Sunday, February 01, 2009

Why newspapers can’t stop the presses

Contrary to some of the ill-informed articles you might have read lately, almost every newspaper company still needs to print newspapers if it wants to stay in business.

Although the idea of paperless newspapers ricochets around the blogs with some regularity, fans of the concept recklessly disregard the economic realities of the publishing business as it exists today. So, we’re going to do a little math in a moment to prove:

A. Why it would be suicidal for any reasonably profitable publisher to stop its presses in perpetuity.

B. Why a paper going to digital-only publication would have to eliminate roughly half of its editorial staff to achieve even a modest profit on that operation.

Notwithstanding the above realities, this is not to say that publishing won’t, or shouldn’t, migrate to all-digital media in the future. Before that happens, however, the economics of the business would have to change far more radically than they have to date.

Because newspapers on average derive approximately 90% of their sales from print advertising, the only ink-on-paper newspapers that can afford to attempt digital-only publishing are the ones that are irreversibly losing money. Moving to digital publishing is the last, best hope to salvage at least some value from their waning franchises.

But those web-only franchises would produce far less cash than their print predecessors, reducing the value of those businesses by several magnitudes. How much less? A conventional newspaper moving to online-only publishing might produce at best 10% of the cash generated by its print-plus-online predecessor.

This would be catastrophic for any of the newspaper companies that operate today on the premise of selling both print and interactive advertising. This is especially true for the many publishers that borrowed billions in recent years to finance acquisitions that for the most part haven not produced sufficient profits to service the loans.

While all-digital publishing might represent a last-ditch effort for some money-losing newspapers, it might not even be a solution for the Rocky Mountain News, Seattle Post-Intelligencer or Tucson Citizen, whose respective owners plan to shut them if they can’t sell them.

The reason is that each of these papers is a participant in a joint-operating agreement, where a third-party agency sells the ads that appear in them. If any of the three papers elected to become free-standing digital publications, their owners most likely would have to invest in establishing new ad-sales and administrative staffs – investments they might not be willing to undertake in this inhospitable economic climate.

The latest buzz over paperless newspapers was triggered by a widely noted post a few weeks ago by Buzzmeister Jeff Jarvis, who reported that the Los Angeles Times makes enough money from its website to cover the salaries of the 660 journalists on its payroll (the staff is soon to be cut t0 590).

“Imagine if the Times turned off its presses tomorrow,” said Jeff. “I see hope: the possibility that online revenue could support digital journalism for a city. The enterprise will be smaller, but it could well be more profitable than its print forebears today and – here's the real news – it would grow from there. Imagine that: news as growth.”

It is reasonable to conclude that some communities could be left before long with digital-only news coverage, if the business of dead-tree publishing continues to shrivel amid shrinking ad revenues and inescapably high operating costs.

But we are a long way from seeing a publisher make the proactive decision to pull the plug on a profitable print-on-paper operation. That’s because pulling the plug is not a decision a rational publisher can afford to make.

To prove the point, let’s take a closer look the case of the Los Angeles Times, where editor Russ Stanton confirms that revenues from the website indeed cover the salaries of 660 journalists.

Though Russ won’t go into the details of his newspaper’s finances, it is a fair guess that the average salary in his newsroom is $100,000 per year (while that seems like a lot, a hundred grand doesn’t go as far in L.A. as it would in St. Louis). At an average of $100k per employee, the newspaper’s online revenues would be about $72 million per year.

Because newspapers on average generate 10% of their annual sales from the web, it is a fair guess that the print sales of the L.A. Times are about $650 million, making for total annual revenues of $722 million.

Assuming the paper were producing an operating profit of 10% of its sales (the average reported by the publishing division of its parent, the Tribune Co.), then the annual earnings of the Times before interest, taxes, depreciation and amortization (EBITDA) would be about $72 million.

That means the newspaper would be providing $72 million a year to help service the $12 billion-plus debt incurred by Sam Zell when he bought the company in 2007. (Tribune isn’t paying down its debt at the moment because it’s in bankruptcy, but neither the federal court supervising the case nor the bondholders want to see its cash flow go down.)

