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.