Ken Doctor's  Instablog

John Paton may be getting most of the Digital First headlines, but behind the scenes the digital first pressures are building up on publishers on both sides of the Atlantic.

Today, we hear that the Newhouse's Times-Picayune is following the "Michigan model," no longer a "daily" paper, but one published three days a week on paper. That model, launched in Michigan at the beginning of February, has quickly proven itself to Newhouse execs. The principles, if not the execution - or the longer-term impact - are clear:

• Pare down print days so as to keep 80%-plus of print advertising. Sunday is a natural here, with its heavy preprint business. Those preprints are endangered themselves, but not immediately; they now account for about a fifth of all newspaper company revenue in the U.S. Keep another "market" day midweek, both for preprint and display advertisers, and probably add another day, Friday, to get to people as they move in their leisure (and shopping) days.
• Use the print strip-down to completely shake up - and streamline - the organizational charts. In Michigan, that meant two "new companies," though both, of course, are owned by Newhouse. One, ML MediaLive, focuses on the core of the digital business (content, sales and marketing) and the other, Advance Central, on everything else, production, distribution and all the accounting and HR functions. Importantly, instead of having separate organizations for each of these functions per title, in Michigan, Newhouse could combine them into a single, cheaper-to-operate unit.
• Bet on the digital future, for readers and advertisers, promising the kinds of advanced digital products - from desktop to smartphone to tablet - that will keep customers coming in.

The New Orleans move looks to be a forced march to digital. With the Michigan results good enough to proceed, and print advertising in a near-death spiral, Newhouse is circling the print wagons, hoping to milk the remaining print advertising by corralling it into a few days of the week. Surely, it will lose some print advertising, but even a small additional loss should be made up by the major cost reductions, in printing, production, distribution and staffing. In one of the earliest moves, Gannett moved its Detroit Free Press to three days a week, back at bottom of the recession, and later claimed it had kept 90% of its advertising; my efforts to confirm whether that meant 90% of ad revenue or 90% of ad customers - a big difference - were unsuccessful.

I'd call it a forced march because it doesn't look like the Times-Picayune, or its new successor, the NOLA Media Group, is yet ready for the digital transformation. It has been making a digital transition, and there 's a big difference between the two. It doesn't have a digital circulation strategy yet in place; though about a fifth of U.S. dailies do. Digital circulation is key to making this work, so that core print readers become more likely to transition with the enterprise - and keep paying their monthly subscription bills. The Times-Picayune did launch an iPad app in Apri, though it's clearly in beta, with four of the same stories repeated this morning on the iPad version home page.

Plainly, Newhouse's thinking itself has been transformed. It is the last major US newspaper company to have kept its digital business separate, through Advance Digital, though responsibility for the digital business has been moving away from Advance Digital to the newspapers over the months. Now, it is embracing full bore the principles of digital first, part of a movement we're going to see across the U.S. and Europe, as publishers respond to the same environment Newhouse is facing. In fact, Johnston Press, a significant UK publisher, turned five of its dailies - presto, magico - into weeklies and may soon the same with others.

The perils are three-fold, at least:

• Revenue: Though this is a bid to retain, or regain, profitability, there are too many moving income pieces - print ads, digital ads, circulation - to know how stable revenue may be in 2013-2015.
• Readership: A well-decorated, prize-winning "paper" of 134,000 daily circulation and 155,000 Sunday circulation, it is profoundly a print habit. How will its readers really adjust to the other four days week of digital-only, if they're not strongly digital - and don't have great digital products to consume. Big worry: Breaking the daily habit makes newspaper companies far less essential far more quickly. One other thing: a Center for Public Integrity/Lens project showed how relatively poor Internet access is in New Orleans, so the impact of print-less days may have more impact there than other cities.
• Regard: The loss of as many as another 50 newsroom jobs, bringing the vaunted newsroom down to 100, from a pre-Katrina high of 265, is a major loss, and can't be painted otherwise. The community reaction will be strong, and it's hard to predict how long-lasting. But, then, the long slide in New Orleans, and everywhere, has already significantly reduced community reliance and regard for newspaper companies and what they do.

The New Orleans move is not a shocking one. By 2020, we'll be used to a few days a week of print, or maybe just "the Sunday paper," and wonder why we chopped down whole forests; didn't we always have these tablets? Newsprint is going the way of the steam engine, to be visited in theme parks. US newspaper companies are using only a little more than half of what they consumed, in newsprint, a decade ago.

