Thursday, February 05, 2009

Can newspapers transition to digital?

Last in a series. Previous installments are here, here and here.

It is all but certain that falling advertising sales, declining readership and rising costs will begin killing off some print newspapers in a matter of weeks, months or years.

If so, the choice for their publishers will be either to migrate to strictly digital operations or to shut down altogether. The problem for publishers hoping for digital reincarnation is that most are seriously unprepared to be full-on interactive competitors.

In but one measure of the staggering challenge they face, analyst Tom Corbett of Morningstar calculated that publishers recaptured just 1.7 cents in online ad revenue for every $1 of print advertising that they lost in the first nine months of 2008. In other words, publishers last year took 100 steps backward and 1.7 steps forward.

To be sure, not all print operations are doomed. Where there is sufficient demand for printed papers among readers and advertisers in the future, they will continue to be manufactured (though not necessarily on all seven days the week).

Where the expense of producing and distributing the physical product outstrips the ability of publishers to profitably produce it, then printed papers will succumb. How long can even the mighty Hearst Corp. afford to spend $10 per copy to print and deliver the Sunday San Francisco Chronicle to subscribers who pay only $20 for a weeks-long promotional subscription?

As discussed in the earlier installments of this series, newspaper companies in a post-print world would have to rebuild almost every fundamental aspect of their businesses, from their capital structures and revenue streams to their audience bases and products. (For a second opinion, see this prescription from Dr. Mark Potts.)

It is difficult to imagine how a newspaper company forsaking print today could avoid defaulting on the billions it borrowed to fund ill-starred acquisitions or avoid further erosion in the deeply discounted values of their franchises.

In light of the highly constrained economic resources likely to be available to them, digital-only newspapers would be hard pressed to maintain the depth and breadth of professional journalism produced by even today’s most minimally funded newsroom.

If newspapers are going to be saved in a semi-recognizable form – whether in print, online or some other way – then a number of changes have to happen fast to restore the economic well being of an industry that has failed for nearly two decades to adapt to radical changes in technology, demographics and consumer behavior.

Here’s what needs to be done, urgently:

:: Newspapers should do everything they can to sustain a profitable print business as long as they can to fund the development of a diversified portfolio of media-agnostic publishing brands. While it is fine for them to produce papers (ideally in outsourced production facilities), they should be equally open to exploiting web, mobile and other delivery platforms. The only factor that should matter is whether the medium is profitable.

:: Newspapers should leverage their content-creation and marketing resources to create cost-effectively produced niche products geared to carefully selected audiences attracting a sufficiently large group of advertisers to assure commercial success. Newspapers that find it unprofitable to publish Monday or Tuesday should endeavor to develop new weekly niche products to replace them. They may or may not carry the flagship newspaper’s brand.

:: Newspapers have to abandon their all-but-exclusive dependence on display and classified advertising in favor of modern interactive formats than enable marketers to efficiently target customers on a pay-per-acquisition basis. The new media should include, but not be limited to, contextual advertising, search advertising and Yellow Pages-style directories. Newspapers should be leaders, not followers, in deploying (but not building!) advertising-delivery systems targeted to the demographics, expressed preferences and behavior of consumers.

:: Because the revenues associated with cost-per-acquisition advertising are going to be lower than the print and online rates typically charged by newspapers, publishers will have to sell advertising to far more small and medium advertisers than they historically have done. Because the value of those orders will be smaller than the schedules purchased by large advertisers, newspapers will have to develop efficient inside sales teams, rather than making the costly in-person sales calls they favored in the past. Telephone sales can be readily outsourced, affording significant cost savings in many cases.

:: Publishers also can reduce their sales expenses by developing Google-style systems that empower merchants to create, buy and pay for advertising without human intervention. To get there from here, newspapers will have to invest in acquiring (but not building!) the systems to support such services. They also will have to market aggressively their do-it-yourself ad services to both customers and potential customers.

:: Newspapers should become interactive media consultants, providing content-creation and marketing services to their client base. This would include everything from producing videos and blogs for customers to managing their search-engine optimization and keyword advertising campaigns on third-party sites. Papers should outsource SEO and SEM services to companies with that native skill.

:: The unlimited distribution of free content has to stop. While teaser snippets may be offered to strategically whet the interest of casual readers who can be turned into paying customers, newspaper companies must reassert their right to be paid for the content they create. It makes no sense to focus on driving page views when banner ad rates are deteriorating because advertisers favor targeted interactive formats whose results can be verified and measured.

