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worlds. Not since the Baby Boomers has so much coverage been given to a single generation. Some people believe that Millennials are

so different from previous generations that they require new kinds of products, new types of mar-keting and advertising techniques to persuade them to buy, and entirely new educational tech-niques. Millennials drink more specialty coffee, so coffee makers are responding with multiple new specialty coffee drinks. How about an orange-pineapple latte? And there’s a hint of lower prices geared to the fact that Millennials are earning less, have higher rates of unemployment, and extraordinary student debt. There’s a lot of money at stake getting the pulse of Millennials and figur-ing out how to market to them. Millennials now make up the largest generation in the United States, constituting about 80 million consumers, and over 30% of the labor force. Millennials are just the latest in a long line of generalizations about people who grew up in specific time periods. The Greatest Genera-tion (1901–1924) came of age during the Great Depression and served in World War II. The Baby Boomers (1946–1964) grew up with the civil rights movement, political unrest, and rock and roll. Generation X (1965–1980) continued the trends of the Baby Boomers except more so. Generation Xers were the first to experience a slowdown in living standards, and a growing sense that they might not earn as much as their parents. The Millennials are continuing many of the trends of previous generations, including

an alienation from cultural and political institu-tions, a decline in religious belief and marriage rates, higher levels of student loan debt, poverty, and unemployment, and the reality—not just the fear—that they will earn less than their parents at a similar age. The Millennials are much more ethnically diverse as well: nearly half of the Mil-lennial generation were not born in the United States.

But perhaps most important according

to some is that Millennials are digital natives: they are the first generation to be born into the digital revolution of the 20th century. They grew up with the commercial Internet. According to Marc Prensky, an author and promoter of edu-cational games, Millennials’ brains are physi-cally different because of long-term exposure to interactive video games, console controllers (the “twitch” effect), graphical interfaces, and non-linear hypertext experiences on the Inter-net. Today’s digital natives, in this view, cannot learn from books, newspapers, or linear stories even if they are video-based. They are bored by these old-school learning tools. The implications for education are, according to Prensky, to throw out traditional, old-style, linear thinking found in books and school curricula, and replace these with video games and link-clicking for nearly all subjects. This is referred to as the “gamification” of education.

But real-world Millennials don’t seem to fit

the Prensky mold. In fact, there is no evidence that Millennials think differently from other gen-erations, have physically different brains, or can learn only by using games. More Millennials have a college degree and more graduate school atten-dance than other generations. They apparently do learn in traditional environments, and they didn’t

get through all this education by playing games! Academic researchers have dismissed much of the digital native thesis, finding little support for claims that Millennials have adopted learning styles that are radically different from those of their parents. But clearly Millennials have had a very dif-ferent experience growing up with technology than their parents, given the incredible advancement of digital technologies in the last three decades that have created entirely new platforms like smartphones, tablets, digital photography, and highly interactive console and PC games, all of which have changed how content—books, news-papers, magazines, TV, and Hollywood movies—is created, distributed, and consumed. Millennials probably think like everyone else, but they do have different patterns of content consumption. Let’s look at the data. Given their intense use of the Internet, and absorption in digital experiences, including games, one would think Millennials would read few books (too boring and not twitchy or inter-active enough), and that they would believe the Internet contained just about all the content and knowledge worth knowing about. Not so, accord-ing to a large study by Pew Research: Millenni-als are more likely to have read a book in the past 12 months than older adults, 88% versus 79%. Almost 40% report having read an e-book in the past year, about the same as older adults. They are more likely to use a smartphone to read e-books than a Kindle. And they are more likely to think that there’s a lot of useful information that is not on the Internet, more so than older adults. They are more likely to have used a library in the past twelve months, and more likely to have used a library website. Even more unexpected: a study of 2,000 American and U.K. Millenni-als found this group overwhelmingly preferred printed books to e-books, and preferred buying them at bookstores rather than online stores like Amazon. Apparently, 600 years of reading printed

books has created a print habit that might survive the Internet! Millennials are only half as likely to sub-scribe to a print newspaper, but they are more likely to read news on digital news sites or get news (or links to news stories) from social sites, and to use their cell phones to follow news stories. Millennials are not news-less: 69% read news stories every day, some in print and even more online.

Given Millennials’ intense exposure to high speed, interactive, “twitch”-oriented video and video games, surely they are not about to watch passive, linear TV series online or offline, like regular cable television, or stream feature-length movies that require concentration. Surely they would not sit for 30 hours to binge watch a TV series already ten years old. Here too, the evi-dence does not fit the stereotype, although there are some differences. Contrary to the stereotype, Millennials watch 100–130 hours of regular cable TV per month, about the same as older adults. Marketers believe Millennial interest in TV is greater than any generation. Over 70% watch television live, without digital delays or streaming, slightly less than older adults. They like comedy and sitcoms more than older adults, and are more likely to watch TV on a smartphone or tablet. They also adore older TV series that they may have watched as children. In fact, they seem to have transformed the Internet from a media that involves reading to one that involves viewing. About 55% of binge viewers are Mil-lennials. Millennials are more involved with online video: they watch 200 more videos per month than older adults, mostly on YouTube, in large part because they are more likely to have and use smartphones. Millennials are nearly twice as likely to use streaming services like Netflix, Hulu, and Amazon, and are less likely to have cable or satellite TV service than older adults. About 13% of Millennials have no pay TV service, not that different from 9% of older adults. Millenni-als are not cutting the cord in large numbers, although they are more likely to have never

had cable TV (“cord nevers”). They are using their smartphones and tablets as TV substitutes, viewing TV shows wherever and whenever they want. Millennials are driving a surge in YouTube action sports videos (surfing, skateboarding, and snowboarding). When it comes to finding interest-ing TV shows and videos, Millennials rely much more than other adults on their Facebook friends and newsfeeds. Finally, Millennials play a more active role in creating video content than older adults by posting photos and videos to social sites. Millennials really do consume content differ-ently than older adults of previous generations, although the differences appear to be far less and more commonsensical than journalists portray. For instance, Millennials take more advantage of the latest technologies from smartphones to access streaming music and TV services than, say, Baby Boomers, although Baby Boomers, the generation that created the digital revolution, have adopted the new technologies nearly as much. Millennials have not lost interest in society or news about society, they just access it online somewhat more than older adults. Millennials do indeed create and share more content than elders, and control their TV schedules more often, includ-ing binge watching, even though they are watch-ing hundreds of hours of cable TV every month.

Reaching Millennials can be a problem for

marketers. They are more likely to visit content sites such as Vice and Vox than traditional print sources, but their most frequent news sites include CNN and the New York Times websites. They are more likely to use ad blockers and tune out any kind of online ad. They are more visual and are more likely to use Tumblr, Pinterest, and Ins-tagram. And they are much more likely to use mobile payment methods than Boomers. As with all gross characterizations of entire

generations, it’s a mistake to think of Millen-nials as a single group. Millennials have both a higher percentage with college degrees and a higher percentage of people with only high school degrees; they are both richer and poorer than previous generations, more ethnically diverse, much more likely to be recent immigrants, have higher levels of unemployment, are less likely to marry early, and more likely to live with their parents to later ages and to delay child bearing. Contrary to marketers’ assumptions, the Millen-nial population is actually many different com-munities, with different tastes and consumption patterns.

Millennials are different, but not so differ-ent that we don’t recognize them as our children, inheritors of very powerful digital technologies, to be sure, but inheritors also of several thousand years of literature, history, and culture, which they continue to find of enduring value.

The Internet, television, and movies are converging into a single digital stream. This convergence is described later in the chapter.

