus.
Such is the nature of business in the burgeoning app economy. Success—and a flood of money—can arrive practically overnight. Zynga doesn't charge users to play FarmVille, but it does sell digital crops, cattle, and farmland. Corn seed, for instance, goes for the equivalent of 10 cents; cows run 20 cents each. All those digital goods add up. Zynga pulls in its nine-figure annual revenues from FarmVille and 20 other games.
The company may be just getting started. U.S. revenues from so-called social games have surged over the past two years to $720 million, and analysts project they will grow to $2 billion by 2012. "We are seeing very strong success with these companies," says Atul Bagga, an analyst with investment bank ThinkEquity. "They are basically letting customers choose [how much money] they want to [spend] in a particular game or application."
Zynga has the vibe of a young Google (GOOG). Just like the search giant in its early days, the company has a masseuse on staff and chefs who serve up two meals a day to keep employees from wasting time going out for food. It has weekly keg parties, like the ones Google's founders once hosted. And Pincus has tried to maintain a light atmosphere, even as the company has grown to 468 employees. The winner of a monthly poker tournament gets treated to a one-day Lamborghini rental. Pincus calls the atmosphere "ghetto Google."
Seeds of Success The company's offices are in the industrial Potrero Hill neighborhood of San Francisco. On a recent October day the 43-year-old Pincus, clad in jeans and an untucked oxford shirt, drew three intersecting circles on a whiteboard. He says the next great opportunity on the Web lies at the intersection of three trends—apps, Web services, and small online payments from consumers. Pincus sees apps not as products but as ongoing services that users tap into from Facebook or the iPhone and pay for in small increments. "Our story has been about finding games people could play forever and giving them a reason to do it," he says.
The strategy is in full swing in the FarmVille studio at Zynga, where a 30-person crew manages the company's biggest hit to date. The game is an odd success for the digital world: Users get a virtual plot of land to farm as they see fit. As they grow crops and earn currency, they can use the money to buy more seeds, animals, and tools like tractors. Since all players are logged in to Facebook, they can work with friends or co-workers, or they can compete against them for farmer bragging rights. There are roughly 20 times more people playing FarmVille these days than there are actual farms in the U.S.
For a hit like FarmVille, the work is never done. A wall-size chart in the FarmVille studio lists the various virtual items up for consideration in the next round of improvements to the game, culled from staff ideas and requests from users. The ability to get feedback and act on it quickly is a break from past models, says Mark Skaggs, who runs the FarmVille group. At large companies such as Electronic Arts (ERTS), where Skaggs used to work, "You might design a feature and not know until two years later whether it was good or people liked it," he says. "Here, you can design a feature in a day and put it in the game the next day."
As Zynga's games have grown, they've become giant test labs for new ideas. "Every single click is being recorded," says Vish Makhijani, Zynga's chief operating officer. That means Zynga can quickly find out the impact of small adjustments—such as changing the size of a cabbage patch in FarmVille or the cost of a new gun in the game Mafia Wars—on retaining users and increasing revenue. One recent success: digital sweet potato seeds that cost $5 a packet. The seeds, which of course cost nothing to duplicate, pulled in more than $400,000 in three days.
The rich opportunity has fueled aggressive competition. Zynga's primary rivals are London's Playfish and Mountain View (Calif.)-based Playdom. Playfish is known for a game called Pet Society, which lets people adopt online creatures and then dress them up in designer clothes, while Playdom's hit game is Mobsters, in which people try to gain skills, alliances, and wealth. All three companies are private and don't disclose financial information.
The game makers compete for users across all sorts of technology platforms. The big targets are Facebook, with more than 300 million members, and Apple's App Store, with more than 50 million iPhone and iPod touch users.
Lately, Playdom and Zynga have also been dueling in court. A lawsuit filed by Zynga in September alleges that several former employees recruited by Playdom supplied the competitor with the Zynga Playbook, a proprietary document the complaint describes as "the recipe book that contains Zynga's 'secret sauce,'" referring to its game-making techniques.
The rapid growth and sharp rivalries have drawn comparisons to the early days of Web pioneers such as Amazon.com (AMZN) and eBay (EBAY). One significant difference is that the apps business has virtually no barriers to entry, meaning it is hard for any company to maintain a lead. Today there are thousands of small developers who crank out apps that don't make a dime.
The perk-heavy culture at Zynga is certainly reminiscent of the dot-com days. Inside its office for human resources, 160 small paper bulldogs are tacked on the wall, one for every new hire in the past quarter. There's a cooking staff of 17, and most game studios have their own kitchen. Several rooms are equipped with Xboxes and board games, and are designated "meeting-free areas."
New Staffers and a Couch With employees grouped into a series of discrete loft offices, Zynga's operation looks more like 11 small startups glued together than one large one. It's a reflection of how the company is run: Studio heads set goals and are given freedom to achieve them any way they can. Those who succeed are rewarded with cash and stock bonuses and are granted extra resources such as new hires. When a new game called Café World recently set a company record for growth, signing up 16 million users in its first two weeks, its head, Roy Sehgal, was rewarded with a bevy of new employees and the leather couch he had been requesting for his office for weeks.
Pincus calls this style of management "true meritocracy" and says it's modeled partly after the approach at Amazon. It applies to regular staffers as much as managers. In his first three months in the poker group, Harsimran "Sim" Singh moved up the company ladder three times for helping to bring growth back into the company's longest-running game, Texas Hold'em. A year after landing at Zynga with no direct reports, the 25-year-old runs the entire poker unit, a team of 45.
The Amazon influence affects how Pincus conducts his board meetings. Each time he meets with his directors, he begins by recounting whatever issue kept him awake the night before. It's a tip he learned from Amazon CEO Jeff Bezos, an acquaintance and role model who shares a director with Zynga.
One matter getting airtime at board meetings of late: When should the company consider going public? Zynga doesn't need cash. It raised $39 million in venture capital in 2008 and hasn't touched the money since. But a publicly traded stock would give Pincus the currency to make deals or dole out employee options. Still, Pincus wants to protect the culture he has created. "We all make so many compromises in order to build our businesses that we wake up one day and we've created a company that we don't want to work at," he says. "I wanted to create a long-term home."