If the L.A. Times stopped publishing the print newspaper, 90% of its ad revenues would go away and something like $65 million of its cash flow would disappear. You can see how that would play havoc, to say the least, with Tribune’s ability to recover from bankruptcy.

But wait, you say, wouldn’t a web-only operation be more profitable than a combo operation? Not necessarily.

The $72 million in sales at the L.A. Times website covers only the salaries of the newsroom employees. It does not cover such things as medical benefits, the employer’s share of payroll taxes, workers comp, pension contributions, insurance, office rent, equipment leases, utilities, telecommunications expenses, web hosting, office supplies, travel and lunches with sources. The fully loaded cost of the newsroom is probably $18 million more than $72 million, or 25% greater than the site’s sales.

It takes more than a crackerjack newsroom to generate $72 million in sales. The digital operation would have to employ people to sell, create, schedule and bill for advertising. It also would need accounting, human resources and other administrative staff. The salary, benefits and overhead for that group would amount to about $11 million, or 15% more than the site’s $72 million in sales.

Thus, the fully loaded expenses of the digital-only L.A. Times would be 140% greater than its sales.

The only way a publisher could generate a profit on this operation would be by – you guessed it – cutting the newsroom. To pull a 20% profit out of an all-digital L.A. Times, the editorial staff would have to cut by roughly 48%.

If half of the newspaper staff had been engaged in the production of the print product, then the cutback presumably would have minimal impact the paper’s coverage (though it would be a miserable outcome for the talented and dedicated people whose positions were eliminated).

If it takes a lot more people than half the news staff to deliver the coverage for which the newspaper is renowned, then a digital-only strategy would not sustain journalism as we know it at the L.A. Times.

With $72 million in annual sales, it ought to be possible to make money with a local news website. But there are powerful reasons to question whether a free-standing website indeed would be nearly as successful as one associated with a print newspaper.

That’s the subject of the next installment.

Next: How online ad sales depend on print

So you won’t miss the next installment, sign up for the email alert or RSS feed in the right rail. Your privacy will be protected and the email address will not be used for any other purpose.

31 Comments:

Blogger -30- said...

Now wait, other estimates around the web (yeah, I know wiki-journalism... that's why we have you Alan) point to some (not all) operations leaning more towards an 80/20 revenue split, with almost 60% of operational expenses being entirely print centric.

Now those numbers are clearly not "shut-off-the-press ready" either but they're closer to it than the pictures you tend to paint.

Add to this the "dirty secret" at a lot (no, not all) newspapers that there is still a limited commitment to the web in both editorial and sales and so there should be a lot more room to grow revenue when the -- and this is not an appropriate word here, I know: -- "distraction" of print is removed.

I would be curious to see different scenarios painted, with differing revenue splits and some operational assumptions shifted. Not to simply make the numbers paint the pictures that I may or may not want to see, but to show the potential range. I suppose it is possible that some papers are nearer than we though to going web only while others never will.

I look forward to your next installment.

11:14 PM  
Anonymous Doug Poretz said...

Newspapers are trapped in the transition from a manufacturing economy to a knowledge economy. In the former, fixed assets such as the printing press are the most valuable asset on the balance sheet; whereas in the knowledge economy soft assets (human brains, and journalistic capabilities, for example) are most important. But those assets don't show up on the current balance sheet at all except as "goodwill," which is generally disregarded and even considered a negative. This is hardly irrelevant because the balance sheet used for the manufacturing economy is also the balance sheet used to determine bankability and valuation. Thus, the assets of a very high quality IT company that owns some computers and some desks but has loads of people with great intellectual property and a great future is lower (probably significantly so) than the business with large fixed assets but a dire future. That is why it is essential to dream up some way of changing the balance sheet now used so that real value can be accurately reflected and new valuation systems and ways to determine bankability can be adopted. We will continue to have an upside down view of value as long we we use a balance sheet that places greater worth on that which depreciates and rusts over time instead of one that places greater worth on that which appreciates and gains in potency over time.

4:52 AM  
Anonymous Anonymous said...

