Current Economics and the Future of Publishing

Last updated: July 6, 2013

Summary

1. A generally-accepted idea about media industries is that they are largely “recession-proof.” The cost for consumers to buy most published entertainment products — newspapers, magazine, books, films, etc. — is relatively small. Some histories of the Great Depression reinforce this idea. It is however a broad generalization that I’ll examine in more detail below.

2. Advertising is the core economic driver paying the bills for most media, including newspapers, magazines, television, radio (and now the Internet). While consumer media consumption remains steady in some sectors, advertisers cut budgets in a recession, thereby having a primary impact on the financial health of those media. For analysts it can be difficult to assess whether a publisher is suffering more from consumers switching to online pursuits or the advertisers that have floated the publication in the past.

3. The U.S. remains in the midst of an economic setback. It hasn’t fully recovered from the recession triggered in 2008. As usual, various experts debate over the extent of the problem and its likely duration. Are we still in a recession? Or is it just a slowdown? Are we on the road to recovery? How long will it take to get back to “normal”?

4. As all publishing types continue to struggle with structural business changes brought about by the runaway success of the web and the mobile devices that interact with it, the current “setback” could not have arrived at a worse time for the industry.

Below this section you’ll find my last revision to this article dated July 24, 2009.

Appropriately, as the title suggests, my concern then was to skim fairly light over the relatively grim economic news from the previous summer and focus instead on its impact on the future of publishing.

I’ve been following the news of the U.S. and world economy very closely since then in preparation for this revision.

The news continued largely negative into last fall, but by year end economists and their sycophantic journalists had turned mostly to cheerleaders. The recession was over they proclaimed, and we have the standard economic data to prove it. OK, there are still problems, but just look at the recovery in the U.S. stock market: nothing short of miraculous. The wisdom of crowds: they know that we’ve turned the corner and happy days will soon be here again.

I just could not settle into their warm sentiments. I saw (and see) a tremendous range of storm clouds remaining on the horizon. Surely happy days will return, but will they return so quickly?

The prevailing economic wisdom falls into three main scenarios:

1. A defined recovery in 2010 and beyond. Perhaps a setback or two, perhaps a slower recovery than some would like, but nonetheless the upward course is now set.

2. Yes, the recession is over, but the U.S. (and most Western economies) will not be back into true growth mode until several remaining obstacles are recognized and defeated.

3. The most negative: some variation on the double-dip. Yes, we’ve had a few months of (relatively) good economic news, but there are severe problems either unaddressed or still in formation, and these will either freeze emergence from the recession, or, worse still we may find a double-dip recession or a Japan-style long-term economic stagnation.

Most of the voices that most of my readers encounter day-to-day are the chipper accounts from group #1, or the lightly more somber but still ultimately optimistic accounts from group #2.

I wish to offer a summary of the voices from group #3. There are some distinguished voices in this group, and most offer compelling arguments in support of their position. Why do I do this? Of course it’s partly from my own fatalistic short-term worldview (although I’m extremely optimistic long-term). I predicted the Web bubble and I caught the real estate bubble. Certainly many others did also, but I feel I’ve got some legitimate credentials to the pessimists’ club.

The key issue here is scenario-building. I have a grand plan for my influences section called “Forecasting & Futurism,” but will be the first to admit that it still needs a lot of work. So stating the issue succinctly here, the point in forecasting is to build and contrast realistic scenarios of where you company might be in the next 1-3 year period (I never go beyond three years) based on what is known today, and then based on the probability of deviances from what is known. Scenario #3 above, as I’ll demonstrate, is far from implausible. I cannot state with certainty that it is any more likely than scenarios 1 or 2, but I think there is certainly a similar amount of credible evidence supporting scenario 3 as there is the others.

Unfortunately the impact on most businesses, certainly including media firms is very dire in scenario 3 where it is far less harsh in the others. Hence my impetus to explore the harshest outcome in detail. As long as you do not overreact to its potential consequences, the greater likelihood is that your firm will be stronger by taking reasonable precautions against the very damaging possible outcomes.

