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Advertising and a Democratic Press
By C. Edwin Baker
PRINCETON UNIVERSITY PRESS Copyright © 1994 Princeton University Press
All rights reserved.
Advertising: Financial Support and Structural Subversion of a Democratic Press
Advertising as a Subsidy
Advertising in the media confers obvious benefits. First, but mostly beyond the scope of this book, are benefits to the enterprises that advertise, to the buying public that relies on advertising for information about transaction opportunities, and to the economy as a whole because of advertising's stimulus to economic activity. Often, readers and viewers are as interested in the ads as in the media's nonadvertising or "editorial" content. (Throughout, I will refer generically to all of the media's nonadvertising content, including hard news, news analysis, features, and opinion, as "editorial content.") For example, three out of four women in a 1974 survey agreed that they were "about equally interested in [a newspaper's] advertising and news stories"; a 1979 study found that "58% of all adults consulted newspaper classified ads at least once" during the week; and in 1977 44% of the public said that "they look forward to newspaper advertising" (as compared to 9% who held similar positive views of television ads). Of course, rather than providing these benefits, advertising sometimes imparts misinformation that is injurious to both the public and the economy. Moreover, normative assessments of our consumer society and of advertising's role in creating and maintaining it are contested. I put these issues aside.
Second, advertising provides financial support for the mass media. Virtually all of commercial radio and television broadcasters' revenue comes from advertising. The newspaper industry, which is the focus of this chapter, obtains approximately 75% of its revenues from advertising. Of course, advertising also imposes costs—for ink, newsprint, solicitation of ads, composing, distribution (because of added bulk and weight), and the like. Conceivably, most advertising revenue could be expended on providing the ads, leaving little to subsidize other aspects of the newspaper's operations. Since not only do advertisers value readers but often readers also value ads (as well as editorial content) and the paper sells to both, the direction of subsidy might be expected to reflect which party, reader or advertiser, values the other more. The relationship is likely to be historically and contextually variable—for example, in the eighteenth century the availability of goods for sale might have been especially valuable news to the reader, while today mass marketers and competitive sellers most likely value the reader more than the reader does them.
Virtually all observers and economic studies appear to agree that throughout the twentieth century advertising has paid a large portion of the costs of supplying the public with newspapers. One economic study estimates that without advertisements newspapers would cost as much as five times their current price and concludes that "a full cost-to-the-reader general newspaper free of advertisements would not be commercially viable." Another study concluded that today's $.30 paper would sell for $1.15 if it could maintain present circulation, but since it could not maintain circulation at that price, the absence of ad revenue would "result in the extinction of the press as it has functioned historically." Thus, for a democratic press the advertising "subsidy" may be crucial. Without advertising, the resources available for expenditures on the "news" would presumably decline, predictably leading to an erosion of quality and quantity. The cost of the "news" to the public would increase, thereby restricting its "democratic" availability.
This assessment of advertising may seem uncontroversial—the application of simple economic logic. Both advertisers and readers willingly pay for and both benefit from getting the same product, a newspaper combining editorial content with advertising, into the hands of the reader. The reader, who may be either relatively indifferent to or desirous of advertising, is willing to pay some amount for the newspaper. The advertiser's goal of getting the reader to look at the advertising content requires that the reader pick up the paper. Therefore, in addition to paying the costs of advertising content, the advertiser is willing to pay part of the cost for editorial content in order to obtain readers for the medium containing the ads. This willingness to pay for nonadvertising content is in principle the same in newspapers as in over-the-air broadcasting where advertisers pay for (virtually) all the nonadvertising content. The newspapers' advertisers will even pay extra for more expensive, "high quality" editorial content if it attracts a particularly desirable readership. Given that both purchasers—advertisers and readers—are willing to pay for editorial content, surely not collecting from one of two potential "joint" purchasers of a product would cause the seller to receive less for the product. Any blockage of newspapers' transactions with advertisers would produce an inefficient contraction of the supply of editorial content. Without advertising (or with reduced advertising) there would be less revenue to pay for the media; hence, less media production.
If advertising revenues were eliminated, a publisher might attempt to recoup part of the lost revenue by charging a higher price, but this higher price will cause a loss of marginal readers and result in a smaller amount of total revenue than was previously received from readers combined with advertisers. Eliminating (or, more plausibly, reducing) advertising apparently must result in some combination of an increase in price with a corresponding decrease in readership, and a decrease in the amount spent on news production, which is also likely to reduce readership—in sum, the reduction of advertising revenue will predictably lead to a net deterioration of the democratic press.
