The Fundamental Problem of Newspapers on the Internet

I introduce you to the fundamental problem of newspapers on the internet: The Krugman Paradox - named by me after watching PetMeds.com (PETS) ads appear next to Paul Krugman for three days after it was announced he won a Nobel Prize.

I couldn't believe there wasn't a better way to monetize his presence on NYTimes.com (NYT). Further investigation revealed that the Krugman problem was not unique.

Here goes.

Definition:

The Krugman Paradox is a phenomenon referring to newspapers' websites and the sites' inability to produce economically sustainable advertising revenue, despite their highest audience reach in the history of their industry. The paradox indicates that newspapers must increase the effectiveness of their online advertising if this is to be their main revenue stream.

Prior Art:

On April 7, 2008, Nicholas Carr put forth a theory he referred to as "unbundling". Boiled down to its core, the theory states that advertisements (bundled with content) in a printed newspaper produce a product worth more than the sum of their parts. The opposite is true online where ad performance must stand alone on a single web page. As he writes,

As soon as a newspaper is unbundled, an intricate and, until now, largely invisible system of subsidization quickly unravels. Classified ads, for instance, can no longer help to underwrite the salaries of investigative journalists or overseas correspondents. Each piece of content has to compete separately, consuming costs and generating revenues in isolation.

On September 10, 2007, Doc Searls wrote about the utility of traditional advertising and how better ways of connecting customers to products and services have been created on the internet. He cautions newspapers who assume advertising will always be around at the levels prior to the existence of the internet. As he writes,

While rivers of advertising money flow away from old media and toward new ones, both the old and the new media crowds continue to assume that advertising money will flow forever. This is a mistake. Advertising remains an extremely inefficient and wasteful way for sellers to find buyers. I'm not saying advertising isn't effective, by the way; just that massive inefficiency and waste have always been involved, and that this fact constitutes a problem we've long been waiting to solve, whether we know it or not.

…The holy grail for advertisers isn't advertising at all, because it's not about sellers hunting down buyers. In fact it's the reverse: buyers hunting for sellers.

On April 22, 2008, Jay Rosen responds to Searls' comments to highlight the idea that whether ad spending grows, shrinks, or stays the same:

Advertisers aren't in business to advertise; they do it to reach customers making a buying decision. If there were some other way of reaching that person, some other way for buyers and sellers to communicate, advertising would become more and more superfluous.

Example:

Despite the highest readership of any newspaper in the United States, the New York Times only generated $330 million in online advertising in 2007. Total operating costs for that same year totaled $2.928 billion.

Assumptions:

• It is widely reported that total newspaper operating costs would be reduced by 35% if newspapers eliminated their print product. Using the NYT example again, costs could be reduced to $1.903 billion.
• Online advertising in general is growing approximately 12% year over year.
• The New York Times is following this trend.
• NYT online advertising revenue is projected to be ~$350 million or $29.17 million per month.

Audience:

• The NYTimes.com reaches an average 15.6 million people per month (quantcast) and newspaper websites in aggregate reached 69.8 million people (naa).
• 65.4% of NYTimes.com readers come from the USA.
• NYTimes.com is reaching approx. 3.3% of the US population (15.6 million x65.4%) =10.2024 million/(305 million).

Revenue per person:

• $29.17 million month / 15.6 million unique monthly visitors = $1.87 per unique per month.
• Each unique reader is worth $22.40 annually in online advertising revenue (a far cry from the 1 subscriber = $1000 which is what it was before the arrival of the internet).

Problem:

• The gap to break-even is still a whopping $1.553 billion.
• If advertising rates stay the same, The New York Times needs to raise its unique audience 5.437 times in order to break even. Here is how it breaks down:
  • 5.437 X 15.6 million uniques per month =
  • 84.82 million uniques per month X $1.86 per unique =
  • $158.6 million per month X 12 months =
  • $1.903 billion annual online advertising revenues =Break Even NOT YET PROFITABLE

Questions for further examination or the "Stalin Problem" (reality):

• Is it unrealistic for NYTimes.com to grow their national audience reach much more than 3.3% considering their print audience reach is ~1million or roughly .3%?
• Generating 84.82 million uniques per month would make NYTimes.com the number 5 website in the entire world, ahead of Wikipedia.org

Preliminary conclusions:

Assuming the Krugman Paradox is real:

• Analysis of the Krugman Paradox suggests that pursuing online audience growth strategies to grow revenue may not be the best way to grow revenue
• Analysis of the Krugman Paradox suggests that absent online advertising innovations, newspapers must seek alternative revenue streams to achieve economic sustainability.

Notes about my data:

• NYTimes internet revenue figures include NYTimes.com, about.com, Boston.com and other company websites. I'm not too concerned though, because parsing out this data would only make their revenue numbers WORSE.
• "Correlation does not imply causation", further investigation needs to be done to find out if the Krugman Paradox is real.
• Of course, further research needs to be done in order to see if this situation is representative of the industry as a whole.

I welcome feedback.

Comments

[Tom Baker:]

I could take issue with some of the assumptions, but of course in broad outlines this is exactly the problem: Online editions replace high-CPM ad revenue based on inflated readership assumptions (print) with lower-CPM ad revenue based on actual readership (online). No one has solved this yet.

There are other things newspapers can try, both to cut costs and to find new revenue sources (print spinoffs, premium information services for local industries, more services for local advertisers, etc.). But none of those can be started without some entrepreneurial energy and a little investment.

