Can Google fix the $108bn news industry it helped break?

The innovation that turned Google and Facebook into money-making behemoths wasn't search or social networking. It was selling advertising space alongside content they got for free.

Now, as regulatory investigations in the U.S., Europe and beyond raise the prospect of breaking up the Silicon Valley companies, they're tweaking that formula. The two firms are striking deals to start paying one important source of that content: news organizations. Not only does this help bring them in line with new copyright laws, it also gives them the chance to regain the media industry's trust.

Later this month, Facebook will launch its news tab (which has been available in the U.S. since 2019) in the U.K., with names such as the Guardian, the Economist and the Independent. Google has meanwhile started rolling out its latest news offering, the Google News Showcase, which is already live in Germany with 20 publications, including the Frankfurter Allgemeine Zeitung, Der Spiegel and Die Zeit. Next up it's going to the U.K., France, Belgium and Australia.

Both products set a significant precedent in that the tech giants are paying publishers to license their stories.

In the past, any revenue the two companies directed toward publishers came from either one-off philanthropic funding for news projects or a share of ad income from users clicking on a story — neither of which has been enough to build a sustainable media business. PricewaterhouseCoopers LLP expects the global newspaper industry's combined advertising and circulation revenue to fall from $108 billion to $86 billion between 2019 and 2024.

To be sure, the new licensing fees are, in relative terms, insubstantial. Major publishers in Germany are receiving a flat fee of just a few million euros a year each from Google — between 1% and 2% of their annual revenue. Given that the search giant can account for more than a quarter of their traffic, it's a drop in the ocean. Facebook is paying similar amounts in the U.K.

The trade-off is the ability to cultivate a relationship with readers who are already on these platforms, because these products will direct them to a publication's website to read the story. That hasn't been the case with Apple Inc.'s News+ offering or Microsoft Corp.'s websites — both of which keep readers on their platform and obscure data from publishers, who are nonetheless paid for their stories. Microsoft is developing another news product for Windows that will host the stories itself. Perhaps now the publishers with which it's in early talks will have a stronger bargaining hand.

The Google News Showcase is made up of so-called "cards," each focusing on a topic — say sports, finance or Covid — and displaying stories selected by news organizations. Should a user click on a given story, they're directed to the publication's website paywall-free, thanks to the license fee paid by Google. Conveniently for the Alphabet Inc. unit, the contracts let it use the stories across any of its other products. Facebook's news tab will similarly push readers to a publication's website.

These products are separate from the stories that appear in Facebook newsfeeds or Google search results — the platforms should arguably pay extra for that. But news executives hope that this effort marks a first step toward more sustainable recurring revenue agreements.

There remains a great deal of skepticism from news organizations, since they have been burned repeatedly in the past. For years, Facebook encouraged companies, public figures and publishers to cultivate an audience through Facebook pages. After those groups invested time, money and effort, the California firm then changed the way content was surfaced, making it very hard to reach that same audience without paying for promotion.

That's one reason that some publishers are more comfortable receiving just a small fee from the tech companies when they could reasonably seek more: If it was a more sizable payment, then they'd risk becoming beholden to the Silicon Valley firms' whims.

The new contracts guarantee revenue from Google and Facebook for three years — an aeon in technology half-lives. As much as news executives are excited about the precedent that is being set, they need to ensure these deals yield meaningful results, primarily by attracting new subscribers.

As antitrust pressures on Google and Facebook mount, it's in their interest to help the news business develop sustainable economic models. Doing so might ease the criticism they face for upturning those models in the first place — and ward off additional regulation. Rupert Murdoch's News Corp. has championed new rules in Australia that force the tech giants to share more digital ad revenue. Paying for news should also improve the quality of platforms that have become a hotbed for misinformation. 

A healthy news industry is good for democracy. For the tech giants, it should also be good for business.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

Disclaimer: This article first appeared on bloomberg.com, and is published by special syndication arrangement.