The assumption that digital revenue is a stand alone number is incorrect. Most of these numbers are inflated by online charges for print ads that appear online. In addition, many online ads are part of bundled buy with print. Your revenue model quickly falls appart without print support.

No digital model will acheive revenue levels to support a news organization that any of us would recognize.

6:19 AM  
Anonymous Anonymous said...

An artifact of the print newsroom is that it employs journos that probably wouldn't need to be part of a web-only operation. The Web affords news organizations a direct read on the content that its users want to see, and by extension, the value that should be assigned to contributors. When audiences ignore content offerings, the Internet news organization knows almost immediately and can adjust staffing to match.

Think about the ubiquitous lifestyles sections, for example. In print, these are stuffed into every edition of the paper, which is the sales angle for the newspaper ("Over 500,000 readers each week will see your ad!"). In order to sell this advertising, full-time journalists must be hired and syndicated content purchased so that there will be sufficient "news" to surround the advertising. Actual reader interest is hidden to management and advertisers; they don't know whether the effort and dollars they're spending are in fact providing audiences with something they will read.

In a web-only world, the news organization can get a direct indication of how much interest actually exists for its lifestyles content. If interest is high, it can add writers and content and demand premiums for ad space. If interest is low (more likely) it can cut full-time writers and pick up content based on audience demand, thus paying only what the market indicates is warranted for the content.

Newspapers built big newsrooms because they were a sole-source provider of news content and needed writers to provide comprehensive coverage to a local audiences. The Internet era brings content competition that means that local news outlets are no longer definitive sources for content originating outside of the local area. In such a market, most local news outlets should focus on areas where they have the prime competency (local news) and shed positions where they lack the ability to compete at a national or international level.

Such changes will be disruptive and may lead to fewer and lower-paid journalists in the short run. In the long run, they should also lead to profitable news organizations that can focus on distributing content of interest to audiences without the baggage involved in filling news hole around inefficient advertising.

8:07 AM  
Blogger tom said...

Also: Because entertainment/celebrity coverage generates massive page counts, and LA is in the celeb capital of the planet, it's reasonable to assume the LA Times' web site has substantially higher page view counts than other newspapers.

Hence, I would suggest that even if the LA Times' website generates enough revenue to cover the cost of its newsroom, most papers earn substantially less because Britney Spears does not live in their circulation area.

8:08 AM  
Blogger T Heller said...

Allan: Thanks for wading into this kind of analysis; it is essential to grasp the economics of the newspaper enterprise. But there may be holes in your analysis.


Anonymous remarked: "No digital model will achieve revenue levels to support a news organization that any of us would recognize."

That depends on the quality (hence value) of the news they produce. Has anyone ever tried to assess what *subscribers* would pay for electronic delivery? (Right now, they're getting it for free over the Internet. What value is being lost by that ill-considered "policy"? I'd venture quite a lot.)

That's an area that needs to be assessed. I suspect newspaper guys look too much to their tried-and-true advertiser revenue. I know it's their lifeblood, but to be blunt, it's draining fast. I'm not saying they can't compete in the advertising space, just that they can't dominate it like they've been used to.

Anyhow, I'll be interested in following this discussion. Thanks, Allan.

8:10 AM  
Blogger rknil said...

And yet there will still be all sorts of young journos blathering about how all newspapers should go online today. They'll rant about their Ring of Bling and how they, and they alone, are the salvation of journalism.

Somewhere along the way, we got charlatans who hold up their version of magic beans and say: "No, I have the solution!"

8:11 AM  
Anonymous Anonymous said...

Does anyone know how the Detroit experiment is working out?

8:13 AM  
Blogger idahospudz said...

Finally, an intelligent and detailed analysis of the real issues we face during the long print/web transition. You nailed it!

Roger Plothow
Editor and Publisher
Post Register, Idaho Falls, ID

8:14 AM  
Anonymous Anonymous said...

As one poster right pointed out, the 10% of revenue assumption is perhaps wildly off base. The vast majority of online spending at newspaper websites is bundled with print.

