Monday, August 01, 2011

Will business model ‘stabilize’ for newspapers?

Quizzed by securities analysts last week about his company’s disappointing financial performance, the best McClatchy boss Gary Pruitt could say was that he hopes the newspaper “business model will stabilize” at some unspecified point in the future. But it will not.

And it had better not, if Pruitt intends to save what’s left of his newspapers, where relentless cost cutting has halved the headcount of his flagship Sacramento Bee to some 700 increasingly nervous souls in the last three years.

“It feels like the 19th inning, but we are not sure,” the chief executive of the nation’s third-largest newspaper chain said Friday after reporting that his company’s sales in the first half of the year slid 9.6% to $618 million and his net profits in the same period plunged 68.5% to less than $3 million.

“I do think the business model will stabilize,” he continued. “I am hopeful we are much closer to the end than to the beginning. But I can't give you a read more than that.”

Sorry, folks, but it is unrealistic to think the newspaper business model will stabilize, because we are in the midst of profound and fundamental changes in the way people get information – and marketers connect with them. The model cannot stabilize, either, because the traditional strengths of the newspaper business have been turned into liabilities in the new order of things.

If Pruitt and his fellow publishers don’t intelligently de-stabilize their businesses to modernize them, they run the risk of seeing further deterioration of their once-formidable franchises. Like most other publishers, Pruitt already has lost a lot of ground: The market capitalization of his company, which peaked at $3.5 billion in 2006, now is less than $200 million.

This is why the newspaper business is not going to stabilize:

:: Because people can acquire content from any number of sources on any number of platforms at the time and place they want, there is increasingly less utility in the print product, which necessarily is a static (and often out of date) aggregation of a small subset of all the news, information, entertainment and commercial content available in the ever-expanding digital universe. Despite the diminishing importance of the legacy product among most consumers, the newspaper industry still depends on print circulation and advertising to provide 90% of its revenues.

:: The proprietary production and delivery platforms that previously provided publishers with unrivaled market share and pricing power now represent unavoidably huge fixed costs that put them at a distinct competitive disadvantage to the proliferating digital platforms. Even though roughly 1 out of 3 newsroom jobs has been lost at American newspapers in the last decade, publishers still pay far more to produce content than most digital competitors. Sadly for those of us who treasure quality journalism, the high cost of producing original content has turned the medium’s most cherished competitive advantage into a liability from the standpoint of hard-eyed financial analysis. The same can be said for owning printing presses and large fleets of delivery trucks.

:: While the monopoly or near-monopoly status historically enjoyed by publishers allowed them to charge formidable advertising rates for access to the substantial audiences they aggregated, the increasingly sophisticated digital media make it possible for advertisers to finely target their pitches to specific audiences – and sometimes even individuals – at a fraction of what they have to pay for a newspaper ad. While newspapers depend on selling un-targetable print ads at the rate of $12 (or more) per thousand in order to support their high fixed costs and double-digit profit aspirations, un-targeted banner ads can be bought by the fistful on the web for $1 per thousand – or less. With all due respect to the quality of the typical newspaper ad environment, it is hard to believe this differential pricing can be sustained over the long term.

In light of the above, it is futile to merely “hope” the newspaper business will stabilize. The hopelessness of hope is perhaps best illustrated by the fact that half of the industry’s revenue base vaporized in the last 5½ years while publishers were hoping for a different outcome. Barring a miracle, industry-wide ad sales, which were $49 billion in 2006, are unlikely to top $23 billion in 2011.

Given that despair is not an acceptable option, what are publishers to do? They must begin intelligently, and speedily, de-stabilizing their enterprises by:

:: Accepting that the old business model is winding down.

:: Understanding that consumers and advertisers are forsaking one-to-many media like newspapers in favor of some-to-one media like Facebook and one-to-one media like the wondrously individualized smart-phone experience. (See also this slightly out of date but still relevant post from 2007.)

:: Embracing digital technology to create truly new products and platforms for delivering content, building audience and then monetizing those efforts through advertising or other means. This explicitly means going far beyond porting print content to a Newspaper.Com website and upselling web banners to print advertisers.

:: Considering such previously unthinkable measures as reformulating content strategies, pulling back on seven-day-a-week printing, cutting ad rates and entering into partnerships with digital competitors that previously may have looked more like enemies than friends.

:: Leveraging their formidable strengths – brands, market presence, content-creation capabilities and sales forces – to move smartly into the future.

There is a way forward. But it will take vision and work, not just hope.


Blogger Kenny P said...

That's a cool headed and cold hearted analysis, but it looks accurate from where I'm sitting in the UK. I liked the part about:

"Embracing digital technology to create truly new products and platforms for delivering content, building audience and then monetizing those efforts through advertising or other means."

Yes indeed, '...and then monetizing those efforts...or other means'! It's a bit vague and it's what every publisher has been scratching their heads over for a decade. And I'm not seeing anyone being able to do that with enough success to employ journalists and photographers. Even smaller publishing companies – with lower overheads – are struggling to generate sufficient digital revenues at the moment.

7:57 AM  
Blogger The Big Blogger said...