Will the print habit be abandoned by publishers well before then? In 2013? Or 2015%. The when is important, because the creation of community journalism - in tradition or transition or transformation - demands readiness. Readiness to serve community news needs, with a business model underneath that service that can be sustained. Newhouse isn't yet there, nor is anyone else, but now we'll see now how this new shock therapy works.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Who would you rather support journalism, advertisers or readers?

It's a new question, one that made less sense to pose just three years ago. Now, though, with major shifts in the news market, it's one to think about.

We're about to move into a period in which reader revenue surpasses advertising revenue as the main support of many news(paper) companies. It's yet another kind of profound crossover ("The Newsonomics of Crossover"), demonstrating again how quickly news business models are changing. With readers paying most of the freight comes a new series of profound questions, ones that we should start asking as we try to understand this change.

Unexpectedly, newspapers - of all things - are becoming the leaders in reader-supported media. As the public journalism movement (the enterprising start-ups led by the likes of The Texas Tribune, California Watch, and MinnPost) and public media (née public radio) pioneers move to increase their share of reader funding through voluntary membership (read subscription), newspapers are, almost accidentally, leading the way. The reason is obvious: There are millions of people used to paying for news - and now, courtesy of mobile news proliferation and All-Access plans - their expensive subscriptions are being ported over to the digital world.

How much money are we talking about? Worldwide, according to research I've done in my work with Outsell, circulation revenue - worldwide in 2011 - totaled about $30 billion. In the U.S., daily circulation revenue probably adds up to about $9.5 billion.

That's a large sum, and it's a key puzzle piece for the future.

Is it true digital revenue? Well, of course not. Does that matter? Where newspapers started bundling advertising - print, with a little digital - in combined buys in the '90s, now they're bundling print + digital subscriptions, even as they also sell "digital only" ones. All-access models make for a new indistinguishable blur - are people paying for print, for digital, or for news itself? - and that's a head-turner.

It shouldn't be a head-turner just for those of us watching the trade. If you run The Huffington Post, or Slate, or Examiner.com, you're betting on one big revenue stream - digital advertising - going forward. Though there's a huge amount of money in digital advertising, more than 70 percent is going to companies with the combinations of great audience reach and mind-boggling targeting ability. So, as Facebook shares tank this week, amid concern of it being able to compete well enough to justify its value in the hypercompetitive and cutthroat ad market, think of the smaller news players, like HuffPo, and their relative digital ad revenue prospects. If they're competing in the 2015 marketplace with one revenue stream - digital ads - while whatever we call "newspaper companies" can harness two revenue streams, overall reader revenue and advertising, who has the advantage then? (Facile answer: It depends on how quickly legacy newspaper companies get rid of legacy newspaper costs. Witness Digital First Media and recent Newhouse/Postmedia day-cutting moves. In fact, the Postmedia moves with major Canadian properties - drop days, charge for digital access, centralize whatever can be centralized - are prototypical of how this new world fits together.)

That new twist to digital news competition is one I'll return to soon.

For now, let's understand this inexorable run toward majority reader revenue.

The trend has been slowly developing over the years, and now has picked up speed, because of two trends.

• One: Print advertising is in a never-ending tailspin, with the last positive quarter of U.S. ad growth coming back in 2006. U.S. companies have lost about half of their overall revenue, consequently, in last seven years. Globally, news companies have lost at least a third of all revenue, given the ad downturn across developed economies.
• Two: Digital circulation is now a reality. While it won't bring back the same scale, or kind, of journalism, it now promises to be a second, major contributor to the evolving business model of news companies, at least print-based legacy ones. As news companies transition over their print readers - either providing print + digital "All-Access" for a single price or adding a small upsell for digital to print subscription - long-time print subscribers are learning they are paying for a news product, not a physical one delivered to their driveway. Yes, it's still early, but the early evidence is that smartly executed, print subscribers can be brought along, with their paid subscriptions, into the mainly digital age. Getting younger, less habituated-to-print readers to pay remains a major question mark, but it's not the big one on the minds of legacy newspaper companies right now.

For decades, the rule among newspapers in the U.S. was 80/20. Eighty percent of revenue came from advertising and 20 percent from circulation, with the circulation revenue - heavily home delivery subscriptions in most markets - paying for all those physical costs of getting the ad-heavy product printed and delivered. The great majority of the revenue - and significantly, the 20-35 percent margin profits - came from advertising.

