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July 26 2010

17:54

Don't Blame the Content Farms

content farms logo small.jpg

From a business perspective, traditional journalism is rather inefficient.

Stories are chosen by a small group whose members often have similar experiences and outlooks. With little knowledge of true market demand, they assign the stories to a limited pool of writers and reporters who may not have the knowledge or contacts to quickly do a top-notch job. The stories are then produced and put out to consumers who may or may not like them. The process is repeated, daily or weekly or otherwise, often with little hard data on what, exactly, made a given story or feature popular.

But despite the inefficiencies, publishers have been able to survive, even thrive, because of other inefficiencies and barriers to competition, such as costly printing presses, advertisers with few other viable outlets and controlled distribution.

Enter the Internet. The "content farms" that MediaShft has focused on this week are exploiting new digital information technologies and systems to turn the model on its head, remove the friction caused by the inefficiencies, and reap the economic rewards. Rather than a small group of editors surmising what a community might want, algorithms from Demand Media, AOL and others process search queries and social media, glean what's wanted, then use other pieces of technology to calculate the likely value; they then quickly find writers or producers at a profitable price, assign and produce the content, attach money-making ads, and pay the "content creators" in a streamlined way.

Some in the industry may bemoan what's produced as "dreck," a term AllThingsD's Kara Swisher used while interviewing Demand CEO Richard Rosenblatt, but it does seem to satisfy a significant number of media consumers.

"Whenever you do stuff at scale and it's disruptive, people immediately think it's not good," Rosenblatt told Swisher, saying Demand produces some 6,000 pieces per day. "We're trying to prove that our content is good."

It's not as if the content farms invented the idea of producing work that's just good enough to sell. Just scan the racks at your local newsstand. As for complaints about the amount the content creators are paid, anyone producing the content is doing so voluntarily. By definition, they're being paid a market rate.

Not All Content Creators are Content Farms

Not every company trying new media business models can be put into one "content farm" bucket. Organizations like Politico, Patch and MainStreetConnect (a recent client of my company) are hiring reporters according to a more traditional model and focusing them by subject matter, geography, or both, while also using technology to keep costs down and drive new efficiencies that allow them to become, they hope, profitable with lower revenue than is required by traditional news organizations.

It's the classic case of a disrupted industry: The newcomers can do what's required to make a profit without having to support legacy processes responsible for a majority of current profits.

"It's hard to do something for future gain that is costly in present revenue and margin," publishing industry expert Mike Schatzkin told me in an interview. "If you don't have present revenue or margin, you have nothing to lose."

Writer James Fallows, in a recent Atlantic Monthly article, suggests that those bemoaning the fate of journalism might take a page from the engineers at Google, and instead try new processes, test and iterate, to discover how to derive enough revenue from what they make to sustain its production.

"Find out what [consumers] really want and value, and try to give them that, instead of what you've been making (which they may or may not want to buy, but which you've wanted to sell)," Alan Webber, who co-founded Fast Company magazine, told me in an email. "Find ways to cut costs. Find ways to cut waste. Find ways to test new ideas, new products and services faster, cheaper, and better."

That's more productive than fretting that the old ways of doing business are no longer working. And it sounds like what the content farms are doing.

Transformation of the Media Industry

About a century ago, as Americans were switching from horses-and-buggies and trains to cars, there were said to be more than a thousand companies producing automobiles in the United States. After a vigorous era of foment and entrepreneurialism, a handful survived, often incorporating the lessons learned from some of the other players that they bought out. Eventually, a thriving industry supplying millions and millions of consumers was born.

Entrepreneurial journalism -- an increasingly popular topic at journalism schools and institutes around the U.S. -- is just that, entrepreneurial. Amid the ordered disarray of startups and growth, different models are being tried. Some will succeed, and more will fail. New standards will be created.

Those upset that their skills can't get them more from the market might do well to bolster those skills. No longer is it enough to be able to report and write; hiring managers are looking for the ability to template, shoot, mic and perhaps even write a bit of code. If you don't know how to use Twitter these days, you're nowhere near the cutting edge.

Think of the power the new tools give journalists, including ones working for such venerated institutions as the New York Times, to reach beyond the confines of their publications and personally assemble communities of readers, viewers and participants around the journalism they create, while also developing leads and sources. That's more traffic for the publication, more influence and voice for the journalists. The tools also give people working for the content farms, also known as content mills, the ability to quickly get their work done and in some cases earn an hourly wage well beyond journalists' typical starting salaries.