However, there is one other factor not being considered. Without the print edition to drive it, what happens to website traffic? It is very difficult to maintain top-of-mind awareness as an online-only entity. The irony is that a paper such as the LA Times would end up resorting to buying "old media" -- billboards, TV ads -- to keep their brand in the public eye.

At the end of the day the fact remains: online display advertising is simply not effective -- especially when put against search advertising and we all know who owns that.

There is another solution, but no one is listening.

8:42 AM  
Blogger Michael Rogers said...

Thanks for doing this, Alan. The "just-shut-off-the presses!" meme has long driven me crazy but I've never done the math to show why it's misguided.

One other side note: in working with other media forms (magazines, broadcast and cable television, recorded music) I've found that when you really do the numbers, all of them run into this 10% rule--i.e., you make about a tenth as much per customer on the Web as you did in your physical operation. ("Analog dollars for digital dimes" as Jeff Zucker put it.) Interesting that it's so consistently 10%, which suggests the powerful leveling effect that going digital has on media regardless of original form.

8:59 AM  
Anonymous Anonymous said...

Let me add another factor to the mix. At my company (a large newspaper chain - yes you've heard of us) the value of the services provided by our centralized digital/web operation is wildly inflated, some estimates by folks familiar with web operations outside of the company place it at as much as 10x above reality.

What this means is there's a balance sheet somewhere showing the web expenses for the overall chain running far, far higher than they should be. This, were it corrected, would no doubt shift the numbers again.

I'm curious if such padding exists within other chains as well.

9:28 AM  
Anonymous Anonymous said...

There's no doubt that a market still exists for print publications/newspapers. But, it isn't as large as it was - the demand simply isn't there, because it isn't the only game in town any longer. Is digital-only viable at this point, either for startups or for established businesses? I do not believe so - but I also believe it is the wave of the future for so many other reasons, many of the same that originally worked for print/presses over hand-written works. Which should also be an indicator - how many hand-written books do you have in your library? And, yet, we do still correspond in such a fashion. So, print on a press will likely always exist in some form or fashion, but it will not be an industry leader again, IMHO.

10:49 AM  
Anonymous John Kenyon said...

Amen, Allan. Surprised it has taken this long for someone to point out this obvious flaw in the arguments of Jarvis et al. Shutter the print operations of newspapers tomorrow, and they'll be out of business by the end of the month (or so skeletal that it won't matter). Moving online is fine, but the core product remains the newspaper.

10:56 AM  
Anonymous Anonymous said...

1. You are correct to say that newspaper online operations cannot currently sustain the existing business. That's because they have relied on the same business model as their print counterparts and that model is dying for print and online.
2. Nevertheless, newspapers are closer to the online-only model you describe. You don't seem to be taking into account the huge operational savings gained from dumping print production and distribution.
3. Sure, staffs in the future are likely to be smaller. And the jobs in the newsroom will be different too. Most journalists don't have the skills, attitudes or flexibility needed to be successful in the future. Journalism and story-telling will be different from the approach most newsrooms are determined to save.
4. You are correct to say few publishers will make the move. It would take guts, and guts are sorely lacking in the offices of newspaper management.
5. The biggest problem is that newspapers haven't invested enough in their online future. That's because they invested so poorly in the early days that they are afraid to go back into the water. Even now, as they gasp for air, they are rolling experienced online staffs back into the newsroom. And out-of-date printosaurs are being given the car keys. It's a disaster in the making as top line people like James Brady at the Washington Post leave for greener pastures. (Greener than the Washington Post? What does that tell you?)
Stop whistling past the graveyard and join the force for change before it's too late. Encouraging people to believe that being a newsosaur is a good thing will get us all killed.

11:32 AM  
Anonymous Ryan Chittum said...

Very interesting, Alan.

I'm not on the side of the internet evangelists by any means (I say charge for content!), but I wonder if anyone's studied how much online ad revenue would increase on Friday if the print product closed shop on Thursday.
Would that happen? After all, as you discussed in our interview, newspapers still got nearly $40 billion in advertising last year. Would local advertisers, without that print outlet, move more of their dollars to the online edition?

Just a thought.

1:25 PM  
Anonymous Solitude said...