In Europe and the U.K., the traditional model has been less ad-heavy. Figure that 25-40 percent of revenues have been derived from circulation, with great variation by region and market.

In Japan, thanks to both high pricing and enviable Amway-like network of paper deliverers and bill collectors, readers have long contributed the majority of revenues. Japan, though, stands out as the exception. Now the exception is building a new rule.

Take one good Midwestern example: Minnesota's Star Tribune, fairly typical of once highly profitable, mid-sized metros. Like most of its peer group, it would have derived around one in five dollars from readers for many decades.

Now, according to publisher Mike Klingensmith, the total is up to 43.3 percent; a number that he knew instantaneously when asked. "We will definitely be at 50-percent-plus reader revenue in the next 18-36 months," he tells me.

It's not magic; it's math. We go back to those two principles: fast-declining print ad revenue and new, all-access-inflected digital circulation. "We don't want to hit the 50 percent too quickly," Klingensmith adds with a chuckle. That would mean that print ads continue, or deepen, their downward trajectory. As those revenues tumble, of course, their percentage of the revenue contribution declines. That's a no-brainer.

The other part of the equation, smart reader revenue management, is more interesting.

At this point, publishers have figured out that there are two ways to wring out more reader revenue. Charge print subscribers a little extra for digital reading. Many of the Press+-powered papers, including the Baltimore Sun, charge print readers an increment - in the Sun's case 99 cents a month extra. That adds a new increment to print circulation revenue and has helped at least stabilize circulation revenues at many of the papers that charge, or in some cases boosted it 1-3 percentage points.

Klingensmith takes a different approach. He increased pricing for all print subscribers by 9 percent in April 2011, at a time when digital access was still free. Then, last fall, he introduced a metered paywall, offering subscribers who take print at least two days a week (Sunday-only subscribers still must pay extra) included free digital access.

The result: a 7.5 percent increase in circulation revenue in the first quarter. That compares to a low-single-digit decrease in ad revenue. The lines on the graph are converging. If you do it right, he says, you can keep your revenues growing. "If you support a 10 percent higher price [overall], you can generate much much more income than selling 10 percent of your subscribers digital access," says Klingensmith.

What does doing it right mean? On the reader revenue side, it means a bunch of things, including smart pricing ("The Newsonomics of Pricing 101"); ("The Newsonomics of 99-Cent Pricing"), a state-of-the-art customer database, mobile products (HTML5, app, or both) that provide real value for higher pricing, and substantial enough journalism to make it all work. Of course, containing ad revenue decreases - hold on to as much of print, try to grow digital advertising faster - as much as you can is a vital piece of the puzzle.

The Star Tribune's math is among the most aggressive, but it's got plenty of company in the reader revenue march to majority.

Take A.H. Belo, owner of three major papers, The Dallas Morning News, Providence Journal, and Riverside (Calif.) Press-Enterprise. In the first quarter of 2011, circulation contributed 34 percent of combined ad/circulation revenues. (I've eliminated "other" revenue from this calculation here and elsewhere to focus in on the ad/circ change.) A year later, circulation now contributes 36.5 percent. That's a combination of aggressive pricing, similar to the Star Tribune's, and the ad decline.

Take The New York Times. The company as a whole hasn't quite crossed over, but remarkably the New York Times Media Group has. A year ago, its first quarter showed 48 percent of revenues derived from readers; now that number is 52 percent. At the New England group, basically The Boston Globe and the Worcester Telegram & Gazette, this year's split is 47 percent circulation revenue, up three points from a year ago.

By way of comparison, Time Inc., a good barometer of the consumer magazine industry, clocks in at 43 percent circulation revenue now, compared to 38 percent three years ago. Magazines, of course, take in far smaller annual payments from readers, but then again their costs are much lower. They are, though, subject to parallel print advertising downdrafts.