Internet and Traditional Media: Cannibalization versus Complementarity

Several studies reveal that time spent on the Internet reduces consumer time available for other media (Pew Research Center, 2013). This is referred to as cannibalization. The alternative argument is that the Internet and traditional media are complementary and mutually supportive rather than substitutive. True, there has been a massive shift of the general audience to the Web, tablets, and smartphones, and once there, a large percentage of time is spent on viewing content. Yet, more recent data finds a more complex picture. Despite the availability of the Internet on high-resolution tablet computers, television viewing remains strong, video viewing on all devices has increased, and the reading of all kinds of books, including e-books and physical books, has increased. New television sets are Internet-enabled, allowing consumers to use the Internet to view TV shows on their traditional TVs. Total music consumption measured in hours a day listening to music has increased even as sales of CDs have drastically declined; likewise, movie consumption has increased even as DVD sales also decline markedly. Nevertheless, the bottom line is that physical media are declining relative to the rapidly expanding digital media for all kinds of content. Print media and music have been severely impacted, as described below.

Media Revenues

An examination of U.S. entertainment and media industry revenues reveals a somewhat dif-ferent pattern when compared to media consumption (see Figure 10.2). In 2016, media of all

kinds generated $251 billion in revenue (not including transmission fees for content such as cable TV subscription fees). Television and motion pictures accounted for about 40% and print media (books, newspapers, and magazines) for 32% of total media revenues. Internet media (online music and video) and video games each accounted for 9%, respectively. Radio and recorded music together accounted for 9%. The cost of online media has declined, and its con-venience has been enhanced, resulting in much greater demand and consumption of media.

Three Revenue Models for Digital Content Delivery: Subscription, A La Carte, and Advertising-Supported (Free and Freemium) There are three revenue models for delivering content on the Internet. The two pay models are subscriptions (usually “all you can eat”) and a la carte (pay for what you use). The third model uses advertising revenue to provide content for free, usually with a freemium (higher price) option. There is also completely free, user-generated content, which we will discuss later. Contrary to early analysts’ projections that “free” would drive “paid” out of business, it turns out that both models are viable now and in the near future. Consumers increasingly choose to pay for high-quality, convenient, and unique content, and they have gladly accepted free advertiser-supported content when that content is deemed not worth paying for but entertaining nevertheless. There’s nothing contradictory about all three models working in tandem and cooperatively: free content can drive customers to paid content, as streaming services like Pandora and Spotify have discovered.

Online Content Consumption

Now let’s look at what kinds of online content U.S. Internet users purchase or view online in 2017 (Figure 10.3). It’s not a surprise that 82% of Internet users watch online video of various kinds, but it may be a surprise that 65% of Internet users read online newspapers. Playing games on a mobile device and watching online TV shows and movies are also very popular. The percentage of Internet users that read e-books (33%) initially grew at triple-digit rates when the Kindle was introduced in 2007 and the iPad in 2010, but has since slowed. What this reveals is that Internet users retain their affinity to traditional formats—newspapers, radio, TV shows and movies, books, and music tracks and albums—and bring these tastes to the Internet and their mobile devices. Figure 10.4 shows estimated U.S. online entertainment content revenues, pro-jected to 2020. Online games generate the most revenue in 2017 and are expected to continue growing slowly through 2020. Online TV and movies generate the second most revenue and, like online games, are expected to slow in growth by 2020. While revenue from online music sales in the form of downloads has declined significantly, music streaming revenues, growing at 20% annually, have offset the decline in downloads. Internet radio (digital broadcast stations) revenue is also expected to grow through 2020.

Free or Fee: Attitudes About Paying for Content and the Tolerance for Advertising:

In the early years of online content, multiple surveys found that large majorities of the Internet audience expected to pay nothing for online content although equally large majorities were willing to accept advertising as a way to pay for free content. In reality, on

the early Web, there wasn’t much high-quality content. However, since then, consumer behavior and attitudes toward paying for content have greatly changed. Until services such as iTunes arrived in 2003, few thought the “fee” model could compete with the “free” model, and many Internet analysts believed that information on the Internet needed to be free. Cable TV systems and cable content providers like ESPN had a totally different history: they always charged for service and content, and cable executives, investors, and TV experts never thought information should be free. Neither did the Hollywood and New York media companies that paid for and provided the content to television and movie theaters. The culture of the Internet began to change when Apple introduced iTunes as a source of relatively inexpensive, high-quality music, and firms such as YouTube (and its parent Google), which started out with a business model based on amateur videos and illegally uploaded music videos, began cooperating closely with Hollywood and New York production studios for premium content. In 2017, millions of Internet users are more than willing to pay for high-quality content delivered on a convenient device such as a smartphone, tablet computer, or e-reader, using services like those offered by Netflix, Apple TV, or Amazon Fire TV.

DIGITAL RIGHTS MANAGEMENT (DRM) AND WALLED GARDENS

Digital rights management (DRM) refers to a combination of technical (both hardware and software) and legal means for protecting digital content from unlimited reproduction and distribution without permission. DRM hardware and software encrypts content so that it cannot be used without some form of authorization typically based on a payment. The objective is to control the uses of content after it has been sold or rented to consum-ers. Essentially, DRM can prevent users from purchasing and making copies for wide-spread distribution over the Internet without compensating the content owners. While music tracks in the iTunes Store were originally protected by DRM, in 2009, Apple aban-doned the practice because of user objections, and because Amazon had opened an online music store in 2007 without any DRM protections, with the support of music label firms, who came to realize that DRM prevented them from exploiting the opportunities of the Internet and perhaps even encouraged an illegal market. Streaming content services are inherently difficult to copy and re-distribute. Movies streamed from Netflix are techni-cally difficult for the average user to capture and share, although new apps like Meerkat and Periscope (Twitter) make live re-streaming very easy even if the quality is low. Like-wise, music streamed from Pandora is cumbersome to record and share. Streaming ser-vices, including both Apple and Amazon, use a kind of DRM called a walled garden to restrict the widespread sharing of content. They do this by tying the content to the hard-ware, operating system, or streaming environment. E-books purchased from Amazon can only be read on Kindles or Kindle apps, and Kindle books cannot be converted to other formats. By locking the content to a physical device, or a digital stream with no local storage, the appliance makers derive additional revenues and profits by locking custom-ers into their service or device and satisfy the demands of content producers to be fairly compensated for their work. Google’s YouTube identifies and tracks copyrighted music and removes it if music labels have not granted permission, and offers owners the revenue from advertising if they choose to let the music remain on the site. These efforts have not eliminated pirated content on the Web, but they have reduced its prevalence.

MEDIA INDUSTRY STRUCTURE

The U.S. media industry prior to 1990 was composed of many smaller independent corpo-rations specializing in content creation and distribution in the separate industries of film, television, book and magazine publishing, and newspaper publishing. During the 1990s and into this century, after an extensive period of consolidation, huge entertainment and publishing media conglomerates emerged. The U.S. media industry is still organized largely into three separate vertical stove-pipes: print, movies, and music. Each segment is dominated by a few key players, and generally there is very little crossover from one segment to another. For example, news-papers typically do not also produce Hollywood films, and publishing firms do not own newspapers or film production studios. The purchase of the Washington Post in 2013 by Jeff Bezos, the founder of Amazon, and an Internet mogul in his own right, was an anomaly. Even within media conglomerates that span several different media segments, separate divisions generally control each media segment. In the past, we have not included the delivery platform firms, such as Comcast, Altice,

AT&T, Verizon, Sprint, and Dish Network, in this analysis because in general they did not focus on the creation of content but instead just moved content produced by others across cable, satellite, and telephone networks. However, within the last several years, this has begun to change. Comcast led the way with the acquisition of a majority interest in NBC Universal. AT&T’s proposed merger with Time Warner and Verizon’s purchase of Yahoo, along with its previous acquisition of AOL, are signs that the telecommunications companies are moving into the content and distribution market, as well as the Internet advertising industry, in a major way.

MEDIA CONVERGENCE: TECHNOLOGY, CONTENT, AND INDUSTRY STRUCTURE

Media convergence is a much used but poorly defined term. There are at least three dimensions of media where the term convergence has been applied: technology, content (artistic design, production, and distribution), and the industry’s structure as a whole. Ultimately for the consumer, convergence means being able to get any content you want, when you want it, on whatever platform you want it—from an iPod to an iPad, Android phone, or home PC, or a set-top device like Apple TV and Amazon Fire TV.

