Why newspapers can’t stop the presses
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
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