The Man Behind Apple's Apps
How Eddy Cue and his team keep the App Store ahead of the competition
If you had to choose one person who makes the world of apps go around, Eddy Cue might well be it. Apple (AAPL)'s vice-president for Internet services is the architect and overseer of Apple's App Store. Millions of iPhone owners have downloaded the 85,000 apps available from the App Store. That's light years ahead of rival offerings from Google (GOOG), Microsoft (MSFT), or Research In Motion (RIMM).
Cue and his team seem on track to ensure that those mobile Internet wannabes don't close the gap anytime soon. While no rival has even 15,000 apps, his team keeps tweaking Apple's offerings to make them more attractive to consumers and useful to developers. On Oct. 14, for example, Apple told developers that for the first time they could give away apps on a trial basis and then ask consumers to pay later. "Apple has done a ridiculously good job, and now they're taking it to the next level," says Jeff Holden, chief executive of Pelago, which makes apps for the iPhone and other devices.
Cue, 45, joined Apple as a lowly staffer in the IT department in time to witness the company's darkest days during the mid-1990s. He not only survived a major housecleaning after Steve Jobs returned to the company as chief executive in 1997 but emerged as one of the CEO's most trusted lieutenants. When Apple found itself playing catch-up in digital music early this decade, Jobs put Cue in charge of creating the iTunes Music Store. While far less ambitious efforts floundered, Apple's site was doling out millions of songs within weeks, with nary a hitch.
Hollywood Connection Over time, Cue's role expanded from running the iTunes store to cutting deals to fill it. While Jobs often finalizes agreements, Cue does most of the heavy negotiations with record labels and Hollywood studios. "Eddy doesn't have attitude. That's part of his success," says one former Apple insider. "In an industry with lots of big egos, he can hold his own without saying, 'I'm the inventor of iTunes, bow before me.' One favorite approach is for Cue to "play good cop to Steve's bad cop," says the ex-employee. Apple declined to comment for this story.
Cue stands out within Apple's hard-core culture for his friendly, let's-get-a-beer manner. A rabid Duke University basketball fan, he's described by insiders as an "East Coast guy's guy." But he's one of a tight-knit group that makes sure that Apple devices, software, and services work smoothly together. Many app developers don't know the role he plays or even his name.
No doubt Cue has his hands full with the fast-growing App Store. When Apple rushed plans for the store into place in 2008, it was overwhelmed by the customer interest. The company had to invent the business on the fly, including how to approve and promote applications. Now Apple's back-end infrastructure may be as indispensable a competitive advantage as the iPhone's design. Developers have flocked to Apple because they see how the App Store can make huge successes of programs like Shazam and Tap Tap Revenge.
Apple's success has led to controversy. Some developers gripe about delays in getting into the App Store, and the Federal Communications Commission is investigating Apple's refusal to approve an application from Google. Analysts say Apple needs to develop better ways for customers to find just the right app among the thousands of options—and thereby make the business more profitable for more developers.
Still, most developers give Apple and Cue high marks. They not only established the App Store but also are building on its success. "Apple is really listening to the marketplace," says Shervin Pishevar, CEO of app developer Social Gaming Network.
Enter Yahoo
The company is out to become the go-to place for applications
Yahoo! (YHOO) has big plans for apps. While Apple may have started the app phenomenon by letting developers create programs for the iPhone, Yahoo wants to be the company that brings apps to the wider world.
In the company's most ambitious app effort to date, Yahoo is redesigning its home page to include applications from outside developers. As the changes roll out through November, the apps will be listed along the left-hand side of the Yahoo.com page, used by more than 300 million people each month. Visitors can customize their own home pages, selecting the apps they want. Then they can check the day's headlines from USA Today or bid for an item on eBay (EBAY) without leaving the Yahoo site.
Yahoo will make money from advertising embedded within the apps. It's also considering launching its own app store, similar to Apple's, in which case it could charge for applications and split revenues with developers.
This is only one of the app frontiers Yahoo is exploring. The company has developed software for televisions that lets people launch applications such as Twitter and Facebook on the TV screen while watching their favorite shows. Another new technology allows people to tap into apps directly as they use Yahoo! Mail. Wherever people are, Yahoo wants to "summon up a gallery of all the possible things you could do," says Prabhakar Raghavan, head of Yahoo's research division. "Here are 50 million things you could do—book a ticket, upload a picture. Everything's an app."
Yahoo's home page strategy is getting some traction. Dozens of software developers have signed up and landed their programs in the "App Gallery," a menu from which users can pick and choose their favorite free programs. Carrie Cronkey, the director of business development at personal finance site Mint.com, says people are more likely to join Mint if they're referred by Yahoo because it implies a level of security. "The fact that [your app] is on Yahoo makes you more credible," she says.
For Yahoo, the real payoff from sprinkling apps into TVs and its home page comes in the form of data. By tracking which apps people use and how they interact with them, the company is building on its ability to serve targeted ads. That may help the company compete for ad revenues against rivals such as Google (GOOG). "Apps can play a big role in understanding user behavior," says Raghavan.
Gold Rush?
Money is flowing into apps as smartphones reshape the tech world
When Bart Decrem went looking for office space in the spring of 2008 for his startup, Tapulous, Jeff Clavier opened his door. Clavier, the founder of venture capital firm SoftTech VC, saw enormous potential in the Tapulous software that would run on Apple's iPhone. So he let Decrem use some space in the firm's Palo Alto (Calif.) digs and made an investment in his company.
Eighteen months later, Clavier's support of Tapulous looks like it may be one of his best investments ever. The company's Tap Tap Revenge app, in which players tap on-screen balls in sync to the beats of a song, has become a breakout hit. The game and its multiple spin-offs have been downloaded more than 15 million times. Tapulous, which makes money from game sales, advertising in the game, and the sale of in-game avatars, has been profitable since this summer, a speedy accomplishment for a tech startup.
The investment has convinced Clavier there is loads of potential for venture capital investments in mobile applications. At last count, consumers had downloaded 2 billion programs from Apple's App Store, and that's just one place among several where people get apps. Clavier believes app startups could become billion-dollar outfits that rival traditional game and software companies. "The revenues of these companies will become substantial," he says. "There will be publishers that become large brand names."
