Friday, October 24, 2008

Voodoo newspaper economics

The formidable problems of the newspaper industry won’t get solved if industry leaders substitute voodoo economics for rational discourse. So, let’s dispense with some of the bad juju we have heard in the last couple of days.

Voodoo Economics 101

Not once, not twice but five times, Gary Pruitt, the chief executive at the McClatchy Co., told stock analysts that the sagging sales and profits at his company are the result of “secular headwinds” which evidently will abate at some point to enable his business to revive.

Here is the phrase used in a sentence, as transcribed by Seeking Alpha: “We may be facing secular headwinds for quite a while until the revenue market settles in terms of the Internet being a more mature medium.”

By definition, a secular move in an industry refers to a permanent and fundamental shift, such as the change in consumer preference to automobiles from horses and carriages.

The ups and downs of the economy do create headwinds for business. But a secular change is more like gravity. Unlike headwinds, which eventually blow over, gravity is here to stay.

For the record, the secular forces dragging down newspapers are: Declining readership, shrinking advertising, high fixed costs and growing online competition that makes it increasingly difficult to charge the premium ad rates that were possible prior to the Internet.

Voodoo Economics 102

Several (but certainly not all) of the more than 100 distinguished media figures attending the stimulating New Business Models for News Summit at the City University of New York were captivated by the suggestion from one speaker that newspapers could solve their problems by forsaking the production of the print product, which represents 60% of a paper’s operating expenses.

While it is true that killing the print product would save a bundle of money, it also must be noted that an average of 90% of the revenues at American newspapers are derived from ads sold in the print product.

Accepting the premise that you could save 60% in expenses by abandoning print, here is how this would play out for a prototypical publishing company with $100 million in total revenues and a 15% operating profit:

If the company abandoned print but were able to double its online sales to $20 million, it would lose $14 million in a year, for an operating margin of a negative 70%. To break even, the prototypical publication would have to more than triple its sales from the current levels. To make a profit of 15%, the company would have to quadruple it sales.

This is a tall order, given that some two-thirds of the interactive revenues at most newspapers came from the so-called “upsell” of online classified ads to recruiters, auto dealers and real estate brokers.

With the print product historically the primary attraction for many of those classified advertisers, how many premium-priced, online-only newspaper ads would they buy if free ads on Craig’s List were only a click away? Which, as you know, they are.

19 Comments:

Blogger 10ksnooker said...

It might be that their product is so biased they ran all their paying customers off? And now with the Internet, won't come back.

I'm just saying, but I would rather give $75 a month to the ISP than $10 a month to the biased reporters who don't report the news. That way I can get real news.

7:45 AM  
Anonymous Anonymous said...

How, if at all, does your assessment change if you look at dropping weekday editions and retaining Sunday's heavy ad payload? Or perhaps Saturday and Sunday? One of those seems to me to be the most likely transitional scenario.

8:36 AM  
Blogger Tim Windsor said...

RE VE 102:

I didn't hear a lot of "Dump the paper" from the crowd - even Dave Morgan and Edward Roussel. I heard them saying that paper production was a huge cost and that it should be outsourced, or even leveraged as a revenue stream through contract printing.

Not that such a pat answer provides the road map out, but I don't think most there were ready to throw out the 80%-90% of revenues from print just yet.

10:20 AM  
Blogger william said...

Alan—While you are correct that selling e-paper ads on the current print/online “upsell” model would not yield enough revenue gain to offset the loss of print advertising, that thesis doesn’t necessarily hold if you go to an all e-paper distribution using e-paper technology, especially in a one-paper city. As we pointed out in our Nov. 30 Crosscut.com article on the prospects for such a shift, the technology already exists—and is being used on Amazon’s Kindle Reader—for creating a flexible, tabloid-size e-paper that can offer advertisers a traditional print layout and not the small banner ads and dancing boxes that exist on newspaper websites and that turn off many print advertisers. Moreover, instead of offering static layouts, the wireless e-paper technology offers the prospect of segmented, time-based advertising which would allow advertisers to target their ads in an e-paper, a far more efficient use of their ad dollars than they now get. Finally, when publishers get up the courage to dump their print paper, and its overhead, and go to an e-paper replacement, advertisers--at least those in one-paper cities--won’t have much of a choice, if they want to reach the wide readership they have grown comfortable with in their daily print paper. All these suggest the upward revenue curve from a shift from print to e-paper will be more dramatic than you hypothesize. The key, of course, is the willingness by the owners of papers to cannibalize their current print offering. IT people long ago realized they had to do this to keep up with evolving technology. Economics may be the new goad to push the industry over that hurdle.
Bill Richards

11:22 AM  
Anonymous PJ Brunet said...