Technological Convergence Convergence from a technology perspective (technological convergence) has to do with the development of hybrid devices that can combine the functionality of two or more existing media platforms, such as books, newspapers, television, movies, radio, and games, into a single device. Examples of technological convergence include the iPad, iPhone, and Android (“smartphones”) that combine telephone, print, music, photos, and video in a single device.

Content Convergence

A second dimension of convergence is content convergence. There are three aspects to content convergence: design, production, and distribution. There is a historical pattern in which content created in an older media technology

migrates to the new technology largely intact, with little artistic change. Slowly, the differ-ent media are integrated so that consumers can move seamlessly back and forth among them, and artists (and producers) learn more about how to deliver content in the new media. Later, the content itself is transformed by the new media as artists learn how to fully exploit the capabilities in the creation process. At this point, content convergence and transformation has occurred—the art is different because of the new capabilities inherent to new tools. For instance, European master painters of the fifteenth century in Italy, France, and the Netherlands (such as van Eyck, Caravaggio, Lotto, and Vermeer) quickly adopted new optical devices such as lenses, mirrors, and early projectors called camera obscura that could cast near-photographic quality images on canvases, and in the process they developed new theories of perspective and new techniques of painting landscapes and portraits. Suddenly, paintings took on the qualities of precision, detail, and realism found later in photographs (Boxer, 2001). A similar process is occurring today as artists and writers assimilate new digital and Internet tools into their toolkits. For instance, GarageBand from Apple enables low-budget independent bands (literally working in garages) to mix and control eight different digital music tracks to produce professional sounding recordings on a shoestring budget. Writers of books are beginning to think about video and interactive versions of their books. Online newspapers are changing the news cycle to a 24-hour stream, producing their own video channels, and expanding user comment opportunities on their websites. On the production side, tools for digital editing and processing (for film and televi-sion) are driving content convergence. Given that the most significant cost of content is its creation, if there is a wide diversity of target delivery platforms, then it is wise to develop and produce only once using digital technology that can deliver to multiple platforms. Generally, this means creating content on digital devices (hardware and software) so that it can be delivered on multiple digital platforms. Figure 10.5 depicts the process of media convergence and transformation using

the example of books. For example, consider this book. In 2017, this book was written with a view to appearing on iPads and Kindle e-book readers, and it is now moving closer to the media maturity stage, in which the book is available mostly as a purely digital product with substantial visual and audio content that can be displayed on many differ-ent digital devices. By that time, the learning experience will be transformed by greater use of interactive graphics, videos, as well as an integrated testing system that monitors student performance during the semester. Even the number of pages read by students, and the time on page, will be accounted for by this digital learning management system. Traditional bound books will probably still be available (books have many advantages), but most likely, print editions will be printed on demand either by publishers or by customers using their own print facilities.

Industry Structure Convergence

A third dimension of convergence is the structure of the various media industries. Indus-try convergence refers to the merger of media enterprises into powerful, synergistic combinations that can cross-market content on many different platforms and create new works that use multiple platforms. This can take place either through purchases or

through strategic alliances. Traditionally, each type of media—film, text, music, televi-sion—had its own separate industry, typically composed of very large players. For instance, the entertainment film industry has been dominated by a few large Hollywood-based production studios, book publication is dominated by five large book publishers, and music production is dominated by four global record label firms. However, the Internet has created forces that make mergers and partnerships among

media and Internet firms a necessary business proposition. Media industry convergence may be necessary to finance the substantial changes in both the technology platform and the content. Traditional media firms who create the content generally do not possess the core competencies or financial heft to distribute it on the Internet. Technology compa-nies that dominate the Internet (Google, Apple, Amazon, and Facebook) have the com-petency and wealth to pursue Internet channel strategies, but until recently did not have the competencies needed to create content. Business combinations, licensing deals, and partnerships are made to solve these issues. While traditional media companies have not done well in purchases of Internet plat-form companies, the technology owners such as Apple, Amazon, Facebook, Microsoft, and Google have generally avoided merging with media companies, and instead rely on contractual arrangements with media companies to protect intellectual property rights and to create a business pricing model that both parties can accept. However, this pattern is changing. For instance, CBS Inc., a movie and television content producer, produces television shows for Netflix; Netflix, Hulu, and Amazon produce and distribute their own original TV series; Google is producing original content designed for Internet distribu-tion on YouTube. Amazon created its own book imprint, Amazon Books Publishing, and entered the book publishing business. And in 2017, as noted previously, telecommunica-tions companies are joining the fray, with Verizon acquiring Yahoo and AT&T proposing to merge with Time Warner. In this sense, the Internet is changing the media industry from what it was in the recent past. In the end, consumers’ demands for content anywhere, anytime, and on any device

are pushing the technology and content companies toward both strategic alliances and strategic conflicts in their search for advantage.

THE ONLINE PUBLISHING INDUSTRY

Nothing is quite so fundamental to a civilized society as reading text. Text is the way we record our history, current events, thoughts, and aspirations, and transmit them to all others in the civilization who can read. Even television shows and movies require scripts. Today, the U.S. publishing industry (composed of books, newspapers, magazines, and periodicals) is an $80 billion media sector based originally on print, and it is now moving rapidly to the Internet and mobile delivery. The Internet offers the text publishing industry an opportunity to move toward a new generation of newspapers, magazines, and books that are produced, processed, stored, distributed, and sold over the Web, available anytime, anywhere, and on any device. The same Internet offers the possibility of destroying many existing print-based publishing businesses that may not be able to make this transition and remain profitable.

ONLINE NEWSPAPERS

Newspapers in 2017 are the most troubled segment of the print publishing industry. U.S. newspaper industry revenues have shrunk from their high of $60 billion in 2000 to about $29 billion in 2016 (see Figure 10.6). The newspaper labor force has roughly been cut in half over this period. The newspaper industry has been in an extended period of digital disruption since the rise of the Web in 2000 and the emergence of powerful search engines like Google, which allow consumers to search for and read news articles on any subject without having to browse a physical newspaper or an online edition. Social media sites have become a major source of unique visitors to online newspapers, who, unfortunately, do not browse for news and usually stay on the newspaper’s site for only a few moments to read a single article. These fleeting visitors typically do not engage with the newspaper as a whole or with its online ads. Even before the Internet and Web, newspaper revenue was falling due to the influence of earlier technologies like broadcast and cable television. In 2014, three of the largest newspaper organizations (Gannett, Tribune Company, and E.W. Scripps) spun off their newspaper operations as independent firms so they could focus on television and other media assets, including in some cases, successful digital properties. Newspapers will now be pure-play print and online enterprises and will have to make it on their own without the protection of television or other media assets (Carr, 2014).

The striking growth of alternative pure digital news sources in the last five years, from

Twitter and Facebook, to Vox, Vice, BuzzFeed, and Huffington Post, poses additional chal-lenges. Online news sources are attracting millions of consumers everyday and steer potential newspaper readers—both online and offline—away from the most valuable front page of print and digital edition newspapers. In 2015, the New York Times, along with nine other news media outlets, agreed as an experiment to embed a few of its articles directly into Facebook’s News Feed as a way to attract millions of new readers, and hope-fully convert them from free readers to paid digital subscribers. Facebook calls these news stories Instant Articles. What started as an experiment has become a major source of readers for newspaper articles, but not the entire newspaper. Newspapers are now hiring social media editors to follow trending topics and post articles to newsfeeds. Other news publishers are considering a similar move. The downside is that readers might not ever return to the newspaper websites, which are the most lucrative for digital newspapers. Newspaper survival will depend on how fast newspaper organizations can transform themselves from print to digital, and how fast they can monetize the expanding audience for news all the time, anywhere, on all devices. As can be seen from Figure 10.6, while newspaper circulation revenues (subscriptions

plus newsstand sales) have remained flat since 2000 at around $11 billion, print advertis-ing, which includes display ads, classified ads, and legal notices, has fallen precipitously from a high of $48 billion in 2000 to $12 billion in 2016. Online advertising in newspapers. $3.7 billion the previous year. Digital revenues now make up 18% of total revenues, but this has not been enough to compensate for the loss of print ad revenue. Only the music industry has suffered a similarly devastating decline in revenue. The 15-year decline in newspaper revenues has resulted from four factors: • The growth of the Web and mobile devices as an alternative medium for news and advertising. The movement of consumers to an online life style has drained billions of ad dollars (including classified ads) from the printed newspaper. The same has not been true of television advertising as we will discuss later in the chapter. Even radio advertising has stood up well to the digital revolution.