"We See Huge Markets" The torrid growth has attracted money from other high-profile investors. Last March, Kleiner, Perkins, Caufield & Byers, one of the Valley's marquee venture capitalists, launched a $100 million investment fund specifically to back startups creating software applications for the iPhone. Last October, Research In Motion (RIMM) unveiled a $150 million venture fund, with investments from Thomson Reuters (TRI) and RBC Venture Partners, to develop apps and services for its BlackBerry and other phones. And this October, U.S. mobile operator Verizon Wireless (VZ) announced an initiative to invest up to $1.3 billion in wireless applications and related technologies. "We see huge markets and game-changing opportunities," says Kevin Talbot, co-managing partner of the BlackBerry Partners Fund.
Of course, investors don't need a dedicated fund to participate. Firms such as Union Square Ventures, O'Reilly AlphaTech Ventures, and XG Ventures are devoting an increasing amount of time and money to financing wireless apps. "Most of the deals we see are in the mobile arena," says Andrea Zurek, co-founder of XG Ventures, a new VC firm of former Google (GOOG) executives.
The money flowing into apps is inspired by the belief that smartphones and other portable devices are transforming the tech world. The growth of mobile computing is sparking a renaissance in software development. Gaming apps are the most popular programs right now, but mobile shopping, content, social media, communications, and productivity tools are attracting increasing amounts of capital. "We don't think this is slowing down anytime soon," says Matt Murphy, the partner at Kleiner Perkins running the fund dedicated to Apple-related investments. (View an interview with Murphy here).
Douglas MacMillan is a staff writer for BusinessWeek in New York. Burrows is a senior writer for BusinessWeek, based in Silicon Valley. Ante is an associate editor for BusinessWeek.
It’s Rachael Ray’s world now — we’re all just cooking in it.
Gourmet magazine, which has celebrated cooking and travel in its lavish pages since 1941, will cease publication with the November issue, its owner, Condé Nast, announced on Monday.
Gourmet was to food what Vogue is to fashion, a magazine with a rich history and a perch high in the publishing firmament. Under the stewardship of Ruth Reichl, one of the star editors at Condé Nast, Gourmet poured money into sumptuous photography, test kitchens and exotic travel pieces, resulting in a beautifully produced magazine that lived, and sold, the high life.
Ms. Reichl, formerly a restaurant critic at The New York Times, will most likely leave Condé Nast, though it is not entirely clear, a Condé Nast spokeswoman, Maurie Perl, said. The company will continue with the more recipe-focused food magazine Bon Appétit.
Condé Nast also announced it would shut three other magazines: the parenting magazine Cookie and the wedding publications Elegant Bride and Modern Bride. About 180 people will lose their jobs as a result of the four closings. For Gourmet’s legion of fans, the loss particularly stings — it is the end to a long relationship between readers and the magazine’s depiction of food as exploration.
In choosing Bon Appétit over Gourmet, Condé Nast reflected a bigger shift both inside and outside the company: influence, and spending power, now lies with the middle class.
Advertising support for luxurious magazines like Gourmet has dwindled, while grocery store advertisers have continued to buy pages at more accessible, celebrity-driven magazines like Every Day With Rachael Ray, which specializes in 30-minute meals, and Food Network Magazine.
It was an unexpected decision from Condé Nast, which said it closed the magazine because it was losing too much money.
“In the economics of the ’80s, ’90s and early 2000s, this would be a business decision balanced by the cultural reticence to part with iconic brands,” Charles H. Townsend, Condé Nast’s chief executive, said in an interview. “This economy is a completely different bag.”
With the decline in luxury advertising, the company lost about 8,000 ad pages through the October issues, compared with the same period in 2008, according to Media Industry Newsletter.
With a 43 percent drop, Gourmet was among the hardest hit. This summer, Condé Nast brought in the corporate consulting firm McKinsey & Company to “help in looking at every one of these businesses clinically, not emotionally,” Mr. Townsend said.
Gourmet was smaller than Bon Appétit, with a circulation of about 980,000 versus Bon Appétit’s 1.35 million. Bon Appétit had higher newsstand sales in the first six months of this year, according to the Audit Bureau of Circulations.
Though its sales dropped, Gourmet’s dropped much more sharply in that period, compared with the first six months of 2008. Their editorial approaches differed, too: a recent Bon Appétit cover line promised “America’s Best Hot Dogs,” while Gourmet ran an article on how restaurant critics would spend $1,000 in their hometowns.
“You have to look at the advertisers that support food magazines — they tend to be mass manufacturers, and those are the companies that have the money,” said Dorothy Kalins, founding editor of the food magazine Saveur.
Barry Lowenthal, president at the Media Kitchen in New York, part of the advertising holding company MDC Partners, said that Gourmet’s reliance on travel and luxury advertisers had hurt it. “If you have to make a bet who will support you,” he said, “it’s going to be the Bon Appétit advertiser.”
Gourmet did not lack for impassioned readers. Alice Waters, the California restaurateur, said she nearly started crying when she heard of the closing. Gail Zweigenthal, a former editor in chief of Gourmet, said she was saddened. “I think it was the first magazine that taught people how to navigate the intricacies of foreign travel, where to stay, what to eat,” she said. “It was such a special magazine. It had such history.”
And Dana Cowin, the editor in chief of Food and Wine, praised Ms. Reichl’s “sociopolitical and cultural commentary,” as well as the magazine’s literary sensibility.
The death of Gourmet doesn’t mean people are cooking less or do not want food magazines, said Suzanne M. Grimes, who oversees Every Day With Rachael Ray, among other brands, for the Reader’s Digest Association.
“Cooking is getting more democratic,” she said. “Food has become an emotional currency, not an aspiration.”
It has also become democratized via the chatty ubiquity of Ms. Ray and the Food Network stars. Ms. Reichl is a celebrity in the food world, but of an elite type. She “is one of those icons in chief,” said George Janson, managing partner at GroupM Print, part of the advertising company WPP. But what harried cooks want now, it seems, is less a distant idol and more a pal.
Of Condé Nast’s decision, Abe Peck, professor emeritus at Northwestern’s journalism school, said “they didn’t make the glamour bet here.”
With the news about Gourmet and the other publications, which employees received on Monday morning, another era ended within Condé Nast itself.