Once the NY Times gives up (they are 1 billion in debt) that will show these other papers (that are for sale) there's no hope left. It's time to get online and get with the program.

12:08 PM  
Anonymous Anonymous said...

Gary Pruitt has made one of the monumentally disastrous decisions I have ever seen made by a businessman in the 21st Century. He took a sleepy but well-financed family-controlled company, loaded it down with crippling debt, and is now in the process of driving it into bankruptcy because he fails to understand the basic economics of newspapers today. There is some belief in that company that newspapers cannot be brought down by the Internet because people need to trust the sources of their information, and the Internet is a repository of very dodgy and unreliable information.
There are two things wrong with this belief. One is reflected in polls, which show consistently that people do not trust newspapers to tell the truth. The second is that customers aren't fools and know the Internet is untrustworthy but are voting with their pocket books to use it anyway because it is more convenient and provides more and clearer information.
I had an argument about the economics of Internet publishing with a newspaper executive recently, and he made the same Craigslist argument that you cite. His contention was that newspapers have a unique "brand" recognition that will eventually override the popularity of Craigslist. Furthermore, he said, you can rely on the accuracy of a representation of a newspaper ad because it is vetted by the ad-taker, while with Craigslist you don't know if you are buying hot goods or stolen property because no one is checking the ad before it appears. This executive is just fooling himself. You and I both know exactly how much vetting is given to newspaper ads, and the "brand" is now so tarnished it has no currency.

1:01 PM  
Blogger Rosenblum said...

Hi Alan
Good to meet you yesterday, and nice blog. My only comment here is that newspapers should transcend the traditional thinking of getting news and selling ads. All they are doing here is shifting platforms. I would rather say that they are a corps of digital community content collectors - video, stills, audio, text. How that content is then processed or sold is a function of what the potential markets are, but I think they far exceed a daily information tabloid - on paper or line.

The appetite for video content, for example, is rich - but not just limited to daily stories. What newspapers have to do is become digital creation engines... the market will find them.

1:03 PM  
Anonymous Evil Pundit said...

Further to Anonympus' comment and the value of newspaper brand recognition, two more problems emerge.

(1) Internet services like eBay are also developing brand recognition. In the case of eBay, there is a feedback mechanism to keep traders honest, which cannot be emulated by a traditional newspaper.

(2) The brand image of newspapers themselves is becoming increasingly negative as their bias is perceived by the public. I would trust the word of an anonymous blogger more than I would trust the word of the New York Times, because at least I know there's a possibility that the blogger might not be lying.

For these reasons, newspapers shouldn't count on brand recognition to save them.

4:27 PM  
Anonymous Rick Ellis said...

I'm not sure that I buy that print is responsible for only 60% of the cost. That seems low from what I've seen, but I'll accept it's true for the purposes of this.

You're right, most digital sales efforts at newspapers focus on "upsell," and that's the thing that has to change to make newspapers work financially--whether or not they keep their print edition.

Like most TV stations, digital sales forces tend to be the least experienced people and the smallest amount of attention. Compare the efforts at the average newspaper to a digital sales team at MSN or even CNN.com, and you can see that building an online revenue stream (even by 3-4 times) isn't an unreasonable task.

Well, I might not start in the middle of a recession, but that's a different question.

7:15 PM  
Anonymous Anonymous said...

Alan, another great post. But I wonder if you are taken in by the great Internet-is-the-future hoax. This recession is going to test the financial future of the Internet, and I am not sure I would be as certain as you are that the Internet is the future. My side of this argument is that Internet revenues are declining sharply as you noted in a previous post, so where is the future for newspapers? You don't answer that.

8:56 PM  
Anonymous Anonymous said...

Newspapers never were producers of a product. 'News' isn't a product, it's merely distributed information and newspapers were just one of the distribution systems.

The worth to advertisers was the monopoly that newspapers had on distribution via hard copy.