• The rise of alternative digital sources for news, commentary, feature stories, and arti-cles.

• The difficulty that traditional newspaper firms and their managers experience in devel-oping suitable business and revenue models that could survive and even prosper on the Internet, and the mobile/social platform.

• The rise of social media and search engines, primarily Google, that have directed users to news sites for single articles rather than to the newspapers’ websites.

From Print-centric to Digital First: The Evolution of Newspaper Online Business Models, 1995–2017

Since 1995, when e-commerce and digital advertising began, through to the present, newspapers have developed three distinct business models in an effort to adapt to the Internet, and more recently, the mobile and social platform (see Figure 10.7). The three models are: Print-centric (1995–2000), Integrated Print/Web (2000–2010), and the current model, Digital First (2010–present). You can compare these models on four dimensions: • Search and discovery: How do readers find the news? • Awareness: How are potential readers made aware of news? • Engagement: How are readers engaged with the news and journalists? • Technology platform: How, when, and where is the news delivered to readers? (New York Times, 2014). The milestones reflect important dates in the evolution of the Web and the mobile-social platform. In 1998 to 2000, Google launched its search engine with 60 million pages indexed, and introduced search engine paid advertising based on its Page Rank algorithm. In 2007, Apple introduced its iPhone, creating a truly mobile and universal web device, and Facebook opened its site to the public, and in 2008 signed up over 100 million users, creating the first large-scale, online social network. Prior to the development of the Web, search engines, mobile devices, and social media platforms, readers discovered the news by browsing (a form of searching) the printed paper. They became aware of stories by reading the front page, section pages, and article titles. Readers did not engage with journalists, editors, or other contributors, except for the few who wrote letters to the editor (less than 1% of all readers). Journalism was con-sidered a profession, and readers were not expected to do much more than read and be fascinated, enlightened, and entertained by people who obviously were more informed

than they. Journalists worked all day on their articles and filed them at 5 PM; professional editors revised the copy, and compositors put it on the page for the presses, which ran after midnight. The news stream ended at 5 PM. The technology platform was print, sometimes with color (a major innovation and expense in this period). With the introduction of the Web and its growing popularity, newspapers retained

their existing print-centric strategy and culture. In the Print-centric period from 1995 to 2000, newspapers created digital copies of their print editions and posted them online. Readers discovered stories as they did before, by reading the front page online, following links to stories, and clicking on topic areas or sections (e.g., Sports or Technology). Stories were promoted by a business department that sought to enlarge the print audience and to attract advertisers based on readership and online visitors. Digital advertising was very limited, in part because advertisers did not believe it was effective. Readers were not engaged with journalists except insofar as they read the stories and could identify with the subjects of stories. The business process of creating journalism did not change: articles were filed at 5 PM and went to print editors, and then were sent to the web team and the print group. There was little difference, if any, between the print and online versions. The technology platform for the digital edition was the desktop or laptop, and news was consumed at home and work. In the Integrated Print/Web period, from 2000 to 2010, newspapers adopted multime-dia elements such as video, added more interactive elements like crossword puzzles and contests, and provided more reader feedback opportunities, especially on opinion and editorial pages. There were opportunities to personalize the news using RSS feeds and push

news to the reader. Nevertheless, news was discovered by the reader visiting the website; promoting content online was limited, primarily to RSS feeds. Readers were somewhat more engaged. The technology platform remained the desktop or laptop platform. In the Digital First period, from 2010 to the present, three developments in the tech-nology and popular audience platform occurred: the rapid adoption of smartphones and tablets, and the equally astounding growth of social media sites like Facebook and Twitter, which have come to dominate consumer time on the Web and mobile devices. In addition, the rise of startup news sites specifically focused on using the new technol-ogy and platforms has spurred newspapers to radically transform their business—or go out of business. The new platform is not based on personal computers using a browser, but on mobile devices and apps, with desktops and laptops now just one pillar of the delivery platform. In this new environment, the news does not stop at 5 PM, but goes on 24×7. Stories start with an initial short article that is updated through the day, followed by thousands of tweets, then millions of shares on multiple social sites and on Google. Often amateurs on scene know more about the news in the first hours of a story than any collection of journalists in their offices. Amateurs provide video feeds and commentary to the editors and journalists. The Digital First business model inverts previous models: the top priority is produc-ing the most engaging, continually updated digital edition, and then producing a print product based on the news developed in the digital edition. In the case of pure digital startups, there is no print edition, and the news is just a continuous stream of updates, blogs, tweets, and posts, rather than a fixed article. News articles are time-stamped, indi-cating an update is on the way and the reader should return to follow the story. Instead of waiting for readers to discover the news, or search for the news on a search engine, the news is pushed to readers on any of a variety of venues where they happen to be—social media sites, mobile news feeds, Twitter, or Yahoo or Google News. Journalists remain paid professionals, but they follow Twitter feeds and social media sites, and promote their stories and personas on social media sites. Their job is no longer simply reporting and writing, and getting the facts right, but promoting and engaging readers on a personal level through their own efforts. Superior reporting and writing is no longer the sole cri-terion for hiring and advancement. More emphasis is put on reporters’ abilities to attract audiences on their own social media pages and Twitter feeds. The Digital First business model is not yet a reality for traditional newspapers. The largest print newspaper organizations, such as the Wall Street Journal, New York Times, Washington Post, and others, have begun the journey towards becoming Digital First news organizations. In 2014 the Wall Street Journal launched its Real-Time news desk, a headquarters group of 60 editors aiming to produce a continuous and lively flow of digital news and commentary to social media sites, mobile followers, and its online sites (Romenesko, 2014). The New York Times also initiated a Digital First model in January 2014 and has driven its digital-only subscriber base to 1.5 million, generating over $500 million in digital revenue (both ads and subscriptions) (New York Times, 2017; New York Times, 2014). The Times is continuing to become more digital in 2017 by becoming more visual, creating more original video and graphics, audio, and virtual reality reports. It is also using more digital native journalistic forms like the Daily Briefing feature, which gives digital readers a synopsis of the articles they should read, and Watching, a feature that curates streaming movies and videos viewers might find interesting. In 2015, the Wall Street Journal also launched a new digital first website, with redesigned web and video pages, iPad and Android apps, and a greater emphasis on breaking news stories that are refined in the course of a 24-hour news cycle (see the opening case in Chapter 4). In the past two years, the Washington Post, USA Today, and Bloomberg News have all made similar changes to succeed in a mobile-tablet-desktop digital market place. Most of the major newspaper groups have also joined with social media sites like Facebook to have their articles appear in newsfeeds.

Online Newspaper Industry: Strengths and Challenges:

The newspaper industry still has some major strengths, which it will need to draw upon as it faces the challenges of the future. In the following section, we review those strengths and challenges.

Strength: Newspaper Audience Size and Growth. Online readership of newspapers is growing at more than 10% a year. About 65% of U.S. Internet users (about 179 million people) read newspaper content online (Pew Research Center, 2017). See Figure 10.8 for a list of the top ten online newspapers in the United States. The online newspaper is one of the most successful of all online media in terms of audience size. Mobile newspaper readership is especially strong among young persons due to their greater usage of smart-phones and tablet computers. Young people (age 18–34) are more likely to read news online than older people.