:: With generic news and information freely available on the web, the only way newspapers can successfully charge for content is by creating unique and valuable information. To do this, they have to adequately staff their newsrooms. Starving this vital operation will be strategically disastrous, because weak content will turn off loyal readers and repel new ones.

:: Newspapers cannot afford to author everything they publish. They must develop compelling content by aggregating and editing data that can be easily and appealingly acquired by consumers who are overwhelmed with too much information. Aggregation sites should be combined with personalization technology and smart ad systems, thus giving consumers control of the user experience and the publisher targeted advertising inventory that can be sold at premium rates. Newspapers also should acquire algorithmic publishing systems to turn government records and other raw data into compelling new products like Everyblock. In each case, the newspaper should buy and not try to build the relevant technology.

:: Newspapers have to make their sites truly interactive. There is a strong desire among consumers – particularly young ones – to contribute to and comment on the news. Newspapers can leverage the crowd for everything from investigations to self-help forums and from hyperlocal news to restaurant reviews. In developing the portfolio of products suggested above, the middle-aged managers who make most of the business decisions would be well advised to consult young staffers – or students at the nearest high school or university – for insights into the types of products that are likely to fly.

If newspapers have a prayer of getting where they need to go, their managers will have to abandon their stubborn attachment to print-centric thinking. Here’s what I mean:

The Poynter Institute, which rightly is esteemed as a major thought leader in the newspaper industry, owns Congressional Quarterly, which is exactly the sort of profitable and growing niche publication that a publisher would be thrilled to operate.

But the Poynter Institute also owns the St. Petersburg Times, which, like other newspapers, reportedly has been losing money as a result of the long-running secular decline in advertising and the particularly nasty downturn in the economy in Florida.

So, what does Poynter do? It puts the profitable and growing CQ up for sale to raise money to subsidize the newspaper.

Because the Poynter Institute is organized as the sort of non-profit foundation that so many people think can save newspapers (a belief I do not happen to share), the institute’s charter may leave its directors no choice but to sell CQ to support the paper. Or, the decision may reflect the desire to support the paper at all costs because it probably generates 10 to 20 times more revenue than CQ.

Whatever the reason Poynter was forced to act, it shows how an over-dependence on print for too long has brought the industry to the biggest crisis in the 300 years it has existed on this continent.


Blogger Mark Potts said...

Brilliant work, Alan. I worried that your first three parts provided a bit too much balm for the traditionalists who are clinging to print and downplaying the future for online news and information. But this post sucker-punches their smugness, and your prescription for what needs to be done on the Web is spot-on. Alas, few newspapers will ever get there. It will probably be startups, unencumbered by legacy costs and issues, that find the key to local online news success that has congenitally eluded current publishers.

10:04 PM  
Anonymous Anonymous said...

Very interesting series with a lot of food for thought. The one thing I would quibble with is the idea of paid content on the net. No matter how unique and interesting the newspapers make their content, they will lose readers by switching to a paid content model.

In part 3 you mention the "fly-bys" (aka. "one-hit wonders" or "info-snackers"). I seriously doubt the vast majority of these will continue to "fly by" if they have to pay to read the content.

At the other end are more voracious media consumers like myself. I read several on-line papers every day - the local paper where I live in Norway, the local paper where I am from here in Norway, and three national papers. I lived in Canada for many years, and so I read The Globe and Mail and The Toronto Star. I also read The New York Times and The Guardian and in an average week I visit up to a dozen other papers for specific content.

If all of those papers went to a paid model, most of them would lose me as a reader. I might be willing to sustain two or three online subscriptions, but no more.

And I doubt I am alone.

In short, I do not see how moving to a paid model for online content will do anything other than further reduce the readership of newspapers.

3:47 AM  
Blogger Howard Owens said...

Alan, have you ever walked into a small business owners shop and tried to sell them an ad?

I have. Many, many times.

The idea that these super-busy, often older shop owners are going to take the time to figure out, understand and manage their own self-service advertising program is simply pie-in-the-sky. They're not doing it down with Google. Why would they do it with something a presented?

Further, as for paid content: When have reader EVER paid for newspaper content? Check this quote from Walter Lippmann from 1922.

4:59 AM  
Blogger rknil said...