The company has developed a reputation for luxury. Part of that means keeping cars and drivers idling outside restaurants for its top executives, but it has also spent years holding on to money-losing publications, including, at points, The New Yorker and Vanity Fair.
But Mr. Townsend said that the current advertising picture was too dismal. “The tide’s not coming back in,” he said. “It could take us five years to get back to 2007 levels if we’re lucky enough to.”
So, he said, the company could no longer afford magazines that lost money. “We won’t have businesses that don’t make a contribution,” he said. “This economy has pinched us and sobered us up.”
The consultants from McKinsey issued specific budget recommendations for publications, and executives at some magazines, who asked not to be named as they were not authorized to discuss the cuts, said they were told last month that their budgets needed to shrink by 25 percent.
Mr. Townsend said each magazine was given a profit-margin goal, and it was up to the editor and publisher of each to figure out how to reach those goals. After that, he said, there will be no further cuts for a while. “Done. Done,” he said.
Mr. Townsend said that much of his effort going forward would be focused online, where he wants to move away from dependence on display advertising. He will also expand the wedding magazine Brides, increasing its frequency to 12 times a year, and invest in its Web site.
Mr. Townsend said the closed magazines could have some future on the Web or in other media.
Cookie, for instance, “may very well be an electronic brand of substance,” while Gourmet could have strong books, broadcast and Web businesses.
It is unclear what plans for those businesses are; the company has contracts to fulfill in some of the side businesses. Ms. Reichl, after packing up her office, was expected to return to her book tour for “Gourmet Today,” a new cookbook.
“Sorry not to be posting now, but I’m packing. We’re all stunned, sad,” she posted on Twitter on Monday afternoon.
Stuart Elliott and Kim Severson contributed reporting.
SAN FRANCISCO — Make a phone call that crosses a national border and, without even knowing it, you're probably using a technology that is transforming the global telecommunications industry.
The technology, known as Voice-over-Internet-Protocol (VoIP), began in Israel in the mid-1990s and was popularized by startups like Skype. It chops conversation into thousands of digital data packets, sends these packets over the internet and reassembles the conversation at the other end — bypassing the traditional phone system and its per-minute charges.
“VoIP began as a much cheaper way to make international and long distance calls,” said analyst Ken Landoline of Synergy Research Group in Reno, Nevada.
Now it is now being quietly adopted by telecommunications carriers in Europe, Asia and North America.
Analyst Jeff Pulver said VoIP as a technology has been more successful than Skype, the Scandinavian company that was acquired in 2005 by eBay, the online marketplace. EBay recently spun Skype back off again to compete more freely in the VoIP marketplace.
“Skype as a company hasn't done all that well, but VoIP has gotten a lot of traction in the telecom world,” said Pulver, who tracks the industry through his website, Pulver.com. “The incumbent telecommunication carriers, especially in Europe and Asia, have embraced VoIP to make themselves more competitive.”
Pulver said the Israeli company VocalTec unveiled the first commercial VoIP system in 1995. Skype debuted in 2003 with VoIP software that enabled computer users to have conversations through their PCs, via the internet, essentially for free.
“Skype became very popular very quickly,” Pulver said. “In 2004 and 2005 it was threatening every major phone company.”
In 2005, eBay bought Skype for more than $2.6 billion, hoping to weave online conversation into its digital marketplace and thus spur more transactions. Pulver said the acquisition never delivered the benefits eBay expected and blunted Skype's momentum as an alternative to traditional phone carriers.
In September, eBay sold a controlling stake in Skype for nearly $2 billion to a group of outside investors that includes browser software pioneer Marc Andreessen. Whether the new ownership will revive Skype as a challenger to the telecom status quo remains to be seen.
Meanwhile, analysts say the major telecommunications firms have embraced VoIP as a way to lower their own costs of delivering long-distance voice traffic.
Analyst Stephane Teral with the market research firm Infonetics said telecommunications firms in Europe and Asia have been pushing VoIP all the way into their systems, using it not just for long-haul transport but also selling digital lines directly to consumers, in contrast to U.S. phone carriers that still typically offer old-fashioned analog lines, which essentially connect the caller and receiver over wires that are dedicated to their conversation, like a string stretched between two cups.
NTT in Japan has more than 7.3 million VoIP subscribers, and France Telecom has about 6.5 million, Teral said.
In the United States, cable companies are using VoIP to deliver the phone component of the bundled services they are selling to consumers, enabling them to compete with the telephone carriers.
“Phone calls in my home office come through my cable provider's infrastructure along with my internet and television service,” Landoline said. “The telephone company does not enter my house.”
Silicon Valley technology forecaster Paul Saffo said the Skype spin off comes at a time when VoIP technology is approaching an inflection point.
“So far VoIP has just been cheaper,” Saffo said. “Now the voice quality is getting better. But what will really make VoIP take off is that it can add features that weren't possible with plain old telephone service.”
For instance, he said VoiIP makes it possible for players in online games to speak with one another, adding another dimension to their interactions.
“We're just starting to understand what VoIP can do that the old telephone system couldn't,'” Saffo said. “This is a technology that is moving into the mainstream.”
The American news business today finds itself trapped in a grim paradox. Financially, its prospects have never seemed bleaker. By some measures, the first quarter of 2009 was the worst ever for newspapers, with sales plunging $2.6 billion. Last year, circulation dropped on average by 4.6 percent on weekdays and 4.8 percent on Sundays. Earlier this year, Detroit's two daily papers reduced home delivery to three days a week, the Seattle Post-Intelligencer ended its print edition, and the Rocky Mountain News shut down altogether. This summer, The Boston Globe, which is losing more than $50 million a year, survived only by giving in to the draconian cutbacks demanded by its owner, the New York Times Company, while the Times itself, weighed down by the Globe, had to take out a $250 million loan from Carlos Slim Helú, Mexico's richest man, at a junk-bond-level interest rate of 14 percent a year.
Yet amid all this gloom, statistics from the Internet suggest that interest in news has rarely been greater. According to one survey, Internet users in 2008 spent fifty-three minutes a week reading newspapers online, up from forty-one minutes in 2007. And the traffic at the top fifty news Web sites increased by 27 percent. While this growth cut across all age groups, the Pew Project for Excellence in Journalism found, "it was fueled in particular by young people." The MTV generation, known for its indifference to news, has given way to the Obama generation, which craves it, and for an industry long reconciled to the idea of its customers dying off, the reengagement of America's young offers a rare ray of hope.