Newspapers have responded to the changing audience by providing access to their

content on all digital platforms. With 68% of Americans accessing the Internet with a mobile device, in a few short years newspapers have become truly multi-platform by developing apps and websites optimized for mobile devices, and an integral part of many social network users with 35% of readers using social networks to access articles (see Figure 10.9). Only 51% of newspaper readers are exclusively print readers, while 49% use a combination of the Web, print, and/or mobile (Pew Research Center, 2016). Mobile traffic is continuing to grow for most newspapers, while the number of desktop visitors is declining. In 2017, a majority (53%) of Americans who read newspapers online read them exclusively on mobile devices, while another 33% use both mobile devices and desktop computers. Just 14% use only a desktop (Newspaper Association of America, 2017; Pew Research Center, 2017). Online newspapers also attract a wealthy, educated, and consumer-intense demo-graphic, reaching 64% of 25-to 34-year-olds, and 75% of individuals in households earning more than $100,000 a year on average throughout the quarter. Given the large online newspaper audience, it is clear that the future of newspapers lies in the online and mobile market even as readership and subscriptions to the traditional print newspapers continue to decline at a steady pace.

Challenge: Digital Ad Revenue. Newspapers hope that the digital ad revolution and revenue will hit their shores, and lift total ad revenues. But here’s the problem: while unique visitors to newspaper websites are expanding, increasingly this traffic is less valu-able for two reasons. First, the audience is increasingly coming from social media sites and search engines in order to find specific articles, rather than coming directly to the newspaper’s home page (so-called side-door entry). Second, these visitors from social sites are less engaged, and less valuable. People who come directly to a newspaper’s website view, on average, 24 pages of content. If they use a search engine or social site they view around 5 pages of content. The less engaged visitors are in terms of pages viewed, minutes on site, and return

visits, the less time there is to show them ads and earn revenue. Direct visitors are there-fore much more valuable, and newspapers are hoping re-designed websites and apps will increase the number of home page visitors. As a result, with the exception of 2016, growth in digital ad revenues at online newspapers has been tepid. In comparison, total U.S. digital ad revenue (search, social, and display ads) grew at over 15% (eMarketer, Inc., 2017c). If current trends continue, it is unlikely newspapers can rely on growing unique visitors from social sites, or growing digital ad revenues, to reverse the revenue declines of the past decade. Instead they will need to build on their expanding digital subscription market composed of loyal readers who visit the paper everyday for curation and opinion.

Strength: Content Is King. Why do people continue to buy newspapers and pay for news-paper content online? The oft-repeated bon mot that “content is king” appears to be true in the case of print as well as online content of all kinds, including news and pure digital news sites. As in competitive sports, in general, quality counts. The reason why online newspapers attract exceptionally large and loyal audiences who are deeply engaged is simple: quality of content. Compared to other media, newspapers are the most trusted source of news and commentary on local, national, and international stories (Nielsen, 2013). Local newspapers produce the highest levels of ad engagement: 35% of consumers report making purchases on the basis of local newspaper ads. Online display ads, e-mail campaigns, and fleeting mobile ads do not even come close to these engagement levels. Newspapers employ about 33,000 full-time professional editorial staff, down from about 56,000 in 2000, but still much larger than television, radio, or newer pure digital news sources, which obtain much of their content from unpaid bloggers, cellphone photogra-phers, and bloggers (Pew Research Center, 2016, 2014).

Challenge: Finding a Revenue Model. In 1995, when the first newspaper websites appeared, newspapers offered their content for free, with registration. The hope was that advertising would support the website’s operation and provide a new revenue stream for the print edition content. In some cases, free content was limited to the most popular articles and did not include the classified ads, a lucrative newspaper franchise. At that time, print advertising provided over 75% of revenues and subscription revenue gener-ated about 25%. Charging for general newspaper content was an obvious answer, but publications that

tried this during the 1995–2005 period were punished by an Internet culture that expected online content such as music and news to be free. Public willingness to pay for digital content of all kinds has changed greatly for reasons described earlier. Newspapers (and online magazines as well) have benefited from the changes in

public perception. Today, 78% of U.S. newspapers with circulations of over 50,000 have some sort of charge for online access. Of these, 64% use a metered subscription model (which provides access to a limited number of articles for free, but requires payment of a

subscription fee once that limit is exceeded), 12% provide most content for free, but charge a subscription fee to access premium content, and 3% use a paywall (paid subscription service) model (Williams, 2016). Absent significant changes in the business relationship between legitimate news organizations and the major online distributors of news articles, the legitimate newspa-per industry, especially local and regional news organizations, will likely decline further, except for the major national newspapers, who will likely be diminished, largely unprof-itable, and require support from billionaires and philanthropists. Google and Facebook now account for 80% of the online display ad business, and 60% of all online advertising in what some critics call a “duopoly” that imposes unfavorable terms on the newspapers. Facebook users now spend an estimated 35 to 50 minutes a day on the site. This is all revenue and time that newspapers relied on in the pre-Internet era to survive. The Internet distributors recognize they have a direct interest in the survival of legiti-mate news sites. Otherwise, their users would be limited to so-called “news sites” that lift content from the major newspapers, blog posts, and cat videos. Google, Facebook, and Amazon’s start-up social network Spark have begun to respond to the complaints of newspapers that they do not receive a fair share of the ad revenue generated by these sites. As a part of its Facebook Journalism Project that supports newspapers, Facebook began testing a new freemium metered pay business model tool that would be added to its Instant Articles feature in which users could access ten articles on a major news sites for free, but then would be directed to the newspapers’ subscription pages, and be required to pay for a subscription. Google has introduced its AMP tool to expedite the posting of articles in its search results. Amazon is paying publishers to post articles on its Spark social commerce network. Meanwhile, the News Media Alliance, a leading trade industry group, whose members

include the New York Times, the Wall Street Journal, The Washington Post, The News Corporation, and others, is proposing federal legislation that would allow newspapers to bargain as a group with Internet distributors, creating, as it were, its own news collective bargaining entity to negotiate with the Internet duopoly of Google and Facebook. This legislation would require an exemption for the newspaper industry from the Sherman Antitrust Act, which prohibits such industry collaboration. The outlook for this legislation becoming law is slim, but it is another pressure point on the Internet titans to pay more for use of content from legitimate news sites (Isaac and Ember, 2017; Rutenberg, 2017).

Challenge: Growth of Pure Digital Competitors. The Web has provided an opportunity for newspapers to extend their print brands, but at the same time it has given digital entrepreneurs the opportunity to disaggregate newspaper content by creating special-ized websites for popular content such as weather, classified ads (Craigslist), restaurant and product reviews (Yelp), as well as topical national and international news sites and apps that compete with online newspapers. Despite the declining revenues of the tradi-tional print newspaper industry, entrepreneurs have poured money into news sites, and even print newspapers. Since 2011, Warren Buffett has purchased 28 newspapers for an estimated $344 million in a belief that newspapers delivering comprehensive and reliable information to small, tightly bound communities, and that have a reasonable Internet strategy, will be viable for a long time (Berkshire Hathaway, 2013). In August 2013, Jeffrey.

startup that may have a disruptive impact on traditional newspapers, see the Insight on Business case, Vox: Native Digital News. Pure digital news sites have many advantages over print newspapers. They don’t have

the cost of printing papers; they can create new work flows and business processes that are more efficient and timely; they have a lower cost structure, often relying on user gener-ated content and minimal payments to reporters and bloggers, with lower or no pension costs; and they can take advantage of newer technologies for producing the news. While the quality of journalism on these pure digital sites is not as good as traditional print newspapers, this situation is changing as the pure digital sites hire talented journalists and editors from print newspapers that are experiencing financial difficulties. What online news sites often do not have is credibility and trust. For instance,

BuzzFeed has been the subject of many lawsuits accusing it of copying content from competing newspapers and sites without attribution, claiming the content as its own. Without trust and quality, native digital news sites can become distractions filled with celebrity photos, click-bait headlines, and virtually no original reporting. If the newspaper industry has a future, it will be online and multiplatform. The chal-lenge for newspapers is to create value by focusing on differentiated, timely, and exclu-sive content available nowhere else; to transform its culture of journalism to provide a continuous news stream just as its pure digital competitors; and to make this content available anywhere, anytime, anyplace, on any device. In short, newspapers will have to become Digital First publications, while maintaining their historic quality edge, and meeting the challenge from their pure digital competitors.