"Alan, have you ever walked into a small business owners shop and tried to sell them an ad?

I have. Many, many times."

I did that right after college. Then I went the traditional route. At that time, the option of running around and telling everyone the sky was falling unless they were "wired" was not there. I missed out.

$1 billion in debt.

"Check this quote from Walter Lippmann from 1922."

1922. Yeah.

Today's journalism revisionists are masters at treating history like some sort of buffet, where they take what pleases them and leave the rest behind. That's why we have designers wondering why newspapers didn't emulate the Pulitzer and Hearst papers from the start of the 20th century. Of course, in their case, that part of the buffet has no lights, no heat lamps, and no refrigeration. It sits behind four walls.

5:56 AM  
Blogger Newsosaur said...

In response to Howard Owens:

Yes, I have tried to sell ads to the owners of small businesses. In a presentation a few months ago to a group of merchants and a number of senior ad sales people for a major newspaper, I found the merchants knew frighteningly more about online advertising than newspaper's sales team.

The merchants were sending more and more of their ad dollars to the web without the newspaper guys even knowing it.

6:03 AM  
Anonymous Anonymous said...

Another great one....there are times when I feel that the whole newspaper crisis is really not about content at all but simply is an advertising issue. I never look at newspaper ads - I sell my items on ebay and craigslist and use Google's robust ad system for targeted marketing. My experience with the ad department at the local paper has been consistently poor - the whole system of rate cards and contracts is just a headache. There is no targeting - why should a local restaurant pay for an ad whose reach includes people living 20-30 miles away? Papers once developed "zoned" editions to deal with this but have let those products fizzle and decline to irrelevance.

Now, can you give us your latest thinking on McClatchy?

6:12 AM  
Anonymous Anonymous said...

Most of your comments are dead on, but a few are naive.

- Abandoning display advertising (I assume you mean banners and their kin) would be foolish. That is very much a growth business, even in this economy.

- While newspapers definitely should offer cost-per-acquisition options for advertisers, they do not have the scale to make significant revenue with it.

- Most of the niche product efforts I've seen from newspapers tend to ignore the need to develop audience. As a result, they tend to be oversold to advertisers, who end up abandoning the product. Take a look at some of the HitWise numbers for Moms sites, and note the downward slope of their audience, broken only occasionally by spikes of marketing.

- Recheck you math on charging for online content. When I run the numbers, I can't make it work. The audience shrinks too much to support advertising, and subscription revenue doesn't bridge the gap.

Your initial point that newspapers cannot abandon print is absolutely correct. The key to survival of print is for print to behave more like online. Concepts such as managed inventory, market-driven pricing and aggressive sales structures have been slow to catch on at newspapers, and I would argue that such slowness has more to do with the decline of print than anything specific to online.

7:18 AM  
Anonymous Anonymous said...

Alan, great analysis. A key problem that this throws up for news organizations trying to transition is that nearly every process - and many of the skills - needed in a traditional organization has to be changed drastically for survival in a digital marketplace.

It would be one thing to blow up a company and hire in all new people the next day, but some of the old processes still need to keep going to keep the revenue-generating print product around.

Not that I'm that much of a pessimist - it's doable, but it will take really determined management to make the kind of drastic process changes that are needed.

Beyond Clay Christensen and the various iterations of The Innovator's Dilemma, do you know of any strong analyses of corporate transitions in the face of disruptive technologies?

8:37 AM  
Blogger Howard Owens said...

Alan, doing a presentation in front of a select group of business owners -- who are obviously motivated in a particular direction by the evidence of their very presence -- is not the same as cold calling every shop on Main Street.

Call on 300 such businesses as I have in the past 6 weeks and you find maybe one or two that even know what Google AdWords is, and 10 percent who don't even own a computer, with the majority in between recognizing the importance of the web (very different from four years ago), but still wanting the hand holding that goes with relationship selling.

And relationship selling is something self-service can't do.

Further, Google's global market works for self service because of scale. A local market is bounded and limited. The 90-9-1 rule of social media applies. You're just not going to get sufficient adoption, especially at the rates of self-service, to pay for even one month of one reporter's salary, maybe not even one week.

8:58 AM  
Anonymous Anonymous said...

Howard Owens asks "When have reader (sic) EVER paid for newspaper content?"