How could the financial fortunes of a $50 billion–plus industry decline so swiftly while its product remains so prized? The most immediate explanation is the collapse of what has long been the industry's economic base: advertising. The traditional three staples of newspaper advertising—automotive, employment, and real estate—have all drastically declined, thanks to Craigslist, eBay, the travails of Detroit, and the consolidation of department stores (resulting in fewer retail ad pages). Meanwhile, the steady expansion of space on the Internet has caused online ad rates to crash, and these are not expected to recover even when the economy as a whole does.
The fall-off in ad revenues has been compounded by another phenomenon that newspaper executives would rather not discuss: their own greed. The relentless stress placed on acquisition and consolidation, which dominated the industry for decades, helped drain money out of newsrooms and into the pockets of shareholders. It also shifted the locus of decision-making from locally based citizens to distant corporate boards. Most harmful of all, efforts to build large media conglomerates have saddled newspaper companies with astounding levels of debt, much of it taken on to buy other newspaper companies. The Tribune Company has been in bankruptcy court since October, wrestling with the fallout from Sam Zell's highly leveraged purchase of Times Mirror, while McClatchy Newspapers, having paid top dollar for the Knight Ridder chain, has been selling off papers to keep its creditors at bay.
When it comes to mismanagement, then, the newspaper business seems in a class with Detroit. Unlike GM, though, newspapers offer a product that consumers still value. But how to cash in on it? As the old business models fade, new ones are urgently being tested. Surveying the blackened landscape, I searched for new buds—and stumbled upon something much larger.
1.
In April, The Christian Science Monitor became the first nationally circulated newspaper to end its daily print edition and concentrate on the Web. Having lost nearly $20 million in 2008, the paper wanted to shed the onerous costs associated with printing and delivery. (It still prints a weekly edition.) Some observers saw this as a harbinger for the industry, the start of a mass migration from print to digital. A look at the numbers, however, suggests otherwise. For all the growth in visitor traffic to newspaper Web sites, most online readers don't linger there. According to one study, of all the time readers spend with a newspaper, 96 percent of it is spent on print editions and barely more than 3 percent on the Web. Similarly, of the $38.5 billion spent on newspaper ads in 2008, just $3 billion was spent on the Web. With numbers like these, print is not going away anytime soon.
For publishers, the key is to find a way to maximize revenues from print and the Web. And here a great sea change is occurring. Since the late 1990s, when the first news sites were introduced on the Internet, most papers have offered untrammeled access to them. "Information wants to be free," the digirati proclaimed, and publishers dutifully went along. And for a while, that strategy paid off: as traffic grew, ad revenues did, too. With the steady fall-off of advertising since 2006, however, the free-for-all philosophy has lost its appeal.
Adding to the disillusionment is the growing recognition of the part that free access to the Web has played in the hemorrhaging of circulation. "When we look at why people quit buying the newspaper, it's overwhelmingly because 'I can get it for free online,'" William Dean Singleton, the CEO of MediaNews Group, the nation's fourth-largest newspaper company, recently said. Whenever the Times's Bill Keller and other top editors speak in public, they invariably encounter readers who, expressing amazement at being able to read the paper online for free, plead for ways to donate to it. In 2002, The Arkansas Democrat-Gazette started charging for online content. While it has signed up only 3,400 subscribers, the circulation of its daily print edition has held steady at around 180,000 at a time when that of most other papers has fallen, and its owner, Walter Hussman Jr., has traveled around the country describing how charging for Web content can help stop the bleeding.
Publishers are taking heed. In the next year, many are expected to erect "pay walls"—i.e., charges for access—around their sites. The challenge is getting the height right. Receiving the most attention are "hybrid" models that, part pay and part free, seek to gain subscribers while maintaining a steady flow of online readers.
There are two main models. The Financial Times uses a "meter," or quota, approach. Visitors to FT.com are allowed access to a few free articles a month; to get more, they have to subscribe. This has netted the FT 117,000 subscribers paying up to $299 a year. Affluent and educated, those readers are very attractive to advertisers and so generate considerable ad revenue as well.
The Wall Street Journal' s policy is much less restrictive. Visitors to WSJ .com are allowed free access to all articles about politics, culture, and other general-interest topics. Only those seeking entry to the Journal's business and finance reports must pay. Soon after Rupert Murdoch bought the Journal, in 2007, he announced that, to draw traffic to its Web site, he was going to make access to it completely free, but, seeing the softness of the ad market, he quickly reconsidered, and reports on business and finance have remained behind a pay wall. Today, WSJ.com has 1.1 million subscribers paying $100 to $140 a year. And with the number of unique visitors to the site surpassing 12 million in April, traffic remains brisk. As Murdoch recently acknowledged, the Journal's digital revenues "are not a gold mine," but, he added, "People reading news for free on the Web, that's got to change." In recent weeks, executives at Murdoch's News Corp. have been meeting with other publishers about forming a consortium to charge for news delivered online.
Such moves rankle advocates of free access to the Internet. Among the most vocal is Arianna Huffington, the cofounder and editor in chief of the popular Internet news-and-blog site The Huffington Post. "Walled gardens," she insists, don't work; the "link economy" is here to stay. (Free links, it must be noted, are vital to The Huffington Post's health.) As evidence that pay walls don't work, Huffington and others point to TimesSelect. Introduced by The New York Times in September 2005, it placed the paper's columnists behind a pay wall and charged online readers $49.95 a year for admission. Two years later, the Times, concerned by the fall-off in traffic, reinstated its free-for-all policy.
Even that limited test, however, attracted 220,000-plus paying subscribers. If the Times were to place even more, or different, content behind a pay wall and find the right entrance fee, it would no doubt gain many more. For months, the paper's executives have been studying various pay options, and they plan to offer one or more in the fall.