Where Are the Potential Weaknesses?

People hate pessimists. Not because they’re pessimists but because they’re right most of the time.
They hate them because they’re downers and they’re right.
— Jeremy Smith

I’ve collected some 50+ articles and blog entries since my last revision to this entry. I found it very challenging to sort through them so as to offer some reasonable path to understanding. At first it was overwhelming, but eventually certain topics repeated themselves such that I can offer a short summary of the categories that could individually, or in combination, make scenario #3 appear plausible. Here is my listing based on those articles:

  1. Unemployment
  2. The U.S. (and other Western countries) growing current account deficits
  3. The strength of the U.S. dollar
  4. “Irrational exuberance” in the stock markets
  5. The failure of the banking system to resume lending
  6. The collapse of commercial real estate
  7. Continued weakness in the U.S. housing market, coupled with…
  8. Ongoing price inflation in housing markets outside of the U.S.

You can head from here over to my recent blog entry that brings the story to mid-July, 2010.

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Current Economics and the Future of Publishing

July 24, 2009

Summary of Current Economics and the Future of Publishing

A January, 2008 blog entry on CNBC by Julia Boorstin reflects much of the thinking around the media sector in light of the current economic challenges. She writes: “Economic concerns are making Wall Street nervous about the media sector. Today analysts at Goldman Sachs and Sanford Bernstein issued negative reports on the broad media sector.

“GS’s Anthony Noto reduced estimates across communications, media and entertainment sectors. He says they’re all economically sensitive sectors he says will be dragged down by the recession Goldman forecasts this year.”

Similarly a March, 2008 entry by Jill Goldsmith and Dade Hayes on Variety.com states that:

History shows that whenever the economy went through a recession or, for that matter, the Great Depression, showbiz came through remarkably resilient.

The twists and turns of the nation’s financial health seemed to have little in common with the public’s thirst for entertainment.

But this time around, with nearly every indicator showing a serious recession is near (if not here already), there’s ample reason to believe the business won’t emerge unscathed….The industry has become increasingly enmeshed with Wall Street and private equity. And the grim economy as well as stock-market stagnation not seen since at least the 1970s, means Hollywood will be giving a lot of ground in the coming year.

The “bible” for understanding the impact of broad economic factors in the publishing industries is Harold L. Vogel’s “Entertainment Industry Economics: A Guide for Financial Analysis.” The eights edition was published in 2010. It’s a dense but readable textbook of some 600 pages. Oddly (from my perspective), neither “recession” nor “depression” appear in the index, but nonetheless, Vogel’s insights into both the macro- and micro-economics of the publishing industry never fail to strike a tone suggesting an authoritative command of the subject. (Vogel uses the term “entertainment industry” rather than “publishing industry” as he also covers live entertainment in depth.)

In just the introduction Vogel examines in great depth theories behind “leisure and work,” the “demand for leisure,” price elasticity in the entertainment industries, and monopolies in media industries. “Movies and Television,” “Broadcasting,” “Cable,” “Music,” and “Publishing” each command chapters roughly 50 pages long.

So while Vogel does not specifically address economic downturns in his book the economic theories that he presents for the publishing industries in general provides the data to make your own assessment.

Conclusion about the Current Economics and the Future of Publishing

I tend to be a pessimist in matters economic. Hence my bias is that the decline of the U.S. economy still has a way to go before recovery begins. Further I believe the drop will be major, not minor. So that bias should be recognized in my analysis. A superficial abstraction of that bias would suggest that I fear mayhem for the publishing industries. But there’s another side of the coin. The Internet offers an extremely cost-effective way to disseminate media, even during an economic downturn. My conclusion is that the declining state of the U.S. economy will force media companies to fully embrace the efficiencies that they have been able to side-step during flush times. This could be a very positive outcome.