"Yes, Demand Studios is a content mill. A new business model well adapted to the way consumers demand information. Get over it already," writes a commenter on a previous story in our series. "Why do I work for Demand Studios? The hourly pay is worth it and the independence fits my lifestyle."

A former managing editor at ABCNews.com and an MBA, Dorian Benkoil has devised and executed marketing and sales strategies for MediaShift. He is SVP at Teeming Media, a strategic media consultancy focused on attracting, engaging, retaining and monetizing audiences. He tweets at @dbenk.

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June 16 2010

12:43

Can Financial Firms Use 'Hot News Doctrine' to Stifle Aggregators?

Traditional print newspapers and magazines are experiencing upheaval thanks to the rise of the Internet, but they are not the only information providers facing serious challenges. Even before the tumult created by the recent recession, major financial firms were struggling with the effects of competition from online financial news aggregation services aimed at investors. In some cases, these online services have obtained and disseminated the firms' most closely held, time-sensitive and valuable information product: The daily stock recommendations generated by their financial analysts.

The battles fought by several of those firms (Barclays Capital, Mogan Stanley and Merrill Lynch) are detailed in the recent federal district court ruling in Barclays Capital, Inc., v. Theflyonthewall.com (S.D.N.Y. Mar. 18, 2010). The firms won a big victory when federal judge Denise Cote, relying on the "hot news" misappropriation doctrine recognized under New York state law, issued an order limiting the republication of the firms' stock recommendations by the defendant, financial news aggregator theflyonthewall.com ("Fly").

Fly countered with a plea [PDF] to the the U.S. Court of Appeals for the Second Circuit that the enforcement of the injunction would force it out of business. In a dramatic turn, on May 19 the appeals court granted a stay [PDF] of the injunction and a rare expedited appeal, calling for briefs to be filed by July 26.

This case about the hot news doctrine has now itself become "hot news."

The Hot News Doctrine

As previously written on MediaShift, the "hot news" misappropriation doctrine is a legal principle first recognized in the early twentieth century when the Associated Press news service sued a rival service for paying off AP employees to pass on early versions of stories that were intended for West Coast newspapers. The rival service rewrote the stories to avoid claims of copyright infringement, and then sold them to West Coast news outlets.

The U.S. Supreme Court ruled in 1918 in International News Service v. Associated Press, that the AP had a right in the news content that it gathered that was distinct from its rights under copyright law: "the peculiar value of news is in the spreading of it while it is fresh," the Court famously commented.

With a bow to the First Amendment, the Court distinguished an individual's right to disseminate information contained in a newspaper once published from a business competitor's act of appropriation of material that had been acquired through expenditure of labor, skill and money. The Court concluded that the AP could sue on the theory that the rival's conduct constituted "unfair competition in business." Although the ruling was later criticized and challenged, the U.S. Court of Appeals for the Second Circuit reaffirmed its viability in 1997 in National Basketball Association v. Motorola, Inc., a case involving transmission of basketball scores.

The Barclays case is the first time that the Second Circuit has had an opportunity to consider the hot news doctrine in the context of the Internet age, which began picking up steam just after the ruling in NBA v. Motorola.

Current views on the viability of the hot news doctrine are mixed. The doctrine exists in tension with First Amendment values that protect the right to freely disseminate facts, and with the limits of copyright law, which do not extend to mere facts but only to the expression of facts. Nevertheless, the federalization of the hot news doctrine (which currently has been recognized only in a handful of states) has been proposed as a tool to support the efforts of traditional media to protect their content from online competition. That and other proposals to support traditional journalism made it into a recently released FTC Staff Discussion Draft [PDF] that summarized the discussions at the FTC workshops on the future of journalism.

The Value of Timely Financial Information

The Barclays opinion demonstrates the value of hot financial news, and the effects that unauthorized dissemination of that news can have on the financial firms that prepare and market it.

barclays_logo.gifAt issue in Barclays is the information contained in reports prepared by the financial firms for their largest and most lucrative customers and disseminated as "actionable recommendations" -- recommendations to buy, sell or hold a stock. As the district court explained, the firms' recommendations are not casually made; they are the product of the efforts of a large staff of analysts and related functionaries who acquire, sift and compile information on an ongoing basis, at great cost and expense.

