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Facebook CEO Mark Zuckerberg.

Media drama is a bit of a perennial thing. Fights over ABC funding and content, Kevin Rudd’s campaign against News Corp, The Daily Mail stealing content, and now Facebook’s pull out of news.

All of it seems to go on forever. But why is this? And why haven’t we found a solution that solves the media’s issues once and for all?

The answer to both questions is that it’s partly about power. The pen is mighty — people fight over who gets to hold it. But there’s another undercurrent, one about media economics. And when you understand this, the patterns in media drama become much clearer.

Free and easy?

You might be wondering why media companies, if they need money from Facebook, don’t start charging for their product instead. Of Nielsen’s top 10 news websites in Australia, seven of them are free to read.

How come so many media businesses are giving away their product for free when businesses in other industries don’t? It has to do with the fact that the marginal cost of news is falling at the same time competition is rising.

The concept of “marginal” cost is important. It’s the cost of taking your product to just one more willing customer. To illustrate, we start with a car company, which has high marginal costs.

If Volkswagen wants to sell a product to just one more customer, it needs steel and aluminium and plastic and a spot for the car they are making on a boat or a truck. None of that stuff is cheap, so its marginal cost is thousands of dollars per customer served.

Another example: If McDonald’s wants to serve fries to a marginal customer it has to pay for the fries and the packaging they come in, plus the time it takes for the 15-year-old kid to cook them. It has marginal costs of a dollar or so.

Note that in each case, the marginal cost excludes all the fixed costs of running the business. For example, the design of the car, or the advertising McDonald’s uses. These are not costs of serving just one more willing customer. They are fixed no matter how much you sell.

What about a media business? What’s the marginal cost of showing a story to just one more person online? The answer is different here. Each click costs you nothing. Once the story is written, the cost of serving one more willing customer is zero.

This is terrible news for the news, because economics teaches us that in perfectly competitive markets, price will be equal to marginal costs.

A marginal issue

In some cases the predictions of economics are flaky — and indeed the media market is not the idealised perfectly competitive market — but here the predictions of the model are pretty good: Volkswagen charges a lot for its product and never offers cars for free, McDonald’s charges a little for its product, and much of the mainstream media charges nothing for its product, often giving it away (even if it costs a lot to produce, like some investigative journalism).

The story about marginal cost pricing applies mostly to undifferentiated news. Which is not to say low quality news: information about what happened in parliament, pandemic daily case numbers, weather — all these are important facts, which are also not unique to any one outlet.

Once upon a time you could make money on undifferentiated news. But the internet has changed mainstream media.

Back in the day, the machines that allowed a company to print thousands of copies of a daily paper were very, very expensive. Tens of millions of dollars. That was a high barrier to entry. In Melbourne there were just three daily papers — The Sun, The Age, and The Herald. Later that collapsed down to two.

These days the media is a free-for-all. This environment — with more outlets producing more news they have to give away for free — is not one that can find an equilibrium. Raise prices, lose eyeballs; gain eyeballs, subsist on the skinny amount you get paid for display ads.

Ad and subtract

As a recent financial report from Nine Entertainment Company shows, the print side of the former Fairfax papers still makes substantially more advertising dollars than the online side. I find this absolutely horrifying. Despite having millions more readers, hosting online ads just doesn’t pay.

This is why outlets flip flop from paywall to free and back, or subsist on outside funding (e.g. The Guardian, The New Daily, the ABC).

A messy blend of paywalls and free content appears to be the best idea, but it’s also very challenging to make work — which is why we see big media tweaking its metered paywall model so often. There’s not one winning strategy, no dominant equilibrium. Only a few strong brands with unique products can successfully put up a strong paywall (like Crikey!). But even then, paywalls prevent your stories from going viral, as people are less likely to share something others may not have access to.

It has always been difficult to make money in media, but since the internet, it has become harder still. From this fact flows all the media drama.

We need political coverage, but who will pay for it? This is ultimately why the big tech companies are being targeted by the government. Good quality news is valuable to society — and we are losing it.

What the government is proposing is not the solution. But there is no great solution — that’s the point. There’s a fundamental inability to make money in this market, and yet money is needed for Australia to get the news it needs.

One way to solve this problem is to take away the competition. If a single player is ready to launch a Spotify for news, that could work for a while. A single subscription could exist and all mastheads would be able to set prices for their news. That works for music and for TV (such as with Netflix, etc). But would it work for news? The identity of that single entity would matter a lot. Would you want it to be Spotify? Facebook? Murdoch?

Perhaps the answer is that in the end the one dominant player is the ABC. Given its dominance in online ratings, maybe we are part way there already. Which doesn’t mean media drama would be over. Just that in the future it would all be about ABC content, allegations of bias, and funding.