 

Economics References

1. Entertainment Industry Economics: A Guide for Financial Analysis

As discussed above, the best reference for understanding the economics of the publishing industry is Harold L. Vogel’s acclaimed Entertainment Industry Economics: A Guide for Financial Analysis. (The 8th edition is © 2010).

2. Economy May Face Prolonged Pain, History Suggests

This prescient article from the Wall Street Journal considers the historic pattern of recovery from recessions.

3. Too Soon to Relax

Given my affection for The Economist as an excellent gauge of where things are, and where they’re headed, I offer also this article from May 2008, “Too soon to relax: Sentiment has improved, but lots of financial problems remain.”

4. An Oracle of Oil Predicts $200-a-Barrel Crude

In a May, 2008 New York Times article, Arjun N. Murti, an analyst at Goldman Sachs, “foresees a ‘super spike’ ‒ a price surge that will soon drive crude oil to $200 a barrel…the grim calculus of Mr. Murti’s prediction, issued in March and reconfirmed two weeks ago, is enough to give anyone pause: in an America of $200 oil, gasoline could cost more than $6 a gallon.” An interesting critique of the NYT article appeared soon after.

Everything has changed since this analysis. The price of oil has plummeted. It’s beginning to rise again, but not drastically. Some say that it will; others point to decline worldwide demand. By July 2010 it was trading around $75/barrel. At July 2013 it’s trading for just over $100/barrel.

5. National Trend of Home Price Declines Continued into the First Quarter of 2009 According to S&P/Case-Shiller Home Price Indices

Many (most?) commentators on the changes in home prices consider the S&P/Case-Shiller Home Price Indices to be the most accurate indicator. The latest S&P/Case-Shiller Home Price Indices are very grim, although other data conflicts on a nearly daily basis.

In 2005 I purchased the recently-published 2nd edition of Robert Shiller’s “Irrational Exuberance” (preface and Chapter 1 available online). The main reason Shiller wrote the second edition, was to look at the real estate bubble, which was acknowledged by very few commentators at the time. As the dust jackets states: “Shiller amasses impressive evidence to support his argument that the recent housing market boom bears many similarities to the stock market bubble of the late 1990s, and may eventually be followed by declining home prices for years to come.” He saw it coming.

6. The Bias of Economist and the Bias of the Public

One of my blog entries in July 2010 examines a confusingly misleading article in The Wall Street Journal comparing the opinions of its panel of economists with a public poll conducted a month before. It augments the content of this piece. In the entry I state that “there is ample documentation of the bias of economists.” I needed to offer a single link to demonstrate the ampleness of the evidence, and found instead many different articles, so I thought better to link here.

The articles I’ve found include:

(i) Economic bias and ideology: evidence from the general social survey

“This paper examines the connection between political ideology and four distinct categories of economic bias: anti-market bias, make-work bias, anti-foreign bias, and pessimistic bias…” Of course this paper has a bias, but it provides a range of additional references as well.

(ii) Logic, Bias and Economics

This is a blog entry referencing a another widely-referenced blog entry, specifically examining the shortcomings associated with the Efficient Market Hypothesis (EMH). The author of the second blog entry, John Mauldin, writes mainly about a presentation from “financial heretic” James Montier, who specializes in “behavioral investing.”

(iii) Bryan Caplan, a professor in the Department of Economics at George Mason University, and author of “The Myth of the Rational Voter” has an eclectic blog with many links to his (earlier) excellent articles and papers. He also blogs at EconLog (with Arnold Kling and David Henderson) on “issues and insights in economics.”

(iv) Survey of Americans and Economists on the Economy

“This Washington Post/Kaiser/Harvard University survey examines public understanding, perceptions and attitudes about the economy with those of economists. Articles as part of this series by The Washington Post ran from October 12, 1996 through October 16, 1996 and are included with the questionnaire.”

The disparities are remarkable: fascinating and important. Bryan Caplan frequently uses the survey as source material.