In this Market Foolery segment, host Chris Hill and Motley Fool Rule Breakers' Aaron Bush consider the unusual antitrust situation that newspapers find themselves in. Asserting that the power Google (NASDAQ: GOOGL) (NASDAQ: GOOG) and Facebook (NASDAQ: FB) have over online advertising puts newspapers at an unfair disadvantage in an aggregated, online world, they want some relief. But even if Congress agrees, can it change the laws of digital-media physics?
A full transcript follows the video.
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This video was recorded on July 11, 2017.
Chris Hill: This is going to be something to watch. This is, newspaper publishers, through their trade association, which is the News Media Alliance, and if you're old like me you remember back in the day this was the Newspaper Association of America.
The News Media Alliance, which represents 2,000 newspapers in the U.S. and Canada -- including, by the way, The Wall Street Journal, and this is a story from the Journal, so you have to assume that they are at least tacitly involved in this -- newspaper publishes are calling on the United States Congress to allow them to negotiate collectively with Google and Facebook as what they are calling a digital duopoly which increasingly dominates online advertising and news distribution. And that part is not new, this is something we've talked about a bunch of times before. The growth in digital advertising over the last year or two has been captured almost entirely, if not entirely, by Google and Facebook. Now, you have every newspaper in North America essentially going to the Congress and saying, "The old antitrust rules that are in place here don't apply, we would like a waiver for this." I don't know. The thing about members of Congress is, every one of them has a bunch of newspapers back in their district or home state. It will be interesting to see where this goes. If you're Google and Facebook, are you worried about this at all? Are you putting your lawyers on this to any significant degree? Or, do you just think, this isn't really going anywhere?
Aaron Bush: I don't think it's going to go anywhere. It's kind of interesting because of the legal angle on it, how it could have an effect for the newspapers. But at the end of the day, I think what they're pushing for doesn't make any sense at all. And their argument, in my opinion, is built off a myth. And the myth is, Facebook and Google are using their dominance to purposefully harm traditional media companies, and that's just not true at all. There's nothing purposeful about it.
Hill: It might be a byproduct, but it's not the goal.
Bush: It's the new rules of playing a new game. If you think about it, Google and Facebook are digital aggregators here, and the economics of content fundamentally changes on aggregated platforms. So, it's not wrongdoing in any way at all, it's just a new reality. And that new reality means that newspapers and other media companies have no choice but to engage in perfect competition on those sites, because it's just a void that needs to be filled on people's timelines. That essentially means commodity products with zero marginal cost. And the main issue here for the publishers is that they're still built for the old way of doing things, not the new one. They have large fixed costs -- salaries, marketing, budgets, all that kind of stuff -- and they're still reliant on a daily basis on the traffic and data that the aggregators have, just so that they can stay afloat.
What the News Media Alliance is pushing for is essentially an escape from perfect competition, and begging for a way to make the old business model still work in a completely new world. But, the truth that I think is maybe a little too understood is that newspapers made money in the past not by adding societal value. They made it by, perhaps ironically, having monopolistic control of print advertising in whatever geographic region they were in. And why Facebook and Google are so powerful here is because they stole newspapers' advertising dollars, not their reporting. So, it's really just a simple business model problem. And none of that is going to change. What would be needed for this to change is fundamentally altering the way that Facebook feeds work, or Google searches work in the first place, and that's just not going to happen. So, I think what we're going to see is probably a fallout even more in newspapers, but those who survive will be the ones that can prove that their content is good enough and can attract enough attention that people are willing to pay for it. So, only the people that have subscriptions will stay alive, but they're still struggling.
Hill: And if you look at the The New York Times and The Washington Post, just to name two, and the strides that those two newspapers have made when it comes to digital subscriptions -- The Washington Post is no longer a public company, but you can read the tea leaves of their business, particularly since Jeff Bezos bought them, and see that they appear to be having a similar level of success that The New York Times, which is a public company, is having in terms of digital subscriptions. The other thing, which is not a part of this, this is something that has nothing to do with Google and Facebook and everything to do with Craigslist, and that is want ads. Newspapers, as you said, once upon a time, they had this locality-by-locality monopoly on print advertising and want ads. And Craigslist came along and absolutely decimated that for the newspaper industry. And that was such a cash machine for so many newspapers. So, that's another thing. Even if this is successful for newspapers, let's say that Congress totally backs them on this, let's say that everything breaks their way, they're still not going to get close to the levels of profitability that they had when their want ad sections were really fat.
Bush: No, not at all. And I do think there will be a shakeup also in the sense that new business models will emerge, meaning that new players will emerge, too. I think, a lot of times, the traditional players have a really hard time changing their plans to fit how things will work in the future, but that also creates a void for those who are more social media-native, like the Buzzfeeds of the world, also, take over and carve out some space for themselves.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of Alphabet (C shares) and Facebook. Chris Hill has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.