MAGAZINES REBOUND ON THE TABLET PLATFORM

The Internet and the Web did not have much impact on magazine sales at first, in part because the PC was no match for the high-resolution, large-format pictures found in, say, Life or Time. However, as screens improved, as video on the Web became common, and the economics of color publishing changed, print magazine circulation began to plummet and advertisers turned their attention to the digital platform on the Web, where readers were increasingly getting their news, general-interest journalism, and photographic accounts of events. Magazine newsstand sales have also declined significantly since 2001. News magazines like Time, Newsweek, and U.S. News and World Report have been the hardest hit. In contrast, special-interest, celebrity, fashion, lifestyle, and automobile magazines have remained relatively stable (Sutcliffe, 2016; Castillo, 2016; Trachtenberg, 2015). Despite the shrinkage of print subscription and newsstand sales in the past few years,

the total magazine audience size increased by over 6% in 2016, due entirely to growth of digital magazines, especially mobile web editions, and the percentage of adults who read digital edition magazines has more than quadrupled since 2011 (Magazine Publishers Association, 2017). Another study found that over 40% of those surveyed had read an average of 2.5 digital magazine issues in the past month (Mequoda Group LLC, 2016). More than 35% of tablet computer owners read magazine content once a week, and there are an estimated 1,200 magazine apps for mobile readers. Total U.S. revenues from subscrip-tions and newsstand sales of magazine were around $27 billion in 2016, down about 3% from 2015 (Sass, 2017). Ad revenues constituted about $13 billion of the total, the rest being subscription and newstand sales. The bad news is that magazine digital ad revenues are VOX: NATIVE DIGITAL NEWS

Despite an unprecedented array of entertainment options, people are reading more news online than ever before. In fact, reading news online is the second most popular activity online. Digital news readers are highly engaged with both the content and the journalists who put the words on the screen. All of this is not lost on inves-tors, who have poured over $1 billion into native digital news sites (sites without a print edition or television franchise) in the last few years. Vox Media is a prime example of a startup

media firm grounded in the digital news stream. Founded in 2003, Vox Media is a privately held company based in Washington D.C. with over 800 employees. The company has raised $300 million in venture capital, including $200 million in 2015 from Comcast’s NBCUniversal division, valuing the company at a whopping $1 billion. This valuation is unexpected for a company that has never made a profit. Gaining access to NBCUniversal’s content distribution and production capabilities has helped Vox Media to branch out into other forms of media. Vox Media has pursued a unique strategy

from the beginning. Rather than creating a single digital news site, as, say, traditional newspapers have done, and showing tabs for various areas of interest (sports, business, or entertainment), it instead has unbundled the general news site into a number of focused niche sites, populating them with content from hundreds of different blogs that it has created or purchased. It started with SBNation (SportsBlogNation), a collection of 315 individual sites, most of which focus on individual professional sports teams. Each SBNation site has its own name, URL, brand, and writers. Vox Media currently owns eight specialty sites, which themselves are often collections of blogs or websites, including Eater (food), Curbed (real estate), Verge (culture), Polygon (game),

Racked (fashion), Re/code (tech), and most recently, a general news and commentary site, Vox.com. These niche sites foster much greater intensity of reader engagement. The approach seems to be working: Vox Media reached 70 million unique monthly visitors in April 2017, with the typical visitor being under 35 and with income over $100,000 a year. Almost one-third of its readership belongs to the coveted age 18-to-34 demographic. Vox.com, the news site, was created in

January 2014 when Vox hired respected political reporter Ezra Klein from the Washington Post. Vox.com pioneered the “explanatory journal-ism” movement by presenting news in card stacks rather than long text articles. Most digital news sites have adopted this approach: multiple head-lines that the reader clicks on for the entire text of the article. Readers can pursue news in small increments, one card at a time, with use of color photos, videos, and graphics on the cards. Vox hoped this new format would be more easily con-sumed by mobile readers, differentiate its product from digital versions of print newspapers, and also be easily placed on social network newsfeeds. Vox Media is often regarded as the future

of digital news publishing because of its technol-ogy, culture, and business organization. One of the first priorities Vox pursued was to invest mil-lions of dollars in a content management system (CMS) called Chorus. Chorus goes beyond content creation and management because it provides the publishing environment as well. When report-ers and editors are done, they can use Chorus to publish formatted content to various websites and social media. Chorus offers journalists unprece-dented levels of control and customization, includ-ing the ability to engage with reader comments and to integrate content from others’ stories. Vox also has a unique organizational struc-ture when compared to traditional newspapers. At

Vox, the organization is flat, with fewer middle and senior managers. This empowers reporters and circumvents the lengthy editorial review process at traditional newspapers. Unbundling news into more focused, vertical

websites and harnessing technology to reduce the cost and improve the speed of content creation has been a good start for Vox. But Vox must continue to focus on quality reporting while maintaining an active presence on the myriad other platforms where its audience now gets its news. Vox has been active in its efforts on Facebook and YouTube platforms, such as its early involvement with Snapchat’s Discover service for content creators. For Discover, Vox creates 10-second infographics combining voiceovers and text to plug its latest features. Vox also places heavy emphasis on its YouTube channel, which has well over a million subscribers and whose most popular video has 24 million views. Vox produces high-quality video content to accompany some of its print stories as well as other video content that stands alone, with 11 full-time Vox employees responsible for video content development. Visit Vox.com and you find two-thirds of the screen contains video news seg-ments. Much of Vox’s video traffic originates from Facebook, where videos shared by Klein garner millions more views. In 2016, Vox launched what it calls its Storytelling Studio, which prepares long-form journalism using these techniques for particularly notable stories. Not content to stop there, Vox also announced a partnership between Curbed and A&E to develop a television show

focusing on high-style housing, as well as plans to create other television-style content for BravoTV.com.

Despite new production processes, formats,

and video content emphasis, venture investors, who pumped billions into new digital news sites like Vox, have begun to wonder if Vox Media, and Vox.com, its most popular site, has a viable busi-ness model. In 2017, pure digital news sites like Medium, Buzzfeed, Huffington Post, TechCrunch, and Business Insider have all seen significant declines in visitors, and are unable to make a profit from digital advertising. Some of these sites have laid off more than 30% of their staff. Vox’s niche strategy attracts small audiences by defini-tion. Vox.com for instance attracts only about 25 million unique visitors, placing it 39th in online news sites. Many of Vox Media’s niche sites have lost traffic and cannot compete with the digital ad duopoly Google and Facebook for large media pur-chases. Subscriptions are one possibility that the major online newspapers are using successfully, but it is unlikely Vox’s audiences will pay for subscrip-tions. Vox is moving aggressively into “branded content” stories that are paid for by major national brands and do not appear to be ads, and in some cases creating entirely new branded websites for major brands. Ad blockers will not see these stories as advertising. The pure digital news sites face the same problems online as traditional newspapers, namely making a profit based on an advertising business model. The digital disruptors are in this case being disrupted themselves.

expected to be flat going forward, stuck at around $12 billion for the next few years. Print advertising (about $14 billion) is expected to remain relatively flat through 2021 (eMar-keter, Inc., 2017d). Digital ad revenue is not enough to compensate for the decline in print ad revenue. One possible solution is to begin charging a subscription fee for access to the digital editions, which currently are often free. Magazine publishers also rely on magazine aggregators like Zinio, Texture (Next Issue Media), Magzter, and Flipboard who make it possible for customers to find their favorite magazines using a single app. A magazine aggregator is a website or app that offers users online subscriptions and sales of many digital magazines. To survive, magazines must create a uniquely digital online and mobile version of

their print magazine, without at the same time losing their unique brand and quality, and still maintaining a print presence. For instance, The New Yorker, founded in 1925, pub-lishes a mix of news, culture, short stories, and the arts written by some of America’s finest and best known authors, along with cartoons and movie reviews. Thoroughly grounded in print ink and paper, the magazine underwent a digital remaking following its introduc-tion of a metered paywall in 2014 (Bilton, 2014). The New Yorker established a forty person digital staff to bring its print authors and new full-time journalists to the online audience. The digital edition of The New Yorker is in continuous production 24x7, producing upwards of 18 original posts a day, while the print edition continues its deadline-driven 47 annual issues (Mullin, 2017). The New Yorker has aggressively pursued an online presence on Face-book (over 1.6 million followers), Twitter (3 million), and Instagram (150,000), along with Foursquare, Pinterest, and LinkedIn; built a series of blogs: Culture Desk, Page Turner, and Currency. The New Yorker’s mobile audience has swelled. Contrary to initial expectations, mobile readers are more likely to read and complete long stories on their phones than on their desktops. Recently, the magazine began producing four videos per week on topics not covered in the print edition, producing over 1.6 million views in 2016 (Magazine.org, 2016). The digital makeover has worked: The New Yorker routinely has around 20 million unique visitors a month, while maintaining a base of 1 million subscribers to the print edition. A subscription to both print and digital costs $99 a year ($89 a year for print or digital alone), and includes free access to ten articles (Moses, 2017).