A lot will be riding on what they decide. Aside from being the nation's top newspaper, the Times has devoted far more money and manpower to its digital edition than any other paper. At its Midtown office, teams of cybergeeks, futurists, and "creative technologists" have worked feverishly to combine traditional journalistic practices with the protean powers of the Web. Their imprint is apparent in the welter of videos, multiband graphs, sumptuous pie charts, slide shows, and time lines at NYTimes .com. Now, in addition to reading Nicholas Kristof's descriptions of malnutrition in Africa, you can watch a video of him interviewing some of the victims. On an interactive photo feature titled "Casualties of War," a click on a montage of photos of soldiers killed in Iraq and Afghanistan summons up mini-profiles of each. A "word train" offers a snapshot of what's on reader's minds by displaying in varying type sizes the adjectives they send in based on the frequency of their mention.
There are blogs galore—Andrew Revkin on the environment, Paul Krugman on the economy, Errol Morris on whatever's on his mind—plus leisurely features like "One in 8 Million," an audio slide show about ordinary New Yorkers (linked to a regular feature in the print edition), and "The Puppy Diaries," managing editor Jill Abramson's weekly musings on her new pet.
For an institution long known as the "Gray Lady," it's a dazzling mix. But is it on the right track? Lionel Barber, the editor of the Financial Times, told me:
The prerequisite for establishing a pay-for-content model is good content—must-read content. It's extremely important in the modern news business to be clear on what your comparative advantage is. If you want to be everything to everybody and spread your resources too thin, you're going to get into trouble.
The FT's comparative advantage, he added, "is business and financial." The New York Times's advantage, he argues, is its "global network" and its "deep and original reporting." While some observers maintain that the FT and The Wall Street Journal are uniquely able to charge for content because the information they offer is so valuable to businessmen, Barber believes that a high-quality general-interest paper like The New York Times can charge as well.
(The FT, by the way, has introduced a number of specialized services, like "China Confidential," which offer inside information on high-value subjects to readers willing to pay a premium. This points to another potentially lucrative revenue source for news organizations.)
The Times site does offer much excellent content. Too often, though, it seems overwhelmed by gadgets and gizmos, features and fluff. Technologically in a class by itself, the paper has seemed less adept at grasping the Web's potential to spotlight issues and stir debate. This summer, for instance, the blogosphere lit up over "The Great American Bubble Machine," Matt Taibbi's provocative Rolling Stone article about the political and financial power of Goldman Sachs. On the few occasions on which the Times took note of the story, it was with Olympian disdain. Imagine the stir it would have created had it hosted a Web forum on the piece under a headline like "Is Goldman Sachs a Bubble Machine?" In the long run, such features would, I think, draw far more traffic than word trains or puppy diaries.
Still, the Times seems likely to attract many readers even after it begins charging for content. In view of its unique place in American journalism, it seems certain to weather the current crisis. The same seems true of America's other nationally read papers, The Wall Street Journal and The Washington Post. (The Los Angeles Times might be able to join them if it is able to find ways to exploit its own comparative advantage—coverage of the entertainment industry.) Many of the nation's smaller papers have their own advantage—they're the only news source in town—and many are thriving. It's the large metropolitan dailies like The Boston Globe, The Baltimore Sun, and The Miami Herald that, contending with both large staffs and brisk competition, are the most endangered, and it's widely feared that one or more will go under in the coming years.
Such a development would be catastrophic for the public. As gatherers and purveyors of information, newspapers are without peers, and the retrenchment they're undergoing is seriously eroding their ability to enlighten and expose. At the same time, the industry's travails are serving as a stimulus. A restless array of entrepreneurs, innovators, and idealists—taking advantage of the Internet's low entry barriers—has emerged, testing new ways of delivering the news. Are any succeeding?
2.
So far, the attention paid to new Web ventures has focused mainly on the for-profit sector. Most of these sites are pursuing roughly the same strategy—building sufficient Web traffic to attract advertisers. And most are after the same market—the 25 million or so affluent, educated Americans who roughly overlap with the audience for NPR. Three of these enterprises in particular seem to be making a go of it. One is Slate. Founded in 1996 with the help of Microsoft, it initially struggled, but since being purchased by the Washington Post Company, in 2004, it has generally been profitable. Deriving 95 percent of its revenue from ads, Slate owes its success both to the Post's backing and to its own journalistic formula—sharply written contrarian pieces offered for free on its site and promoted with clever headlines (for example, "Where Are the Jewish Gangsters of Yesteryear? Or, what we can learn about 'respectability' from Bernie Madoff and Meyer Lansky"). In an effort to replicate Slate's success, the Post in 2008 created the Slate Group, and since then it has introduced several spin-offs, including The Root (African- American affairs), The Big Money (business), and ForeignPolicy.com.
The online arm of Foreign Policy magazine, ForeignPolicy.com is in some ways the most interesting, offering free access to both punchy articles from the magazine and a roster of contentious, thoughtful blogs written by such disparate figures as the military reporter Thomas Ricks; the Harvard political scientist Stephen Walt, coauthor of The Israel Lobby and US Foreign Policy ; and Marc Lynch, a Middle East specialist at George Washington University. It also has offered some original reporting in the form of "The Cable," Laura Rozen's behind-the-scenes look at US foreign policy making. (In late August, however, it was announced that Rozen was leaving ForeignPolicy .com to work at Politico.) The model, according to executive editor Susan Glasser, is the newspaper Roll Call, which has long offered advertisers a cost-effective means of reaching a select Capitol Hill audience. Glasser says she's optimistic but acknowledges that, to date, "We haven't cracked the code."
Politico seems to have. After not quite three years, Politico attracts on average about 3.2 million unique visitors a month. Its founders say it's in the black, though by how much is difficult to say, since it's owned by Allbritton Communications, a privately held, TV-rich conglomerate. Politico's hundred-person staff works out of Allbritton's office building in Arlington, Virginia, and it's hard to separate Politico's overhead from that of its parent. Fully dependent on ad revenue, Politico gets much of it from its print edition, which is published five times a week when Congress is in session and—distributed free of charge—has a circulation of 32,000. In other words, Politico, one of the Web's success stories, remains in no small part dependent on print.
