Why Print Newspapers Are Screwed: The New York Times, For Example

It's easy to say that the New York Times (NYT) and other newspaper companies are screwed, but sometimes it helps to actually run the numbers.  Do you know why
they're screwed?  It's actually not the cost of paper, ink, trucks, printing plants, and other physical distribution expenses.  Rather, it's the cost of content creation.

Senior New York Times reporters believe they are underpaid, and, relative to other highly educated folks at the peak of their professions, they sure are.  But relative to the online revenue they generate, those talented reporters, columnists, editors, and fact-checkers actually cost a fortune.

Newspaper content generates way more revenue in the physical world than it does online, because offline it can be packaged with classifieds and display ads and actually sold.  In the online world, meanwhile, it has to be given away, and because classified ads are now run by classified sites and newspaper sites are only one of dozens of places where people get news, the advertising opportunity is comparatively tiny. 

How tiny?  Compete.com says the monthly reader base of NYTimes.com is about 7.5 million people. Offline circulation, meanwhile, is about 1.1 million.  If we assume that the ratio of offline/online revenue at the Times Company is similar to that for the publication itself, the 7.5 million online readers generate 10% of the publication's revenue, and the 1.1 million offline subs generate 90%. Offline circ and ad revenue are both declining.  So let's think about what might happen as these trends continue.

Specifically, let's pretend that, tomorrow morning, every print reader stops buying the paper, and, instead, reads it online.  To be safe, let's further assume that each offline "subscription" actually encompasses two or three readers.  In other words, let's pretend that, tomorrow, print circulation goes to zero, and online readership jumps by 2.5 million.  What would happen to the business?

1. The company would eliminate paper, distribution, printing, and all other physical production costs.
2. Online inventory (and, therefore, revenue) would increase by about 33% (7.5mm to 10mm users).
3. Content creation costs would stay the same.  (The site would have to pay the freight for all the  content it now gets for free).
4. All print revenue--ads and circulation--would vaporize.

No, no, you say, the latter assumption is absurd.  By the time print papers disappear, that $55 billion-plus of annual newspaper advertising will all have moved online, so the companies will be fine.  Yes, the advertising will have moved online.  But, no, newspapers won't be fine.  Why not?  Because only a small fraction of that $55 billion will flow to newspaper sites as opposed to eBay (EBAY), Monster (MNST), Yahoo (YHOO), Google (GOOG), et al.  We can quibble about the exact percentage, but just for kicks, let's pretend that, if the paper were suddenly eliminated, 25% of NYT's offline revenue would flow to NYTimes.com. 

With these assumptions, we can make the following adjustments to the NYT's Q2 numbers.  (The calculations and assumptions are laid out in more detail on this page).

REVENUE:

1. Cut offline revenue to zero.
2. Boost online revenue by 33% to account for increase in online readership.
3. Boost online revenue by 25% of offline revenue under assumption that some will follow online.

COSTS:

1. Cut "raw materials" costs to zero.
2. Cut "other" production costs to zero, under assumption that they are ALL print-production and distribution related (which they probably aren't).
3. Reduce "wages and salaries" by 25%, under assumption that some are print-production and distribution related (which is probably too big a reduction).
4. Reduce sales, general, and administrative costs by 33% to account for lower revenue base.

RESULTS:

Revenue drops by more than half, 40%-50% of employees get fired, and the company still loses money.  Using the NYT's Q2 numbers and these assumptions, for example, revenue would have dropped from $789 million to $285 million.  More importantly, EBITDA (earnings before interest, taxes, depreciation, and amortization) would have dropped from $118
million to -$64 million.  Which means that management would just be getting ready to fire a few hundred more people.

This, in short, is why newspapers are screwed.

Comments

[Malkiel:]

I reject the assumption that paper product must go away, can go away, or will go away. We make the perpetual error of believing that a format such as the internet which still has only a fairly limited distribution among American households, and requires a specific regime of logging on and powering up to use, is going to be preferred to picking a piece up from your mailbox or doorstep and launching into the reading experience. The newspaper or magazine are not going to go away any more than DVD's, music cd's, or books. The thriving market for bookstores shows how wrong the predictions of inevitability against old formats can be.

The problem for the newspapers is that nobody is recognizing that their print market represents a niche that can't be replaced by anything else but needs to be served differently in order to maximize profit. The printing/delivery process needs to be streamlined by changing the size and formats so the product can be printed off on demand by regional distributors who work with delivery contractors like UPS, Fedex, and the Postal Service to deliver the goods. The formatting and writing teams would be the same people creating the content just once so that little effort is required to produce a paper product that looks and reads like the web pages, with slight adjustments. Advertising streams can be received and incorporated immediately via internet forms or email and edited into the package that gets delivered to the local printing centers, making local advertising a more satisfying product because revisions, cancellations, and timely delivery will all replace the current bureaucratic process. Local editions would be easier to produce and better, allowing distant giants like the Times or Boston Globe to create what amounts to a local paper for places that never had one before.

No, the future of newspapers isn't bleak, but there is work out there for the pioneers who put in the effort to fix the process. And companies like UPS and Fedex and Kinko's need to awaken to the possibilities so that they can take the piece of the pie which will inevitably fall to them...

2007 Aug 13 11:45 AM

[Swampthing:]

IMO, this is a narrow minded post against the newspapers. Why would Rupert Murdoch buy the WSJ? Why did he buy the newspaper and you are writing about the demise of them?

Think outside the box. How big is advertising thru big media, TV, mags, rags, tabloids, newspapers to reach the consumer? Not everyone is wired to the PC all the time. People are always on the go. Especially business, thru airports, taxi's, etc.

Here is a clue. You need to look at mobile phones and News Corp. They are trialing 'qode' for News of the World. Think about this, I am sure that Rupert already has, how do I give the consumer a interactive response or alert about a topic that was seen in an article or advertisement? How do I give them a permission based reponse to get instant infromation that they might want to know about in the future. What about navigating from a printed article that may have a 2D code, company logo, keyword, or a trademark that you can click on to read more about it? Why not shorten the newspapers, add more content, and, have more adds that will bring in revenue? How do I reach them? Simple, with a dymanic response that the consumer wants. You can then judge the response to fit how it will work for the newspapers.

Newspapers are not dead they are on a turn around. You might want to look again.

2007 Aug 13 12:56 PM

[Living Off ...:]

i do not read physical newspapers and haven't for several years. I probably never will. however there are people who enjoy reading the newspaper physically and always will.
i doubt it will ever go totally online.

but i did enjoy the article.

2007 Aug 13 06:04 PM