There is a difference between what people believe they are paying for and what costs their purchase actually covers. Most people will tell you they are buying the news; a few savvier readers know now they are buying the convenience and portability of a newspaper. Regardless, if people perceive the news -- not the ink and paper -- as having the value, then they might have been persuaded to pay for online content. They'd want to pay less, much as I pay less for an MP3 than I do for the same song on a CD with packaging, but they would pay. Unfortunately, that ship has sailed, and we're left with an unsustainable future where print is too expensive and we've trained people to expect our product for free.

9:23 AM  
Anonymous Anonymous said...

In response to John, has that ship really sailed? As David Carr mused not long ago, everyone thought the ship had sailed for music until iTunes came along. And Kindle does show some consumer tolerance for some payment. I agree that simply putting a pay wall in front of a previously free site is unlikely to work, but it's certainly possible that new products or services could extract money from people - even if they're not paying for content per se, but instead for something else (portability, archive, context, personalization, lottery tickets, whatever.)

11:03 AM  
Blogger Ed said...

Excellent work, Alan...Most publishers would be wise to follow the agenda you've provided for transitioning to a digital future.
I do quibble with the notion of consumers paying for online content, however. Print readers don't pay for the content in newspapers now. Never have. If you loaded the editorial expenses into the P&L you'd quickly see that the revenues from newspaper sales cover only a tiny fraction of the expenses associated with producing the content. Subscribers, in essence, are paying a delivery fee to have the paper dropped in their driveways. I'd argue that many newspapers have an opportunity to increase their prices because of the convenience home delivery provides.
But convenience is built into the web. And technology continues to make all sorts of content accessible anywhere anytime. ISPs and smartphone carriers are the beneficiaries, collecting the fees associated with delivering the content. The newspaper industry's business model -- and practices -- have to change but the emphasis will still need to be on converting the eyeballs generated by content into marketing/advertising dollars.

12:57 PM  
Anonymous Anonymous said...

"Recheck you math on charging for online content. When I run the numbers, I can't make it work. The audience shrinks too much to support advertising, and subscription revenue doesn't bridge the gap."

I'd like to see those numbers. Then I'd like to see you run them again with a few different variables.

1. Assume all print subscribers automatically get online for free. They're already paying for that content and, as Mutter just noted, they represent a large percentage of online readers. (Yes, I know the argument that print subscribers are "only paying for the delivery." One might as well say they're "only paying" for pencils or computers or the editor's salary -- revenue is revenue is revenue.)

2. Assume a tiered structure like the Financial Times, so fly-bys can still see some content for free and only face registration and ultimately a pay wall once they become regular -- and committed readers. Top tier comes bundled with a print subscription or a free Kindle.

3. Assume the least expensive content -- blogs, columns etc . -- stays free, as do user forums and user-generated content.

4. Assume the new structure is coupled with a renewed effort to prohibit unfair aggregation -- as in reprinting the entire or most of an article, not just a link.

5. Assume a new and concerted effort to reach out to local advertisers with the new guarantee that they will be paying to put ads before actual, committed local readers -- not just fly-bys who will never visit their restaurants and shops. (I'll come back to this, Howard Owens.)

I could go on, but start with those five.

The point here is that paid content is not an either/or as it is too often represented. Different papers can and should explore different kinds of charging for different kinds of content. The blanket rejection of the idea has stifled experimentation and innovation for too long. Even Jeff Jarvis, in his most recent posting, has suggested he is at least interested in learning more about what did and didn't work with TimesSelect. That's great.

(TimesSelect is habitually misrepresented, by the way. It DID work -- the Times just decided they could make even more by letting Friedman, Krugman and Dowd roam loose. Is that lesson applicable to non-opinion content -- say local school board or state political coverage? Is it safe to assume that papers without the Times's national standing also will get more from advertisers than from subcribers? We can't know if we don't try.)

The most interesting argument against paid content is that it will just create a new generation of citizen journalists doing work for free or cheaper than the paper. To which I say: Fantastic. Free corporate news has stifled entrepreneurial citizen journalism for too long by creating an uneven field. When Microsoft gives away software for free its competitors scream foul - citizen journalists should be pushing for paid content with all their might. If a newspaper can't compete with its local bloggers on original content, it deserves to fail.

Howard Owens: Where were these merchants? You mentioned Kansas earlier; I honestly am not trying to be snarky, but if that's the demo you're discussing, is it possible that local retailers in San Francisco, Los Angeles, New York, Chicago, or other urban centers might have a different experience with and interest in online ads?