Despite its disarming simplicity, I will argue that the above analysis is wrong—primarily because it relies on too static a notion of the newspaper and of newspaper demand. To begin developing this critique, I present a hypothetical scenario in which the above simple economic logic does not pan out. I then show that the assumptions on which this scenario is constructed have considerable historical basis. This presentation substantially weakens the affirmative case for advertising's contribution to the media. Chapter 2's discussion of other negative effects of advertising further supports a pragmatic reconsideration of advertising's contribution to a democratic, free press—a press that is widely available and responsive to the needs of a diverse society.
Hypothetical: Advertising as a Destructive Force
Imagine two periods, one before and one after advertising is introduced into the newspaper world. During "Time 1," there are two principal types of relevant costs: variable costs, like those for paper, ink, printing, and distribution; and first-copy costs, which are primarily editorial or "news" expenses for gathering, writing, editing, and composing copy. ("Fixed" or long-term variable costs that exist irrespective of circulation size should be depreciated and added to first-copy costs; those that vary with circulation should be depreciated and added to variable costs. Precise categorization can be ignored here.) For a paper to be financially sound, revenue must cover both costs and presumably provide some profits. The break-even point would be where revenue equals costs, that is:
1. Circ × CP = (Circ × AVC) + FCC
where Circ = circulation; CP = cover price; AVC = average variable costs per copy; and FCC = first-copy costs.
This can be solved for FCC—the money available for editorial expenses. The revenue available to cover first-copy costs equals circulation times the amount cover price exceeds average variable costs per copy:
2. FCC = (Circ × CP) - (Circ × AVC) = Circ(CP - AVC)
Assume that at Time 1 three papers compete, each with its devoted readers. Also assume that the average variable costs, such as paper, ink, and distribution, vary from $.17 to $.20 per copy, being somewhat higher for the smaller-circulation, upscale papers. Thus, a possible situation at Time 1 is:
Paper Circ CP
Circ (CP - AVC) = avail, ed. resources
X 1,500 $.50 1,500(.50 - .20) = $450 for news
Y 2,000 $.40 2,000(.40 - .18) = $440 for news
Z 4,500 $.25 4,000(.25 - .17) = $320 for news
At "Time 2," advertisers enter. Consider each of two possibilities. First, assume that, beyond the paper's actual costs of securing and including the ads (the ink, paper, and composing costs devoted to the ads), advertisers as a group pay $.12 per copy per reader of Paper Y but, for some reason, they advertise only in Paper Y. This exclusiveness could reflect a principled choice by Papers X and Z not to take advertising; or perhaps advertisers had no interest in using advertising to reach these papers' readers; or, possibly, advertisers refused to place ads in these papers for ideological reasons. Although as a practical matter, a complete absence of advertising in these papers is unlikely, reduced advertising in particular papers does sometimes occur for each reason mentioned above. In any event, assuming advertisers do focus on Paper Y, what would be the consequences?
No certain answer can be given. Still, Paper Y will predictably be able to use its advertising revenue both to increase its editorial expenditures, producing a better paper, and to reduce its price. This change in Paper Y should attract readers from Papers X and Z, thereby further enriching Paper Y and allowing it to augment the changes described. The consequence for Papers X and Z could be severe. If they lose perhaps half their readers, this would reduce by at least half the revenue to cover their "first-copy costs." In response, they are likely either to reduce drastically the quality of their content or to increase their cover price, with either reaction's leading to a spiral of further loss of readers and new declines in content. The virtually inevitable result is closure, either before or after bankruptcy. This abstract scenario illustrates the historical observation of Noam Chomsky and Ed Herman that "an advertising-based system will tend to drive out of existence or into marginality the media companies and types that depend on revenue from sales alone."
Alternatively, assume that advertisers willingly purchase advertising in all three papers—valuing readers on average at $.12 each (beyond the paper, ink, and labor costs associated with the ad itself)—although distinctly more for elite readers of Paper X and less for the poorer readers of Paper Z. What would be the result? The competition could lead to a new equilibrium between the papers, but not necessarily. The added advantage of gaining advertising revenue increases the gains for each from predation on the other papers' circulation—hence increasing the instability of any equilibrium. If one paper is best able to use new advertising income to change its combination of format and selling price in a manner that draws readers from other papers, those other papers are likely to enter a declining-circulation/declining-quality spiral which ends like the first scenario. This outcome corresponds to the local-monopoly daily newspapers that apparently constitute the equilibrium position in the United States today. Thus, it seems quite plausible that after advertising is introduced, a single paper would prevail. In both this and the first scenario, a paper able to use advertising revenue to make its product sufficiently desirable to enough former readers of the other papers undermines the other papers' financial viability. Without this advertising revenue, including the added revenue that advertisers pay for the newly secured readers, the prevailing paper could not have gained enough from trying to attract the other papers' readers to make the effort profitable.
