Newspaper Economics

With traditional revenue streams slumping, newspapers are clearly in need of new business models. Executives know it, and a consensus strategy has emerged for what’s next. The industry wants to develop online, to build niche publications and some direct shopping, and several bigger companies intend to invest cash flow in fast-growing non-news businesses.

So the industry is not standing still, expecting some big rebound in its daily print editions to carry them. But questions linger. Will online revenue continue to grow enough to make up for declines on the print side as the sites mature? Is big strategic innovation really in the DNA of companies built around traditional departments like production or advertising to sustain the print franchise? Will companies swing too far in the new focus and neglect the news core of the venture?

Online Sites

Online has become a favorite child. As discussed in more detail in the Newsroom Investment section of this chapter, 2005 marked a sharp break with a general pattern of doing little more than posting print content online. There were investments both in upgrading the timeliness of reports and in bells and whistles like video, audio, citizen journalism and blogs. Some local sites are more advanced than others, but the practice of simply rehashing the morning paper, so-called “shovelware,” is increasingly out of favor.

The Web sites of national newspapers merit some special mention. At the New York Times and USA Today, print and online news staffs began to be consolidated, a process expected to extend through 2006 and beyond. The Washington Post’s staffs remained separate, but a 24-hour news desk was added, linking the two. The Wall Street Journal’s site, which requires a paid subscription, has 764,000 users, and the New York Times took a step in that direction by putting columnists and some other content behind a wall called “Times Select.” By the year’s end, “Times Select” had 336,000 subscribers, about 45% paid, at $50 a year; the rest were subscribers to the print edition who had registered to get the service free.17

Those developments have not gone unnoticed. Over all, online advertising revenues at the public companies grew 30% to 60% again in 2005.18

The emphasis on the Web, at long last, makes obvious sense. As the data on audience make clear, the future of news in written form is increasingly online. And advertisers have proved willing to move there. The problem is whether and how quickly that can be made profitable — through advertising or subscriptions — at a level comparable to print.

Assuming that ad rates for online and print ads stay roughly where they are, by our calculations, if online operations sustain 33% growth a year it will still be 2017 or 2018 before they have bulked up to the size of the slower-growing newspaper divisions. (That assumes newspaper ad revenues grow at an annual rate of 3% during the period. If newspaper ad revenues begin to decline, the tipping point will come sooner, but the whole operation will be smaller).19

Online Revenue vs. Newspaper Revenue

Revenue in millions

	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Online	3	4	5.3	7.1	9.5	12.7	16.9	22.5	30	40	53.3	71	94.6	126.1	168.1
Print	97	100.9	104.9	109.1	113.5	118	122.7	127.6	132.7	138	143.5	149.2	155.2	161.4	167.9

Source: Rick Edmonds,"An Online Rescue for Newspapers?", January 27, 2005, Poynter Institute
Projected revenue growth through 2018 is based on 2004 growth numbers of 4% for newspapers and 33.3% for online.

Sustaining growth, though, is not a slam dunk. The biggest and best-developed sites, like WashingtonPost.com and USAToday.com, grow more in dollars, but at a lower rate than the industry overall. With maturity come new issues like “inventory” — the available space for displaying ads.

There is also the challenge of reaping revenues online that come anywhere near those in print. Currently, online advertising revenue typically amounts to roughly 5% of total advertising revenue. Though the units do not allow for a strict apples-to-apples comparison, analysts estimate that when an advertiser switches part of a schedule from print to online, the Web ad generates only 20 to 33 cents or so for each dollar lost in print revenue.

Paul Ginocchio of Deutsche Bank Securities paints an even bleaker assessment: A newspaper print reader is worth an average of $360 a year (circulation revenue included); an online reader is worth closer to $20 to $25 because of lower rates and shorter visits.20

The upside is that Web distribution involves vast savings. As readers move from print to online reading, there are small savings now and bigger ones later from not having to print and deliver as many paper copies. If the companies have modeled the cost and profit side, that half of the game plan is not openly discussed. Yet even if distribution accounts for half of the cost of print, the lost revenue of a reader switching to online overwhelms, for now, what might be saved in distribution.

This was how the Washington Post’s Donald Graham summed up the online questions in that presentation to analysts and investors in December : “Will WashingtonPost.com grow in traffic? You bet. Will it grow in revenue? Chances are. How much can it grow in profits? That might be one of the central questions we face.”21

Niche Publications

A second leg of the consensus strategy is heavy attention to youth, niche and ethnic publications. The strategy is hardly new, but after three or four years the publications continue to flourish. They have economic appeal because they are comparatively inexpensive to produce, and a good share of the ads are sold by the newspapers’ existing ad staffs.

Ethnic publications remain a hot category, but newspapers have met a strong push back from established grass-roots competitors. Tribune’s Hoy, for instance, once considered the leading edge among Spanish-language dailies, turned out to be a house of cards built on padded circulation in New York . Tribune quietly shifted from paid to free distribution of Hoy’s Chicago edition. In Los Angeles , where Tribune was up against the longstanding family-owned La Opinion, it made a similar switch.

The Spanish-language publications seem to succeed where the largest concentrations of Hispanics live — San Antonio , Dallas or Miami — but in other cities are harder to sustain. The San Jose Mercury News, for example, closed its Spanish newspapers and sold its Vietnamese paper because they were not making enough profit.22

Youth publications — dailies in the biggest cities, weeklies elsewhere — also continue to proliferate, as do other kinds of niche publications. Gannett, for instance, now has more than 800 niche and other weekly publications, and says most have become quickly profitable.23

Many niche publications, with their focus on home design, health, travel and fashion, lopsidedly cater to the interests of the well-to-do. Some might view that as a distraction from the newspaper’s role of covering the whole community; others argue that it helps pay the bills, same as run-of-the-paper advertising has done traditionally.

There is no dispute that online and niche together have been a financial godsend. Print edition revenue growth, alone, was typically just 1% in 2005. But a multi-platform growth total was at least a bit brighter at a little more than 2%. Even the St. Petersburg Times, often held up as a model of modest profit margins and investments in the news core, expected 45% of its ad revenue growth in 2005 to come from online and a new youth-targeted weekly.24