That's gone now. The internet is a technologically superior method of information distribution and advertisers have figured it out.

There's nothing anyone can do. It's progress.

Walter Abbot

4:35 AM  
Anonymous Anonymous said...

This PC Magazine writer was ahead of his time. The article, "Newspapers and Movies--Both Fading Fast," by John C. Dvorak was published three years ago:

http://www.pcmag.com/article2/0,2817,1860821,00.asp

2:39 PM  
Anonymous Anonymous said...

On the brand issue made by the anonymous poster above, note this generation seems to be far more skeptical about the information it reads than older generations. Gone are the days of trusting "Uncle Walter" Cronkite to give the truth, or newspapers to tell an accurate story. This generation relies on the accuracy provided by a consensus of crowds, as shown by the popularity of Wikipedia, which is very useful in spite of its innacuracies. Scoff as we might at Wikipedia, every correction that runs in a newspaper screams that we are just as prone to error as Wikipedia. As unreliable as people may believe the Internet to be, there are people still willing to give their credit card number to some Internet company they don't know to buy a product.
What this means for newspapers, I think, is that they have to go back to the days of developing a distinctive voice. Whether that means political voice, or social conscience voice, or reform voice doesn't matter. The era of bland "he said, she said" stories is over. The need for public spirited journalism is clear, and I think the only way newspapers can regain attention in this era of deliberately muddied voices yelling for attention.

8:30 AM  
Anonymous Anonymous said...

"This PC Magazine writer was ahead of his time. The article, "Newspapers and Movies--Both Fading Fast," by John C. Dvorak was published three years ago:"

call John Dvorak a pc magazine writer is like calling Churchill a private in the army.... ;>

7:38 AM  
Anonymous Anonymous said...

Once a newspaper migrates to the Internet, it's no longer operating in a "one-paper city."

From an advertiser perspective, the remaining advantage to a print newspaper is that it provides access to customers through a medium that isn't duplicated. If you want to reach newspaper readers, or people who look in newspapers when they're shopping for cars, groceries, etc., then you don't have much choice about where to advertise.

While the choices are usually broader, they're still limited for advertisers trying to reach customers who listen to the radio or watch television.

When it comes to reaching people who use the Internet, even people who read or watch news on the Internet, the choices are much broader and are likely to widen as viable models for Internet news operations take shape.

The big obstacle to new news operations in other media is the startup cost. While not insignificant on the Web, the startup cost for a credible local news operation is well within the range for other small businesses.

Any business model that assumes the local newspaper will remain the only game in town as people keep shifting to the Internet is in for a rude bankruptcy.

1:33 PM  
Anonymous Reg said...

Following up on William's point above:

One of the problems with the e-paper model, at least from a publisher's point of view, is precisely that advertisers find electronic advertising more efficient. When advertisers target ads based on reader demographics and behavior, publishers aren't able to generate the kind of monopoly revenues they enjoyed in print.

I'm not suggesting that's a bad thing; only that simply porting an entire paper to an e-paper edition, keeping your circulation and major advertisers, will still probably result in much lower ad revenues. I don't have numbers, but I suspect even the cost savings from trucks and printing plants may not offset those losses.

3:29 PM  
Anonymous Anonymous said...

quote: call John Dvorak a pc magazine writer is like calling Churchill a private in the army.... ;>

A thousand pardons, Mr. Dvorak! I meant no disrespect to you or your Celebrated Journalist peers. ;)

1:47 PM  
Blogger rknil said...

Don't worry -- the obsession with tiny design details will bring the readers running back. [/designdoltseverywhere]

8:50 PM  
Blogger -30- said...

Sorry I'm so late, to this party here, but aren't the print:online revenue numbers closer to 80:20?

Given that, a news org would only have to raise it's online revenue by 60% to turn a reasonable online profit (no, not 15%) and not the 300% you propose.

(Caveat: I suck at math, so I may be off)

When you factor in that despite all the talk to the contrary, newspapers are still probably only putting 10% or their day-to-day efforts into online (both in content and sales) so when faced with 100% of effort an increase of 60% is not unreasonable.

You also have to factor in that the future of print is seriously in question. Expenses such as newsprint and ink continue to rise, circulation continues to tank. Yes, there will be short term losses, but they will ensure long term sustainability which is not what the industry has now.

10:08 AM  

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