Alan Mutter, thanks as always for your thoughtful analysis. I don't agree with all your points, but yu are generating actual factual debate in a discussion that for too long has been drowned in opinionated screaming. Keep it up.

1:57 PM  
Blogger Howard Owens said...

@Working ... I normally don't respond to anonymous posters, but ...

Most recently, Batavia, NY.

But I've also sold advertising in San Diego.

SMBOs are SMBOs where ever you go.

And besides, are we only going to have newspapers in the largest of the large metro areas?

But more than that, you've got to think about scale. The number of savvy SMBOs you might find in a large metro area can lead to a sense of tunnel vision, extrapolating from a small sample size to represent the market. The savvy will be most visiable to you at first, but is there enough of them.

And run the math -- how many SMBOs will you need paying $80 to $200 a month in self-service advertising to pay for a metro newsroom?

As for paid content: It won't just be citizen journalists that come along with competition for paid content sites, but entrepreneurs with VC backing who will see a paid site representing nothing more than a big opportunity.

4:20 PM  
Blogger Nancy Wang said...

Great series of posts, Alan. I have run some numbers on different scenarios for a paid model (partial or total). Please take a look:

At the end of the post, people can also download the spreadsheet to play around with the numbers.

9:10 PM  
Anonymous Anonymous said...

"The only way newspapers can successfully charge for content is by creating unique and valuable information."

And here is the the stumbling block.
Journalism doesn't give anyone the capacity to create unique information. You either stumble onto it or arrive at it in the course of your endeavors.

Hence the situation that a biochemist with a degree in business communications is going to write a better article on a new pain reliever, and describe it in his blog which will be picked up by aggregators long before a journalist can bring himself up to speed as far as understanding the subject well enough to write about it.

You aren't gatekeepers anymore. people don't even want a gate.

10:06 PM  
Anonymous Anonymous said...

Very nice work, Nancy. However, I disagree with some of your assumptions.

The big one is that 100% of existing print subscribers would sign up for the web version if the print went away. I would think that even 30% would be unlikely, but at that rate, the "no print" model drops to $1.9 million, even after including additional revenue described below.

You assign a $15.00 CPM to sold inventory but assume only one impression per page view. $10 is more realistic, but there typically are at least 3 impressions per page view. Also, you leave out any revenue from local remnant programs ($4 is realistic for about half of unsold inventory), national remnant (95 cents for what is left) and contextual, i.e., AdSense (50 cents for 100 percent of the PVs).

When you factor all that in, the open model comes to $2.3 million. The closest contender is the 80% free model, at $2 million.

8:36 AM  
Blogger Nancy Wang said...

@Anonymous Thanks for your feedback

I completely agree that it very unlikely that 100% of existing print subscribers would sign up for the web version. We were just demonstrating what could be the potential maximum revenue if all 100% did.

You're right, we forgot to include impressions per page view as a multiplier. I have updated the excel file with your additions. We used most of your figures. However, we used $.20 CPC for contextual ads and a CTR of .5% based on our sources. Also, we didn't sell 100% inventory; we stayed at 80% sold, based on our experience as well.

I've updated my post with the new figures and the excel file. Please let me know if you have any other feedback... and how the numbers look to you now.

8:43 PM  
Blogger Linda K. Foley said...

Write on! Seriously, I think you nailed it. Another thought: Is it time to overhaul the copyright laws to reflect the realities of the digital age? The so-called "free" content that's produced by news organizations and used by Google, etc. was actually paid for by someone. Shouldn't there be some way to assess the costs to all users (end and otherwise)?

8:17 AM  
Anonymous Anonymous said...

The solution is an "all you can read" electronic subscription to many of the top newspapers (NYT, WaPo, LAT, etc), just like cable TV, for $10-$15/month (similar pricing as Rhapsody and XM). Free news should be a teaser, and use micropayment for the full article for casual readers. Newspapers are now competing nationally, if not globally. That means they must specialize, like local news or biz (WSJ) or politics or sports. But you can't have 20 papers chasing the same boring story. Newspapers are news "originators", which can be resold and repackaged for a variety of platforms in a global market. And you can invite top bloggers into the pay wall to pull in their audience, too.

The important point: if the NYT can't get people to pay for an online subscription, nobody can (WSJ is weird case). They all have to jump in together.

1:52 PM  

Post a Comment

<< Home