I agree we need to continue to evolve and not try to restore a permanently departed past. But print newspapers in conjunction with decent websites and efficient news organizations will be profitable for years to come.

6:29 PM  
Blogger Janet DeGeorge said...

Alan, right as always. I just had a conversation regarding why newspapers are not charging other digital media sites that are picking off their fresh daily content. Our conclusion,fear. Fear and lack of a national leadership to bring the newspaper's content under one roof. The newspaper industry needs to get paid for those who use their content, starting with Google, just as the music industry charges radio stations to play their songs. News is not free to the consumer as we want to believe. That consumer pays Apple, AT&T, Verizon, Comcast, HP, etc. for the products and systems that bring them that news and yet, the newspapers that produce this fresh content daily get no cut of this revenue.
I can only hope that the new president of NAA, Caroline Little, who is an awesome digitally smart person, can rally this effort and get payment for use of what newspapers produce.

As for advertising, the jury is still out since the recession still keeps the majority of businesses from spending what they use to. Many newspapers, like the Arizona Republic, have remarkable online tools for advertisers but the marketplace is still dragging. After some glimmer of hope the first half of this year, I am finding another pitfall this 3rd quarter. Jobs not rebounding, real estate foreclosures still haunting most communities and another slow down in homebuilding. Only Auto dealers showing some signs of recovery. But without Job growth, the consumer holds off on spending money and that keeps advertisers from spending be it in print or online.
What can they do for now? They need to multi task, still getting as much revenue from print as possible to pay the bills while they invest in new digital media and experiment with new products that fit their marketplace. I have customers everywhere that surprise me with their ability to find new revenues in places never before approached.
Get more feet on the street with commission only sales people and give them products to sell that advertisers want and need be it print or digital. There is money out there, but you need a strong sales force with the best trained people to go get it. That has not changed.

6:43 PM  
Blogger Steve Ross said...

Jeez, newspapers might start by selling "Groupon" deals. Although Groupon's second city was Boston, the Globe has yet to do that.

As everyone "knows" the model is dead, there's little for the newspapers to invest in anything new, but even low-cost initiatives to expand ad revenue are ignored.

7:00 PM  
Blogger TucsonSentinel said...

"The newspaper industry needs to get paid for those who use their content, starting with Google...."

Google pays for the AP content that appears, when it posts entire stories. As for the summaries that show in search results, that's called advertising - and it's free. Instead of buying the sides of buses and billboards, you've got the best advertising platform in the world sending you readers for free. And, if you don't like it, it takes but a single line of code to tell Google to stop showing your stuff.

But newspaper publishers continue to kick a gift horse in the mouth....

12:25 AM  
Blogger John A. Newby said...

Great piece!

While there are pockets of good news and results here and there, your overall view of the industry is quite accurate. Even though we speak of change and innovation, we rarely walk the walk. We are the most risk adverse industry outside government I can think of. We are content to let others figure it out and then attempt to copy it - only to find out we are a little late to the ballgame yet again.

I am one that believes we can not only survive, but thrive in the economic climate has and will continue to be the norm. True change involves a little calculated risk, but that
is our direction or path if we are survive.

4:47 AM  
Blogger Mike Donatello said...

Janet, as much as I admire your expertise, I believe that what you are advocating is a protectionist, defensive strategy. "Lack of a national leadership to bring the newspaper's content under one roof"? Sounds like the kind of consolidation that will benefit no one except boards and investors, whose demand for continuing fat profits is the reason that so many papers have cut resources below viable levels.

Now, anyone who knows me can attest that I am one of the most politically conservative people you'll meet, but even I argue that the last thing this industry needs is consolidation that leads to fatter dividends and CEO paychecks instead of more investment. Given the industry’s track record, I find it hard to believe that investment would be the outcome of any protected position.

I do agree with you on the effect that fear has on the industry's chance for resurrection. Despite the crappy ad climate, newspapers have most of the tools (e.g., brand strength, reporting expertise, etc.) they need to compete. But they're lacking creativity, as well as a willingness to invest without that guaranteed plump return to which they've become addicted. Fear of being unable to feed the addiction has paralyzed (much of) the industry.

As our friend from Tucson noted, keeping aggregators from using a paper’s content is a simple matter. Ultimately, however, the paper will suffer far more than Google (or another aggregator) will. And, the only reason for locking out Google would be a futile attempt to return to the good old days, which is an untenable strategy.

Screw the old days. They made many people rich, but at the expense of companies’ long-term health. If that’s what we’re after, then let’s take our profits and call it done. If not, let’s realize that we can’t build a future by continuing to suck the blood out of our operations. Playing the victim – whether of the economy or aggregators like Google – isn’t going to get us anywhere.

I, too, hope that Caroline can jump-start some creative thinking, but I think that she has her work cut out for her.

12:56 PM  
Blogger Gregory said...

If Pruitt and his fellow publishers don’t intelligently de-stabilize their businesses to modernize them, they run the risk of seeing further deterioration of their once-formidable franchises.

This is one of your better articles. This statement is right on point.

7:22 AM  

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