E-BOOKS AND ONLINE BOOK PUBLISHING

The book publishing industry’s experience with the Internet is very different from that of the newspaper and magazine industries. Despite the extraordinarily rapid growth of e-book sales (25% or more annually in the early years), sales of print books have until recently been steady and book publishing revenues have been fairly stable over the last five years. But in 2016 printed book sales experienced a sizable decrease of around 6%, dropping industry revenue for 2016 to $26 billion down from $28 billion in 2015. Pro-fessional books, which include college textbooks, remain predominantly printed for a variety of reasons, but even they were down about 8%. Trade books (general fiction and non-fiction) generated $15.8 billion in revenue. E-book versions of fiction and non-fiction books (so-called trade books) have been very successful, reaching nearly $8 billion in sales by 2016, making up 30% of total book sales. However, annual growth of e-book revenues slowed to 15% in 2016 and is expected to decline to 2% in 2017 (see Figure 10.11). Unlike the newspaper business, it’s too soon to declare that the book industry has been digitally

disrupted or mortally wounded and there is some reason to believe that printed books will continue to be with us long into the future. The first commercially successful e-book was Stephen King’s Riding the Bullet, a 66-page novella that King made available on Amazon in 2000. At first it was free, and there were 400,000 downloads on the first day, crashing Amazon’s servers. When the price was raised to $2.50, demand remained brisk. Ten years later, Amanda Hocking, an unknown writer from Austin, Minnesota, uploaded one of her vampire novels, My Blood Approves, to Amazon’s self-publishing site, and later to the Barnes & Noble e-book store. Her novels had been rejected by many of the publishing houses in New York. Within a year, she had sold more than 1 million copies of her e-books, which generally sell for 99 cents to $2.99, and earned more than $2 million. In the space of a decade, e-books have gone from an unusual experiment by a major

author, to an everyday experience for millions of Americans, and an exciting new market for authors, changing the process of writing, selling, and distributing books. An entire new channel for self-published authors now exists, a channel not controlled by the major publishing companies and their professional editors. Over 44% of Amazon’s top 100 selling e-books are now self-published, selling for less than $2.50, generating around 14% of e-book revenue for Amazon. The Big Five traditional publishers, in contrast, sell 48% of

Amazon’s e-books although they generate over 40% of Amazon’s e-book revenue with prices around $14/per e-book (Publishers Lunch, 2017). However, only around 100 indie authors have sold more than 1 million copies of their books, according to Amazon. The vast majority of indie authors are unable to make a living solely from e-book sales. Accounting for e-book sales in the mix of total book sales is difficult because most

self-published e-books sold on Amazon do not have ISBNs (International Standard Book Numbers), and, therefore, are not counted by the publishing industry, whose books always have ISBNs. Industry-based reports on e-book sales only include those published with ISBNs. The book distribution market has been greatly changed, and yet in 2017 it is appar-ent that the major publishing firms still maintain their positions as the dominant source of book content in terms of revenue. In addition, while bookstore chains like Borders and Waldenbooks have disappeared and while Barnes & Noble faces earnings challenges, small independent bookstores have grown 27% since 2009 to over 2,000 stores. Since 2015 even Amazon has opened eight physical bookstores in major cities.

Amazon and Apple: The New Digital Media Ecosystems:

Although precursors of e-books and e-book readers were introduced in the early 2000s, it was not until 2007 that the future of e-books was firmly established. In that year, Amazon introduced the Kindle, which allowed users to download books from the Kindle store using AT&T’s cell network. E-books received another boost in 2009 when Barnes & Noble intro-duced its Nook e-reader, and in 2010 when Apple introduced its first iPad tablet computer. With its large, high-resolution screen, the iPad was an even better e-book reader than the Kindle, albeit not as easily slipped into a purse. Amazon greatly improved its Kindle, and in 2017 its Fire HD 8 tablet with a high resolution 8” screen sells for $79. Today, Amazon and Apple together account for 92% of the e-book market, with

Amazon the leader with a 83% market share and Apple in second at 9% (Barnes & Noble’s Nook has experienced declining market share, but still accounts for about 4%) (Author-earnings.com, 2017). Amazon’s Kindle Store contains millions of e-book titles, while Apple’s iBooks Store has over 2.5 million. The result of the Amazon and Apple ecosys-tems, combining hardware, software, and online mega stores, was an explosion in online book content, readership, authorship, marketing, and at least a partial upending of the traditional book publishing and marketing channels. The process of writing and publishing a book has similarly been changed. In the traditional process, authors worked with agents, who sold book manuscripts to editors and publishers, who sold books through bookstores, at prices determined largely by the publishers. Because bookstores had a vested interest in selling books at a profit, there was only limited discounting during clearance sales. In the new publishing model, unknown authors still write books, but then bypass traditional agent and publisher channels and instead self-publish digital books that are sold on Amazon or by Apple. Prices are deter-mined by the author, usually much lower than traditional books depending on the popu-larity of the author. The digital distributor takes a percentage of the sale (usually 30%). New self-published authors often give away their early works to develop an audience, and then, when an audience appears, charge a small amount for their books, typically 99 cents to $2.99. Marketing occurs by word of mouth on social networks, author blogs and public readings. Although only a very few self-published authors have thus far struck it rich like Amanda Hocking, the possibility has been enough to arouse the passions of thousands of potential writers of the great American novel, as well as lesser genres from police procedurals to paranormal romance novels.

E-book Business Models

The e-book industry is composed of intermediary retailers (both brick-and-mortar stores and online merchants), traditional publishers, technology developers, device makers (e-readers), and vanity presses (self-publishing service companies). Together, these players have pursued a wide variety of business models and developed many alliances in an effort to move text onto desktop and increasingly mobile screens. There are five large publishers that dominate trade book, education, and religious

book publishing. These traditional publishers have the largest content libraries for con-version to e-books and they produce over 80% of new book titles in a year. In the e-book marketplace, the large publishers started out using a wholesale model of distribution and pricing, in part because this is the same model they used with hard cover books. In this model, the retail store pays a wholesale price for the book and then decides at what price to sell it to the consumer. The retailer sets the price with, of course, some kind of understanding with the publisher that the book will not be given away for free. In the past, the wholesale price was 50% of the retail price. With e-books, publishers discovered that some online retailers like Amazon and Apple began to sell books below their cost in order to encourage customers to purchase their e-book reader devices or to sell them other goods. The real value in e-books for Amazon and Apple is selling digital devices. While the publishers were expecting e-books to sell for $14, Amazon began selling them for $5, reducing the publishers’ revenue by at least half. Amazon not only sold millions of Kindles but also sold 90% of all e-book titles on the Web in 2011. Amazon had a de facto monopoly on e-books. In response, the top five publishers, along with Apple, introduced an agency model

of distribution in which the distributor is an agent of the publisher, and can be directed to sell e-books at a price determined by the publisher, around $14.99 and higher for certain titles. In return for a 30% commission, Apple agreed to support this model, as did Google, neither of whom were comfortable watching as Amazon dominated one of the hottest areas of web content sales. Amazon’s prices rose to this level, and its market share fell to 60%. The Justice Department was not delighted: it sued the five publishers and Apple

for price fixing in violation of antitrust laws. The case was settled and Apple paid a fine of $450 million. The settlement created a public relations storm for Amazon as writers, journalists, politicians, and publishers decried Amazon’s use of its market power to sell books that would bankrupt the established publishing industry. Today, each publisher (and not an industry consortium) makes an agreement with Amazon about the price of their books (agency model), but the book publishers pay a “listing fee” to Amazon. Today, e-book prices from major publishers are variable, but generally sell for around $15. For instance, John Grisham’s latest crime novel published by Doubleday in 2017 sells at $14.95 for a Kindle e-book, $15.99 for a paperback, and $17.99 for a hardcover edition. Amazon is no longer selling e-books below their own cost.