The one site that has turned a profit without the aid of print or a sponsor is Talking Points Memo. In nine years, Josh Marshall has built it from a one-man blog into a bustling political journal with 1.5 million unique visitors a month. TPM relies mainly on advertising—everything from Comcast to T-shirt companies—and its combination of low overhead and an engaged readership has enabled it to thrive. Over the summer, Marshall agreed for the first time to accept outside capital—between $500,000 and $1 million from a group of investors that includes Netscape founder Marc Andreessen. With it, he plans to expand his site from its current eleven employees to about twenty, with the possibility of adding more if the site's traffic—and revenues—expand sufficiently.
The challenge TPM faces is evident from the experiences of a younger, flashier sibling. The Huffington Post seems in a state of constant motion. In just four years, it has conjured up a cast of bloggers numbering in the thousands, a Washington staff of seven, an investigative unit, and local editions in Chicago and New York. The company has been coy in discussing its earnings, saying only that it is profitable in some months and not profitable in others. In June, the company announced that it was replacing its CEO of the last two years, Betsy Morgan, with Eric Hippeau, one of its original investors. The reason, Arianna Huffington has said, is that the company was not sufficiently "monetizing the traffic." Though ad revenue has been growing briskly, the company feels it needs to attract far more display advertising—a challenge facing all sites.
Of all the for-profit experiments out there, the most intriguing, perhaps, is Global Post. Launched in January with close to $10 million in start-up funds from private investors, this site already has seventy-four part-time correspondents in fifty countries. The co-founder and editorial chief, Charles Sennott, a former Boston Globe correspondent, says that the "void" created by the cutbacks in foreign reporting has created "an opportunity. We want to be one of the sites that Americans regularly go to when they think about the world." In June, Sennott and a photographer spent nearly three weeks in Afghanistan, producing a multimedia medley of articles, podcasts, videos, and slide shows about the US fight against the Taliban. (To date, the site seems to lean more toward straight reporting than in-depth analysis, focusing on questions like "Who are the Taliban?" rather than "Should we be in Afghanistan?")
The service does not come cheap: in addition to paying most of its correspondents $1,000 a month for four stories, it has a full-time staff of sixteen in Boston. To help meet that payroll, Global Post foresees three revenue streams: advertising, membership, and syndication. Of these, the last seems the most promising; already, it has signed contracts with ten papers to run its stories, including The Pittsburgh Post-Gazette (a five-figure deal) and The Newark Star-Ledger. In the course of a long phone conversation, Sennott grew animated as he described his experiment and its potential for radically transforming foreign reporting, offering global dispatches at a fraction of the rate charged by the AP. Yet as I listened, I couldn't help but think of the huge sums needed to keep his operation afloat and to wonder where they'd come from. The same was true for the commercial sector as a whole. For all the impressive projects out there, their economic base seems tenuous, and my encounters with them left me feeling sobered by the obstacles they face.
3.
My inquiries into the nonprofit world, by contrast, left me heartened. Here I found all kinds of excited activity. Much of it, I discovered, had been set in motion by an Op-Ed piece that appeared in the Times in late January. David Swensen, the chief investment officer for Yale's endowment management team, and Michael Schmidt, a financial analyst there, argued that in light of the struggles of newspapers, they should consider turning themselves into nonprofit endowed institutions, like universities. "Endowments," they wrote, "would enhance newspapers' autonomy while shielding them from the economic forces that are now tearing them down." Taking the Times as an example, they estimated that, with a newsroom costing somewhat more than $200 million a year to run, and with some additional outlays for overhead, the paper would need an endowment of around $5 billion. "Enlightened philanthropists must act now or watch a vital component of American democracy fade into irrelevance," they declared.
Swensen is widely known as an expert on university investing, and the article set off a storm of speculation. On his blog at The New Yorker, Steve Coll, calculating that The Washington Post (his former employer) would need an endowment of $2 billion, called on Warren Buffett to write a check to the paper in that sum. In Washington, Senator Benjamin Cardin introduced the Newspaper Revitalization Act, designed to make it easier for newspapers to qualify as nonprofits under federal law, and John Kerry convened hearings in the Senate on how to save America's newspapers.
The image of the Times and the Post protected by huge endowments seems comforting indeed. Unfortunately, it's entirely unrealistic. Turning those papers into nonprofits would require the Sulzbergers and the Grahams to voluntarily give away their wealth. Even if they were so moved, where would all those billions come from? They simply aren't out there. In light of the dramatic fall-off in the value of Yale's own endowment, Swensen's proposal seems doubly unpersuasive.
Yet by highlighting the industry's struggles, the article "sort of rang the bell," I was told by John Thornton, an Austin-based venture capitalist turned philanthropist and news entrepreneur. Last year, Thornton, seeking investment opportunities in the news business, couldn't find any. The golden era of commercial news, which had lasted from 1960 to 2005 and which had been based on the confluence of a booming population with an explosion in advertising, seemed gone for good. Where journalism is concerned, he came to believe, "you can't serve God and Mammon at the same time." Alarmed by the sharp decline in the number of journalists covering Texas politics, Thornton set out to raise money for a nonprofit online service. He didn't get very far—until the Times article appeared.
In the months since, he's been able to raise more than $1 million from wealthy friends, in addition to $1 million he's put up himself, toward a goal of about $4 million. The Texas Tribune is scheduled to begin operations in November. Already, it's snapped up some of the state's top journalists, including Evan Smith, the respected former editor of Texas Monthly. Thornton has since become an evangelist for non-commercial news, urging his fellow philanthropists to invest in it because "the bang for the buck"—the satisfactions of improved coverage—is so high.
Scott Lewis, the CEO of Voice of San Diego, shares his enthusiasm. Founded in February 2005 by Buzz Woolley, a retired venture capitalist disturbed at the cutbacks taking place at The San Diego Union-Tribune, this community-based nonprofit Web site offers a daily dose of local and regional news and commentary. Its nine professional journalists have broken many stories, including the existence of a clandestine bonus ring at a San Diego development corporation. It does all this on an annual budget of $1 million. "If we could get to two or three million, we could do amazing things," says Lewis, who, in addition to running the site, writes a popular political blog. And he thinks that's very attainable. "I'm bullish that reporting can survive and even thrive in a nonprofit model," he said. Currently, the site gets 40 percent of its revenue from foundations such as the Knight Foundation and the San Diego Foundation, 30 percent from large donors, and the rest from corporate sponsors and smaller donors giving $50 or $100. The potential of smaller donors to give more is huge, says Lewis, adding that "we're being contacted by people from all around the country who want to start something like this."