I personally left newspapers for the internet in 1998.

From 2005 until recently I have had a PDA phone in my pocket. News anytime, anywhere. This is now supplemented by a 7" screen tablet PC that I always carry.

I click past news sources that do not offer debate sources - for the most part.

There are tech sites, music sites, and ebook sites I go to daily to do a little shopping.

All this is with me at any time. I don't take a free paper when they are offered - the medium is too limited and shallow.

If you post an article I expect you to defend it point by point -as the commenters on this blog are insisting that you do. As you may demand in turn that I do.

Newspapers have been surpassed in the way that scientific calculators surpassed slide rules.

The genie isn't going back in that bottle.

2:21 PM  
Blogger rknil said...

Way to miss the point, Anonymous 11:32 A.M.!

I am surprised it took more than three hours before someone from the Howie Owens/Hats in Reverse Bunch/young, clueless journos brigade came on to post nonsense, though!

2:31 PM  
Anonymous Reg said...

Alan, thanks for the great analysis. It points out how complicated the actual situation compared to the prescriptions that seem to get thrown around.

That said, while it's important to figure out ways to fund traditional newsrooms - not least for those of us in traditional newsrooms - it's probably more important to work out what kind of revenue a new news organization could generate, from subscription, advertising, transactional and other streams, and then work out what kind of newsroom that would support.

I realize there's a chicken-and-egg element to this - what kind of newsroom it is affects what revenues come in, and vice versa. But it's clear an online only (or online primarily) newsroom operates in a very different fashion to a traditional newsroom, and it doesn't make a lot of sense to try to reverse engineer out those structures when we could be designing from the ground up.

2:45 PM  
Anonymous Anonymous said...

A shift to online by newspapers would eliminate the cost of ink, presses, paper, delivery trucks and personnel and all the bodies that provide those services.
And all the ad revenue from print will not be lost. Some will move to online, and others that did not advertise because of the high cost of newspaper ads may buy online ads at lower rates. And think of the savings and advantages online publication has over the old zoned editions – more space for news from bedroom and outlying communities.
And there are devices such as Kindle that make online delivery easy for those who don't have computers. Subscribe and get a Kindle or some similar device. Cheaper than ink, paper, presses and trucks.

4:51 PM  
Blogger Martin Langeveld said...

Of course, online only doesn't work economically. But most, if not all newspapers, if they analyzed each day of the week carefully, would find they are losing money several days a week. What little advertising they carry on those days can be shifted to other days.

So there is a very viable solution in shifting to once or twice weekly publication: in one fell swoop, papers would save most of the advertising (especially the preprints which are still sold at monopoly rates), keep some of the subscription revenue, cut out a big slice of the production and distribution expense, and push more viewers toward the online product.

6:17 PM  
Blogger rknil said...

Interesting how the people who keep trying to claim: "But it's cheaper than papers and ink and trucks and presses and carriers and bundle wrappers, etc." post anonymously.

And without numbers. Or refuting any specifics.

Another sign of the evidence of the Howie Owens/Hats in Reverse/young journos bunch.

8:18 PM  
Anonymous Jonny said...

Of course, IMHO Jarvis' wrong for most papers; it's far easier to make any kind of incremental transition.

BUT - you DO have to actually make that transition, and be energetic about it, and keep away from clearly-false excuses with plenty of counterexample like, online ads never work anyway (one tripled my calls far cheaper than a local newspaper, and that's all I need, one countexample), or face carriage-makers' or GM's fate, and that's where too many newspapers are today. The St. Pete wouldn't even listen to a man who'd helped launch a long-successful largely-online-ad-driven operation.

If you're an executive who holds many employees' fates in his hands, don't you owe it to them to move forward and do your best to understand and try a thing or two? It might even be an interesting challenge. And, it's not enough to just try things, but put your heart in it. IMHO, NYT's online ads are weak compared to their print efforts in several ways; they aren't putting their heart into it.

WaPo, my local newspaper, and McClatchy-DC, by the way, get my kudos for being energetic.

10:28 PM  
Anonymous Jenny Woolf said...