Does the above scenario show that advertising subsidizes expenditures on news and makes the press democratically available? This question too cannot be answered abstractly. Consider a possible context that provides one possible answer. Assume that the single prevailing paper, Paper P (which may reflect a merger of Papers X and Y, with Paper Z failing) is able to sell for a cover price of $.20 and still spend more for editorial content than did any of the previously existing papers. Suppose, however, that 20% of the original papers' readers valued distinctive qualities of "their" papers so much that they will not bother to purchase Paper P, even though it is the only paper available and sells at a low price. Still, not enough of these dissatisfied readers exist to keep their preferred paper alive. Meanwhile, Paper P picks up most of the former papers' readers plus some new readers who previously purchased no paper. Thus, Paper P reaches four-fifths of the 7,500 readers from Time 1 plus 1,000 new readers, for a total of 7,000.
In order to include the ads, Paper P becomes larger, thereby increasing its variable costs, but assume that advertisers pay those additional variable costs related to the advertising plus a further $.12 per reader. (Below I will ignore both the increase in average variable costs due to ads and the equivalent portion of ad revenue that pays for this increased cost.) Paper P also gets larger because of new editorial items, resulting in some additional variable costs over those at Time 1. Thus, at Time 2 the new hypothetical situation is:
Paper Circ CP
Circ(CP + ads - V.C.) = avail, ed. resources
P 7,000 $.20 7,000(.20 + .12 - .23) = $630 for news
Note that this scenario assumes that some readers value a particular type of paper sufficiently to be dissatisfied by a different, larger paper even at a lower cost. It also assumes that, although many readers will consider comparative price in deciding which of several papers to purchase, demand is sufficiently inelastic that a drop in price produces only a limited number of new purchasers. Both assumptions are realistic.
The significance of this possible scenario should not be underestimated. Free market advocates often admit the troublesomeness of obvious inequalities of income, but they usually claim that in a market system, if people value a product enough to pay for it, the market will produce it.* This scenario illustrates that a news journal's survival depends in part on the preferences of other purchasers (advertisers) for other products (the readers of another newspaper). Readers could sufficiently value a particular journal that it would flourish even without advertising when readers provided all the revenue for all journals. The journal could fail, however, if advertisers in effect "purchased" some of the journal's less committed or poorer readers.
Consider, as a real-life example that closely resembles the case of Paper X in the above hypothetical, the failure in the 1960s of the Daily Herald, "the lone consistent voice of social democracy in the national [British] daily press." James Curran quoted the conventional analysis given by a free market advocate, Sir Denis Hamilton (the chairman of Times Newspaper Ltd.), who asserted that the Herald failed because it "was beset by the problem which has dogged nearly every newspaper vowed to a political idea: not enough people wanted to read it." But Hamilton's explanation represents the victory of typical conservative ideology over facts. Curran notes that the Daily Herald, "on its death-bed, was read by 4.7 million people—nearly twice as many as the readership of The Times, Financial Times and Guardian added together." Surveys showed that its readers "constituted the most committed and the most intensive readers, with the most favorable image of their paper, of any national paper audience in the country." The problem was not a lack of readers but that the Daily Herald's readers "were disproportionately poor working class and consequently did not constitute a valuable advertising market to reach." It failed because of a competitive environment in which other papers received advertising subsidies that it could not obtain.
Other features of the hypothetical merit attention. Although the introduction of advertising results in the surviving paper's being both bigger and cheaper than any of the initial papers, the total number of newspaper readers declined. The "consumer surplus"—the amount consumers value receiving the product beyond what they pay for it—cannot be abstractly calculated since it depends on actual demand, that is, actual preferences. Nevertheless, it is plausible that the readers' consumer surplus was greater when there were three papers than when most readers switched to the new, cheaper paper and others stopped purchasing a newspaper altogether. For example, readers of the Daily Herald apparentiy valued their paper more than others valued theirs—suggesting a higher average consumer surplus for the more diversified, non-advertiser supported press.
Excerpted from Advertising and a Democratic Press by C. Edwin Baker. Copyright © 1994 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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