What is news, in economic terms?
Is it a service?
"Man, it has been a while since I had my news done. Rhonda, I'll be back in an hour."
Maybe the collection of news is a service that is performed for others. You don't have time to go talk to all the lawmakers in the world about the health care bill, so we'll organize a team of specialists to do that for you, then write up an executive summary. The fact that the greatest majority of people are unwilling to pay for this service has until now been handled by selling whatever people use the service to advertisers. This is similar for many other services that are provided for free, like email, search engines, Facebook, Skype, and so on. So that's a fine idea: offer a free service to people, then sell whatever users you have to advertisers.
The problem is, journalists have no idea what services people actually want or, for that matter, who will want them, until the entire range of services has already been provided. I just saw an article that called this asymmetrical information, which seems to apply. (More information here.) In the news industry, this works in two ways. First, consumers have no idea what news will be produced on a given day. They must decide whether to buy access to the day's information without knowing whether they will be interested in it or whether it will be of any value to them. In other words, the choice to buy news is a choice to buy information you don't know you don't know (unless your friend on Facebook already told you that bin Laden was killed). And how can you possibly place a value on that? Second, news producers have little idea what will be interesting to people until after it is published, except in a few obvious cases. Journalists make value judgments all the time based solely on past experience, and the best appropriate analogy is stock traders. Past performance may not be a guarantee of future performance, but it is the only indicator one can use in making decisions for the future.
So economists say that, in markets where there is asymmetrical information (such as used cars - only the seller knows the car's quality; or home loans - only the borrower actually knows his ability and/or desire to repay), one of two things is likely to happen. In the worse case (1), the market may collapse. The agent on the side of the transaction that is lacking in information may decide that it's just not worth it, given the high likelihood that he's going to be swindled (sold a lemon, not repaid, or given a newspaper full of fluffy evergreen stories because news was slow that day). If the market doesn't collapse (2), it contracts into a market of adverse selection. This means that, because one side has such an information advantage in the transaction, the market is flooded with low-quality products. I think it would be easy to argue that this is now happening in the media market.
One way to resist this contraction is through signaling. Those on the side of the transaction with more information may choose to signal to those on the other side, either by volunteering some of that information or via guarantees or by building confidence in their brand. This is where media trust and credibility come in -- unfortunately, media are not doing such a hot job there either.
Coming in part III: The only serviceable analogy I can think of, and what it says about news.
Is it a service?
"Man, it has been a while since I had my news done. Rhonda, I'll be back in an hour."
Maybe the collection of news is a service that is performed for others. You don't have time to go talk to all the lawmakers in the world about the health care bill, so we'll organize a team of specialists to do that for you, then write up an executive summary. The fact that the greatest majority of people are unwilling to pay for this service has until now been handled by selling whatever people use the service to advertisers. This is similar for many other services that are provided for free, like email, search engines, Facebook, Skype, and so on. So that's a fine idea: offer a free service to people, then sell whatever users you have to advertisers.
The problem is, journalists have no idea what services people actually want or, for that matter, who will want them, until the entire range of services has already been provided. I just saw an article that called this asymmetrical information, which seems to apply. (More information here.) In the news industry, this works in two ways. First, consumers have no idea what news will be produced on a given day. They must decide whether to buy access to the day's information without knowing whether they will be interested in it or whether it will be of any value to them. In other words, the choice to buy news is a choice to buy information you don't know you don't know (unless your friend on Facebook already told you that bin Laden was killed). And how can you possibly place a value on that? Second, news producers have little idea what will be interesting to people until after it is published, except in a few obvious cases. Journalists make value judgments all the time based solely on past experience, and the best appropriate analogy is stock traders. Past performance may not be a guarantee of future performance, but it is the only indicator one can use in making decisions for the future.
So economists say that, in markets where there is asymmetrical information (such as used cars - only the seller knows the car's quality; or home loans - only the borrower actually knows his ability and/or desire to repay), one of two things is likely to happen. In the worse case (1), the market may collapse. The agent on the side of the transaction that is lacking in information may decide that it's just not worth it, given the high likelihood that he's going to be swindled (sold a lemon, not repaid, or given a newspaper full of fluffy evergreen stories because news was slow that day). If the market doesn't collapse (2), it contracts into a market of adverse selection. This means that, because one side has such an information advantage in the transaction, the market is flooded with low-quality products. I think it would be easy to argue that this is now happening in the media market.
One way to resist this contraction is through signaling. Those on the side of the transaction with more information may choose to signal to those on the other side, either by volunteering some of that information or via guarantees or by building confidence in their brand. This is where media trust and credibility come in -- unfortunately, media are not doing such a hot job there either.
Coming in part III: The only serviceable analogy I can think of, and what it says about news.
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