Hm, it's very easy to assess this situation from a position of trailing behind. Most people reading this blog will have grown up reading print. The question should be asked whether the generation now aged around 18-20 is reading print for pleasure? They're the ones whose habits do not YET influence the industry, but will inevitably increasingly do so.

Anyone know of any studies of this generation's reading habits? if so I'd be interested to see the link. Jenny Woolf
www.jabberwock.co.uk

12:17 AM  
Blogger dr droock said...

re:"Newspapers are trapped in the transition from a manufacturing economy to a knowledge economy. In the former, fixed assets such as the printing press are the most valuable asset on the balance sheet; whereas in the knowledge economy soft assets (human brains, and journalistic capabilities, for example) are most important."

In addition to really cool search and web apps, they have the most and best server farms on the planet. It's a common confusion to be blind to the physical underpinnings of the knowledge economy.

The Print delivery structure is a defensible advantage for a newspaper. The cost of entry on the web is very low. The real estate on the web is limitless.

The web is a great way to identify and nurture tribes. Print is the best way to make stuff the tribes will buy and to deliver a search platform in the real world.

2:52 AM  
Anonymous Doug Poretz said...

In this debate, when discussing a loss of revenues, it shouldn't be forgotten that a big top line that ends in a negative bottom line is trumped by smaller top line that ends with a positive bottom line. Every time.

8:34 AM  
Anonymous Anonymous said...

Any time something costs you more to produce that you can recoup from selling it, you find that it is indeed possible to stop doing it.

3:12 PM  
Anonymous Jim Meiers said...

WHERE WILL YOU ADVERTISE TOMORROW?
Very interresting article the publishers in germany should read.
But one thing i don`t understand: "If the L.A. Times stopped publishing the print newspaper, 90% of its ad revenues would go away"
WHERE will the ads money go? Isn´t it so that the advertisers need the ads to sell their products? In my area a local newspaper shuts down, a friend started an online newspaper and acquires most of the advertisers.

12:39 PM  
Anonymous Anonymous said...

The Detroit experiment is moving ahead at full speed. Set to start on March 30. Home delivery 3 days a week, papers available all 7 days, and an e-edition with a subscription.

1:10 PM  
Anonymous Anonymous said...

I was wondering how long it was before the issue of the 18-29 reading habits issue was brought up. For the last 30 years newspapers have been dealing with the fact this generation doesn't read newspapers.... except that they do once they get older. I have always compared it to music -- according to the experts because 18-29 years olds listen to rock and roll (or chose your generational choice) all other forms of music will disappear. Except they don't. That's because our choices in music -- and our choices in other areas -- change as we get older and mature. When it comes to news, college students not only are interested in different things than parents and business people, they are interested in getting the information in different ways. No longer is it all about "Give it to me now!" as it is about, "I want to take a few minutes to relax and contemplate the information," be it on a train, at a desk, on a coffee break, on the living room couch or wherever. The question is not "What are the 18-29 years olds doing now?" but "What are the going to be doing 10 years from now?" Answer that question and you will have a much better idea about the future of our industry.

8:21 AM  
Blogger Christina said...

Now....I have read all the posts and I noticed that 1/3 agrees to change to the internet, 1/3 doesn't want the change at all and the other 1/3 hasn't decided yet. There are some things that I agree with and others I don't.

First someone mentioned that 18-29 yr.old don't read the newspaper and that would be correct. That group of people listen to their MP3 players and then the other half is finding the gossip on Facebook. The upcoming age generation is NOT going to read the paper because they WANT to. There is NO way. I am from the 30-49 age and I don't read the newspaper because I get everything from the internet and the tv not to mention the radio. Teachers now are allowing reports to come from books and the internet and forgetting about the newspaper.

On the other hand newspapers are the main writing tool for the up coming generation also. Not only the newspaper but things in print in general. I work on genealogy and I am glad that there are Censes papers so I can find my family.

I don't want the newspaper to die but in this new generation of technology I believe that it will happen in the next 10 years or so. I think either way it is text and news media. As long as there are reporters and there is a media frenzy text news will always get to the American people.

7:33 PM  

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