The Challenges Facing Traditional Book Publishers

Because of the rapid growth in e-books, the book publishing industry is in stable condi-tion. Yet the industry faces a number of challenges. The early fear of cannibalization, namely inexpensive and less profitable e-books replacing more expensive and profitable print books, has mostly been put to rest although the prices of print books are far lower than what they would have been in the absence of e-books. Unlike the newspaper and magazine industries, printed books are surviving in large part because purchasers of e-book readers continue to purchase printed books, and switch back and forth from digital to print as circumstances merit. For instance, according to Pew Research Center, about two-thirds of Americans said they read a printed book in the previous year, about the same as in 2012. Despite the surge of e-books and digital reading platforms, people still prefer printed books in many circumstances (Pew Research Center, 2016b). In the professional and educational book markets, e-books have made some inroads, in part due to their lower costs, but for a variety of reasons, many students still prefer a physical book to an e-book. Students often find the user interface of e-books more difficult to use compared to printed books and that it is easier to concentrate when using a physical book, increasing comprehension and retention. E-books may be like audio books, a useful alternative but not a substitute product. The falling growth rate of e-books from double-digit to single-digit growth may reflect this reality. The biggest challenge facing the book publishing industry is control over pricing on

the digital e-book platforms. As previously noted, Amazon accounts for about 70% of the e-book market, which, while not a monopoly, nevertheless gives it tremendous market power. For critics, Amazon threatens to decimate the traditional book publishing industry, replacing the old print world of a small number of publishers, limited numbers of titles, independent bookstores, elitist editors in New York, and newspaper book critics, with a new digital world of publishing where content is shaped by algorithms identifying what the consumer wants to read about, writers are their own editors, critics are replaced by reader comments, and distribution is controlled by one or a few online stores (Packer, 2014). So far, this dystopian future has not arrived.

Interactive Books: Converging Technologies The future of e-books may depend in part on changes in the concept and design of a book just as with online newspapers and magazines. The modern e-book is not really very dif-ferent from the first two-facing page, bound books that began to appear in seventeenth-century Europe and had already appeared in the fourth century BCE in ancient China. The traditional Western book has a very simple, nondigital operating system: text appears left to right, pages are numbered, there is a front and a back cover, and text pages are bound together by stitching or glue. In educational and reference books, there is an alphabeti-cal index in the back of the book that permits direct access to the book’s content. While these traditional books will be with us for many years given their portability, ease of use, and flexibility, a parallel new world of interactive e-books is often predicted to emerge in the next five years. Digital interactive books combine audio, video, and photography with text, providing the reader with a multimedia experience thought to be more power-ful than simply reading a book. Apple offers iBooks Author, an app to help authors create interactive books, and iBooks Textbooks, a line of interactive textbooks created by several.

of the largest textbook publishing firms. Several start-up firms have attempted to create digital video trade books that combine text with supporting video and photo materials. These efforts have not succeeded for a variety of reasons, and most have morphed into self-publishing platforms for independent authors. Major textbook publishing firms are creating digital products that combine e-text with video, simulations, testing, and course management for faculty such as Pearson’s MyMISLab. These multimedia products are gaining market acceptance, and are less expensive than traditional printed books. Some experts believe that traditional print books will be curiosities by 2025, while other experts predict the future will be a blend of print and multimedia products.

THE ONLINE ENTERTAINMENT INDUSTRY

The entertainment industry is generally considered to be composed of five commercial players: television, radio broadcasting, Hollywood films, music, and games. Together, these largely separate entertainment players generated $147 billion in annual U.S. revenue in 2016. This includes both digital and traditional format revenues. Figure 10.12 illus-trates the relative sizes of these commercial entertainment markets. By far, the largest entertainment revenue producer is television (broadcast, satellite, and cable) ($71 billion), and then motion pictures ($29.5 billion), followed by video games ($24.5 billion) (both stand-alone and online games), radio ($15 billion), and music ($7.2 billion). Radio remains a strong revenue producer aided in part by the growth of Internet radio services like Spotify and Pandora, but is still largely reliant on FM and AM broadcast technologies

especially in automobiles. Recorded music is the smallest of the major players, at half of its size ten years ago. Along with the other content industries, the entertainment segment is undergoing

a transformation brought about by the Internet and the extraordinary growth of mobile devices. Several forces are at work. Mobile devices, coupled with the easy availability of entertainment content now offered by Amazon, Netflix, and many others, have changed consumer preferences and increased demand for such content, whether in subscription or a la carte pay-per-view forms. Social networks are also spurring the delivery of entertain-ment content to desktop and mobile devices. Social networks are rapidly adding video and live video-streaming to their services, as well as providing a platform for sharing TV and

movie experiences. Facebook executives in 2017 announced that they want to become a “video first” social network. Google announced its STAMP service, which rivals Snapchat’s Discover service by allowing publishers to create rich media mobile apps with plenty of video. The iTunes store and Amazon provide successful download music services where users pay for tracks and albums. Music subscription services like Pandora, Spotify, and Apple Music have millions of subscribers. Both kinds of services—download and stream-ing—have demonstrated that millions of consumers are willing to pay reasonable prices for high-quality content, portability, and convenience. The growth in broadband has obviously made possible both wired and wireless delivery of all forms of entertainment over the Internet, potentially displacing cable and broadcast television networks. Closed platforms, like the Kindle, Apple Music, and streaming services, like Netflix, also work to reduce the need for DRM. Streaming music and video are inherently protected because in the past the content has been difficult to download to a computer (similar to cable TV). This situation is changing with the advent of streamed video apps like Periscope that can capture live video from a PC or TV screen. All of these forces have combined to bring about a transformation in the entertainment industries. In an ideal world, consumers would be able to watch any movie, listen to any music, watch any TV show, and play any game, when they want, and where they want, using whatever Internet-connected device is convenient. Consumers would be billed monthly for these services by a single provider of Internet service. This idealized version of a con-vergent media world is many years away, but clearly this is the direction of the Internet-enabled entertainment industry, in part because technology will enable this outcome, but also because of the emergence of very large-scale, integrated technology media companies like Amazon, Google, Apple, and Netflix. Many analysts believe the large entertainment media giants of the future will be technology companies that have moved into the produc-tion of content and not content producers becoming Internet titans. When we think of the producers of entertainment in the offline world, we tend to

think about television networks such as ABC, Fox, NBC, HBO, or CBS; Hollywood film studios such as MGM, Disney, Paramount, and Twenty-First Century Fox; and music labels such as Sony BMG, Atlantic Records, Columbia Records, and Warner Records. Interestingly, many of these international brand names are moving to have significant entertainment presence on the Internet with their own streaming and on-demand services. Although traditional forms of entertainment such as television shows and Hollywood movies are now commonplace on the Web, neither the television nor film industries have built an industry-wide delivery system. Instead, they are building relationships with tech-based Internet distributors like Netflix, Yahoo, Google, Amazon, Facebook, and Apple, all of which have become significant players in media distribution similar to cable TV networks fifty years ago.

ONLINE ENTERTAINMENT MARKET SIZE AND GROWTH

Shows the current and projected growth for U.S. commercial online enter-tainment revenues for the major players: online TV and movies, online games, Inter-net radio, and online music downloads. Most noticeable is the extraordinary growth of online games, driven in large part by adoption of mobile devices, as well as the growth in popularity of mobile game apps. Close behind is the revenue growth of online TV and movies, driven by the extraordinary growth in over-the-top subscription services such as that offered by Netflix and Amazon. However, the growth in revenue from both online games and online TV and movies is expected to slow significantly as the market becomes saturated by 2020.