The economics of journalism are complicated. Other businesses operate with a simple formula: people pay for a good or service and the business charges a fair price for that good or service. But traditional ways to pay for journalism are not so simple. Sometimes consumers pay nothing for what they watch on commercial radio or television, or when they collect a free newspaper at the railway station. In prosperous times, these media companies thrive by selling advertising around the free content. In effect, advertising subsidizes news. One weakness of the subsidy system is that it hides the true cost of serious journalism.

Consumers often pay only a fraction of the cost of producing a newspaper or magazine. Advertisers have subsidized the cost of most serious newspapers for generations. The amount of paid advertising in a newspaper influences how much a consumer pays for that newspaper at the newsstand. In effect, a small group of customers subsidize the majority who pay little or nothing. With daily newspapers, a few advertisers pay for content so lots of consumers can get the newspaper cheaply. For the past decade this model became the revenue engine for all of the big web companies, such as Google and Facebook.

As of early 2012 advertising remains the main business model for 97 per cent of the world’s online news sites. In prosperous times, the business model is to build an audience around a popular site. The theory goes this way: Lots of users attract advertising, and those advertisements pay the bills. But that model has two big problems: the low price of online advertisements and small click-through rates. Plus sites like Facebook and Google have absorbed huge amounts of online advertising in the past few years.

Facebook’s advertising revenues in 2008 totalled about $300 million (US dollars). According to figures from eMarketer in January 2011 Facebook’s 2010 income from advertising alone, which excluded revenue from virtual currencies and other sources, came to $1.86 billion. The company’s total income reached $4.05 billion worldwide that year, the San Francisco-based Business Times web site reported. This year, worldwide advertising spend on Facebook is expected to reach $5.74 billion, up 42 per cent from 2011, eMarketer predicted. As of early 2012 Facebook had more than 800 million users, and about one million people visit the site each day.

In November 2003 then Tribune Company president Jack Fuller gave the keynote address at the annual conference of the Online News Association in Chicago. Perhaps the most stupid thing the American newspaper industry had ever done, Fuller told me, was to give away content for free on the web. With hindsight it is easy to argue he was right. But the Americans have an apt expression: You cannot put the toothpaste back into the tube once you have squeezed it.

Since the first online news sites of the early 1990s, newspaper companies have put content on the web for free, and continue to do so. Media companies around the world are looking to find new ways to connect content with advertisers, because that connection has been their main revenue source for several generations.

With traditional media, advertising remains an inefficient way to bring buyers and sellers together. The Internet introduces other ways for buyers and sellers to communicate. The future will see a range of business models to pay for journalism: for-profit and non-profit; amateur, professional and pro-am; market-driven; and subsidized.

Journalism in the Western Liberal tradition is a unique business in the sense that its product (news) provides a public good or service. Unlike other public-good activities such as education or scientific research, it is not protected from market forces by government support in countries like the United States, Canada, the United Kingdom, South Africa, New Zealand, or Australia. (Many European governments subsidise newspapers.)

When a huge drop in advertising threatens the financial viability of the news business, the media’s public good role is also threatened. We encounter a paradox: People need news even if they are not willing to pay for it, to be able to function as citizens (for example choosing which party to vote for). But newsgathering is expensive, and becoming even more costly.

Another relevant issue is how people deal with the fire-hose of information that daily invades their lives. Academics have given this concept various names, such as information anxiety and data smog. In a world of excess information, people tend to look for sources of news and information that fit their information and lifestyle needs. That should be an opportunity for newspapers to offer content appropriate for audiences. Busy people in the A-B demographic need organised and compact newspapers designed to make their lives more manageable. Hence the size and shape of the Asian Wall Street Journal, for example.

Instead, newspapers have got fatter. The average number of pages in America’s newspapers tripled during the 20th century. The amount of network television news there ballooned 16 fold in the half century to 2000. In the past generation news has become a 24-hours-a day commodity on cable. Professor Robert Picard, of the Reuters Journalism Institute at Oxford University, said the world was “awash” with news and information. “In the twentieth century news organizations created a huge oversupply of news … and the consumption didn’t increase proportionately with the supply; in fact, it declined. In any industry when you have consumption declining while supply increases, that is a disaster.”

People who love news and journalism (journalists) had deluded themselves into believing that this was a widely held sentiment, Professor Picard said. “The reality is that the average member of the general public has never been highly interested in news and has never been willing to pay for it. Those most interested in news have always been the most economically, politically, and socially active members of the community.” This suggests a market for the quality end of the demographic spectrum.

The other problem is the existence of public service broadcasters such as the BBC, NPR, CBC and Australia’s ABC. Why would people pay for a commodity like news when they can get it free from the online sites of these organisations.

With traditional media business models, journalists provide desirable content and then someone sells access to that content. People consume media because of the perceived quality of the content, and/or it fits their wants and needs and lifestyle. In effect, media sells attention. Welcome to the attention economy. But news and information are no longer a scarce commodity. The Internet is the world’s largest photocopying machine. Meanwhile, busy people have limited time. Their attention is scarce. Some strategists believe “attention transactions” will replace financial transactions as the focus of the modern economy.