2008 Dec 08 08:40 AM

[Daniel Tharp:]

Very thought-provoking article. I would assume that a great majority of newspaper subscribers would prefer print to a web format for various reasons so yes, I'd say it's unrealistic at best. One thing I did notice is you stuck with the constant ad pricing of $1.87/unique. I would argue that that number scales with regards to a site's reach (bigger sites charge higher prices for placement, same as it ever was). So it may take a bit less than the factor of 5.437 that you have listed, but it's still quite unfeasible without additional innovation as Tom points out above.

2008 Dec 08 10:32 AM

[CFed:]

These great points on newspapers can really be expanded to all print, and for that matter, online content. Effectively, the power of brand is minimized online where exit is a mere click away and measurement is instantaneous.

A beauty of online is that investment to subsidize non-performing assets (pages) can rapidly be measured and adjusted to fit corporate objectives. Perhaps, the NYT's moniker of 'all the news that's fit to print' no longer fits an era where micro branding, facilitated by readers/RSS seems to be of greater interest.

2008 Dec 08 10:39 AM

[Badgolfer:]

NYT has another problem.Their ultra liberal attitude no longer plays well in their regional Times network(read: former cash cow).The average subscriber is about 60 years old and mostly Republican.All the columns,editorials come straight from NYT HQ.Guess who is not renewing ?

2008 Dec 08 11:30 AM

[Andrew P:]

When it all shakes out it may be that the only newspapers that survive are those with unique content that they can charge for (WSJ) and those free ad-supported sites that can operate on much smaller overhead than the likes of NYT. As more sites charge it will become easier to charge for content though, and this could save NYT. Eventually, we could see package deals marketed so that one can be an online subscriber to all major papers (NYT, WAPO, LAT, WSJ. etc...) simultaneously, and that way your links still work on the news aggregator sites.

2008 Dec 08 11:44 AM

[hhpeterhh:]

@Cfed haha! yes! "all the news that's fit to link" especially in light of their recent new feature. Times Extra

2008 Dec 08 02:41 PM

[Tobias Wright:]

Interesting article. I think most papers are looking for there to be a direct translation of the print counter part. I often wonder what newspapers would have looked like if they had been invented after the internet.

I'd love to see the print edition become a premium on Demand product, and spend more time drilling the website down into smaller and smaller niche.

I do think that if anyone is doing it better is the New York Times, but like a lot of sites, they didn't figure out how to make money before making the jump. Now, I just want it free.

Robert, I hope you are considering presenting this paper at some industry conferences. They need to hear this.

2008 Dec 08 05:52 PM

[Hawaiiborn2:]

While the issue of advertising revs (or lack thereof) is critical, as badgolfer points out above, you cannot sustain those online grow rates when from an editorial standpoint, you are only appealing to 50% of the population (+/- 3%). Sooner or later the advertisers will acknowledge this as well, compare the demagraphics of the typical NYT reader vs. annual expenditures of the typical reader and no doubt advertising revenue will decline even more. I for one get my news from much more "independent" sources so those that advertise on NYT online will never see my business.

2008 Dec 08 07:07 PM

[TinyTim:]

Interesting article. the issue has been around since the dawn of the Net. Just surprised it took this long.

Two possible results:
-online papers will move toward local or even sub-local news where the content has few competitors
-Ad sites where the content and prices are continuously updated for a limited area

In both cases, the coverage area is decreasing and the timeliness is increasing. This model would also replace TV news for access, depth and searching.

2008 Dec 08 08:50 PM

[Robert Ivan:]

Thanks for all the great feedback. This helps me narrow down the direction of focus for my next article.

Another reader emailed me to remind that one other likely outcome of failing to quickly innovate advertising is "they'll go bankrupt and then restructure on the cost side". True indeed, just look at tribune (and maybe MNI).
-robert

2008 Dec 08 10:51 PM

[Jow Bloggs:]

Clearly this article points the finger at the real issue, the cost of production of offline publications is too high. Why? Because instead of producing centrally and then distributing nationwide, the distribution outlet should be producing (printing) on demand content at the location, that way like web content it can be updated as news happens. You could also factor in demographics and segmentation to make advertising more appropriate to readers.

2008 Dec 09 04:58 AM

[Rick543211:]

Excellent article and one which brought another "paradox" I have spent a lot of time thiking about as well. This is an issue related to all advertising on the web and is something I refer to as "Audience Enabled/Time Constrained" versus "Audience Constrained/Time Enabled". Not an elegant name, but an important one. It goes to the probelm of advertisers and creators of advertising having to deal with a radically shifting paradigm for reaching comsumers. The traditional model has been "Audience Enabled", where high ad rates in both print and television can be justified by equally wide - and captive - reach. Thirty second spots on the Superbowl cost millions because there are tens of millions watching at the same time. The job of the advertising is to motivate buying behaviour in 30 seconds and that requires one kind of creative execution because time with the audience is so limited. The flip side is the web, where the audience at any time is much, much smaller - in the hundreds, perhaps. But time is not an issue and the creative challenge is to keep users looking and clicking. Each click raises the value of the user to the advertiser - and, agruably, the value of the click. I admit my ignorance here but I don't know if all clicks are currently regarded as equal in the same clicking environment. At any rate, the creative challenge in this advertising circumstance is very different, because the job now is to engage the user for a longer period of time and use that time to do an entirely different kind of "sell". The value is not clicks and impressions at $x each, but length and therefore quality on engagement. It seems to me that increased web ad value lies there, and with increased value comes an ability to replace "traditional" ad revenues at a profitable and business-sustaining level.

2008 Dec 10 12:04 PM