The recommendations yield value for the financial firms primarily in the form of fees on the trades made by customers who frequently use the trading arm of the financial firm to make a trade on that recommendation. The value of the recommendations to the customers is the timeliness of the information: It is typically disseminated to them between midnight and 7 a.m., before the opening of the New York Stock Exchange. And it is significant as well that the reputation of the big firm analysts is such that their recommendations are themselves news and may move the market price of a stock significantly and in a very short period of time once widely known. Having those recommendations before market opening can provide the firms' clients with "an early informational advantage," as the court commented. The value of the recommendations derive not just from the quality of the information, but the "exclusivity and timeliness" of it.

To protect the value of this "informational advantage," the firms have implemented elaborate systems aimed at limiting access to the recommendations, including the use of password-protected proprietary Internet platforms, and licensing provisions that narrowly limit the right to disseminate the reports and forbid their redistribution to unauthorized parties. The district court described other technologies that are used to control access and dissemination, including blocking access to the firms' proprietary systems from certain websites and social networking platforms, and the use of personalized, encrypted URLs to deliver information to clients. (This makes it easier to track down the source of leaked reports.)

Despite these efforts, online financial news aggregators have been able to gain access to recommendations in advance of their public release. Fly, the district court found, was one of the first online financial news subscription services to engage in the practice of systematically obtaining and disseminating the actionable recommendations of traditional financial firms. Until the institution of the Barclays lawsuit in 2005, Fly's source of these recommendations was employees of the financial firms, who provided them despite the fact that they were not authorized to do so. After the litigation commenced, Fly changed its tactics; but it was still able frequently to obtain those recommendations, often from licensees of the information, and disseminate the recommendations to its subscribers before the financial markets' opening bell.

The Impact on Financial Firms

According to the district court opinion, the aggregators' activities have had an impact on the financial firms' business model and revenue generation, a finding critical to the analysis of one of the key elements of the hot news doctrine: Whether the "free riding" by Fly and the other online services on the financial firm's efforts in generating their actionable recommendations "would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened." This element of the hot news doctrine, the court found, implicates the public interest in protecting "socially valuable products or services in danger of being under-produced."

The court ruled resoundingly in the financial firms' favor on this point, crediting the firms' evidence that they had cut their analyst staff and budgets significantly because, in addition to other factors, the analysts' reports were no longer the driving force behind the generation of commission revenue to the extent that they had been previously.

"With clients able to review the Firms' recommendations and even research reports through other sources, the research department have been handicapped in their ability to argue for their historical share of the Firms' overall budgets," the court found, resulting in cuts of from 20 percent to half or more over the past decade.

The conduct of Fly and the other online news aggregators, the court concluded, threatens the ability of the firms' to monetize their research and continue to produce it. In evaluating the appropriateness of an injunction, the court further commented that this activity "is a valuable social good," and "plays a vital role in modern capital markets by helping to disclose information material to the market, to price stocks more fairly and, as a result, to produce a more efficient allocation of capital."

The Injunction

The injunction crafted by Judge Cote was carefully aimed at the time period that the financial firms identified as most critical to maintaining the value of its recommendations. Fly was enjoined from disseminating the firms' pre-opening recommendations in most cases before one-half hour after the opening of the New York Stock Exchange. The court also provided for a re-evaluation of the injunction after a one-year period, to determine whether the financial firms have taken action against other news aggregators. It would be inequitable, the court found, to enjoin Fly from publication of the firms' recommendations if the firms fail to take action against others engaged in the same conduct.

Conclusion

The result in Barclays v. Theflyonthewall.com is likely to be important not only for financial firms seeking to protect analysts' recommendations, but for general news outlets as well. A reaffirmation of the viability of the "hot news" doctrine by the Second Circuit could spur additional lawsuits and would probably bolster the position of advocates for enacting the doctrine on a nationwide basis. If the ruling is overturned, the legal avenues available to content owners seeking to protect their content from aggregation services will have been further narrowed.

Jeffrey D. Neuburger is a partner in the New York office of Proskauer Rose LLP, and co-chair of the Technology, Media and Communications Practice Group. His practice focuses on technology and media-related business transactions and counseling of clients in the utilization of new media. He is an adjunct professor at Fordham University School of Law teaching E-Commerce Law and the co-author of two books, "Doing Business on the Internet" and "Emerging Technologies and the Law." He also co-writes the New Media & Technology Law Blog.

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