In the last two years, similar non-profit sites have sprung up in the Twin Cities, New Haven, Seattle, St. Louis, and Chicago. The same entrepreneurial spirit has led as well to a surge of interest in investigative reporting not seen since the days after Watergate. The standard-bearer here is ProPublica, the national team of investigators backed by a well-endowed club of donors, but there's also been a proliferation of smaller start-ups, like Investigate West (based outside Seattle), the Watchdog Center (San Diego), and the Wisconsin Center for Investigative Journalism, all seeking to expose corrupt officials, corporate crime, and exploitative working conditions. Investigative reporting has also caught fire at the nation's journalism schools, with institutes committed to teaching and supervising such work established at American, Brandeis, Boston University, and Columbia. Sheila Coronel, who runs the Columbia center, says that this year 120 students applied for the fifteen spots in her class —double the number of a year ago—a development she attributes to a new wave of idealism among America's young.
In early July, the representatives of two dozen such centers met at Pocantico, the Rockefeller estate in Tarrytown, New York, to discuss ways of collaborating. In a unanimous resolution, they committed themselves to establishing, "for the first time ever, an Investigative News Network of nonprofit news publishers throughout the United States of America," with a mission "to foster the highest quality investigative journalism, and to hold those in power accountable, at the local, national and international levels." Following up, subcommittees are now studying ways to foster cooperation in conducting investigations, displaying work on the Web, and—most importantly—securing funding. "I've been doing investigating reporting for thirty years," says Charles Lewis, the founder of the Center for Public Integrity and an architect of the new network, "and this is by far the most interesting time I've seen."
"There's a big pool of money in the nonprofit world—we need to see if we can tap into it," says Joel Kramer, the founder of MinnPost, the community-based site in the Twin Cities, who stresses how challenging it is to make an Internet news operation work. "Even on a nonprofit site, you have to find ways to make enough money to cover the costs." To date, the funding of nonprofit journalism has been led by the Knight Foundation, under the direction of former Miami Herald publisher Alberto Ibargüen, with added support from Carnegie, Ford, MacArthur, and George Soros's Open Society Institute. Benjamin Shute Jr. of the Rockefeller Brothers Fund, which hosted the Pocantico meeting, says that more foundations are showing interest, but, he warned, most
don't see themselves in the sustaining business. They're like venture capital firms—they like to get things started but then want to see them take on lives of their own. At least a significant proportion of income has to come from other sources.
When it comes to cultivating such sources, everyone looks to one organization for guidance: NPR. At a time when not only newspapers but also commercial broadcasters are struggling, NPR has thrived. In 2008, the cumulative weekly audience for its daily news shows increased by 9 percent, to a record 20.9 million listeners. Though not immune to the economic downturn—in December 2008, it eliminated sixty-four jobs, or 7 percent of its workforce, and in April, it cut thirteen more positions and announced five-day furloughs for all remaining staff—NPR remains robust enough to maintain seventeen bureaus abroad and another nineteen at home. To keep all that afloat, it draws on several money sources: its endowment, foundations, corporate underwriting, and dues and fees from its more than 860 member stations, all of which are noncommercial. This last stream is the largest, making up 43 percent of the total. Most of that money is raised from listeners during those annoying pledge drives. In short, NPR is supported mainly by those who actually consume its product—a huge advantage at a time of anemic advertising.
NPR is planning an ambitious campaign to boost the reporting capacities of its member stations. "We're trying to raise money on behalf of not just NPR but journalism at local radio stations—to raise the level of reporting both on radio and the Web and to step up the coverage that local papers can't produce," I was told by Vivian Schiller, NPR's chief executive. Eventually, she says, NPR hopes to connect these stations into a national network anchored by its Web site. Accomplishing this, Schiller says, would be expensive—the news operations at many public stations are primitive—"but not," she adds, "as expensive as a start-up—we don't need bricks and mortar."
Listening to Schiller, I began to envision the outlines of a new type of news system in the United States, one rooted in the public radio stations that reach into nearly every town and county in the country. If the news-gathering abilities of these stations were truly fortified, they could help fill in the gaps in local news being left by the downsizing of daily papers. They could also provide nodes of collaboration for all those innovative Web sites out there, both for- and not-for-profit.
These sites and stations, in turn, could enter into relationships with daily newspapers. The information-gathering functions of those papers cannot be replaced, but, as their staffs shrink, they could receive a valuable boost from collaboration with nonprofits. The network could also provide a home for all those enterprising bloggers out there, drawing on their knack for instigation, indignation, and outrage, as well as a place for nonjournalistic organizations like Human Rights Watch and the National Security Archive that are carrying out their own forms of investigation and documentation. Finally, if PBS were to expand its operations and mesh them more tightly with NPR's, there could finally begin to emerge in America a truly national noncommercial news system, akin to the BBC.
America will never have a BBC. The government funding isn't there. What we do have, though, is a tremendous increase in enthusiasm and initiative that, in the age of the Internet, counts for more than transmitters and printing presses. The retreat of the giant corporations and conglomerates is creating the opportunity for fresh structures to emerge. It remains to be seen whether foundations, wealthy donors, and news consumers will step forward to support them. (Nonprofit Web sites and public broadcasters, it is worth noting, are, in effect, partly subsidized by the public, through the tax deductions taken for the grants and donations made to them.)
The opening won't last forever. Lurking in the wings is a potential new class of media giants. Google, Yahoo, MSNBC, and AOL, all have vast resources that could finance a new oligopolistic push on the Web. Sheila Coronel, who directed an investigative reporting center in the Philippines before joining the Columbia faculty, sees parallels between what's occurring here and what took place there after the fall of Marcos. As the old media monopolies crumbled, a host of smaller players rushed forward, offering a new plurality of voices. Before long, however, the rich and powerful regained control, and those new voices were snuffed out. "There's a historic opportunity to create a noncommercial sector in the media in the United States," Coronel says:
But my experience, after having undergone a somewhat similar transition, from controlled to free media after the fall of a dictatorship, is that the window is narrow. We need to grab the moment now, because if the old order begins to reassert itself, it will be a long time before such a moment comes again.
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