The inexorable trend of paywalls only underlines this trend and will speed the process to majority reader revenue. As we move into this age of majority reader revenue, we see a slew of new questions unearthed. For starters:

• Will majority reader revenue plus some significant level of advertising revenue be enough to sustain high-impact, high-capacity news operations?Here again, it's that topline revenue number that's most important.
• How long will robust reader revenue continue, as readers themselves and their reading products move digital? That's a major unknown, but it seems like those who have "always" paid may transition nicely. At least, publishers are looking at relatively stable, if not growing, reader revenue, as a key part of the next three-to-five year plan.
• If this strategy works, where indeed does it leave the HuffPos? Where does it leave those companies like Digital First Media's Journal Register and the Newhouse properties that have so far eschewed "paywalls"?Might they adopt metered payment for their highest use readers, and how would that play in their respective markets?
• Does it make any difference to the journalism, or to the journalist/reader relationship? As Dean Baquet, managing editor of The New York Times,suggested to a journalism audience in Berkeley in April, the Times digital circulation program had buoyed Times journalists. They felt a more direct validation of their work because some digital readers were now paying, he said. Is that more widely true? Will journalists feel more closely connected to their readers - and to their public service missions - if readers pay more of the cost of journalism? I suspect, so, especially as news organizations make more and more use of their direct reader interaction and feedback the digital world offers. For those of who grew up with an ad-heavy balance of revenue, though, I don't think it confused us in whom we served; the diversity of advertisers provided a buffer against influence. Still, it's fascinating to contemplate new journalist/reader connections, facilitated by that old-fashioned love potion, money.
• Will reader revenue more blur the line between the nonprofits and the profit-seeking? Just last week, the Ford Foundation ponied up a million dollars to help The Los Angeles Times cover border and immigration issues, one of an increasing number of foundation grants to the formerly profitable daily press. With reader, and perhaps, foundation supplying a majority of funding, the distinction between for- and nonprofit narrows. How will the L.A. Times be different than KPCC? How will MinnPost and the Star Tribune be viewed?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Companion post: The Newsonomics of Pricing 101

First published at Nieman Journalism Lab

Honk if you still love newsprint enough to pay $700 or more a year for a seven-day print subscription to The New York Times. Of course, you have many other choices.

You can try one of several print/bundled options for considerably less money. Or if you want to be parsimonious, you can get 10 free article views a month, or more if you want to work the social and search on-ramps to NYTimes.com. Maybe you want to be among those who pay Ongo $1.99 a month, and get 20 Times news stories a day, among lots of other news content.

Love the Guardian, and want to follow each tick of the U.K.'s Murdoch saga? If you're in the U.S., you can subscribe to the lively iPad edition for $13.99 a month - or access it for free via the Safari browser on the tablet. In the U.S., its smartphone app is free, but in the U.K. and Europe, it requires a subscription. Of course, it's quite successful Facebook app gives you access for free as well, anywhere.

If you're shopping the Ongo news kiosk, look at wide spectrum of prices individual publishers are charging for access through that product: The Guardian is 99 cents a month, The Christian Science Monitor is $3.99, while the Chicago Tribune is $9.99 and The Boston Globe $14.99.

It's not just newspaper companies that offer a patchwork of buying (or not buying) choices.

Are you a late-arriving fan of AMC's series "Breaking Bad"? If you want to catch up and subscribe to Netflix streaming, you've got a good deal at the $7.99 a month rate. Cram in the first three seasons' 37 episodes in a single month (where did that month go?), and you'll pay just 21.5 cents per show, and anything else you have time to watch is gravy. Ah, but if we want to watch Season 4, which you can't yet see on Netflix streaming, you have to upgrade to those red envelopes and get Season 4 DVDs - but it'll cost you another $7.99 a month, and you'll have to wait until the DVDs are released in June. (Ah, maybe that's one of the reasons Netflix's maladroit move to streaming is pushing it to a loss.)

Or you can turn to Amazon VOD and get the episodes for $1.99 each (or $2.99 in HD!), or $25.87 for the season. Or why stream when you own the DVD in a few weeks for $29.99 (or add an extra 10 bucks for added Blu-ray clarity). But wait - I'm an Amazon Prime customer. Can't I watch it for free? It's not part of the Prime free streaming offer, but I can watch a whole lot of other stuff as often as I want for nothing. Or maybe I can access "Breaking Bad" through Comcast's Xfinity $100-a-month plus service. Nah, no deal - "Breaking Bad" isn't available.

One more try: on the AMC site itself, there's quite highlights, blogs, and more on the series, but no full episodes.

Let's add in music.

Take Tristan Prettyman. It's $9.99 (or 83 cents a song) for her last CD on iTunes. Through my $36 annual ad-free Pandora subscription, I can listen to dozens of her songs, her musical soundalikes, and thousands of other tunes in a year, bringing down the cost to pennies per song. Or there's Spotify, where her songs are available for either zero, five, or ten bucks a month, depending on what devices I want to use and whether I can stand ads.

Magazines, of course, are offering their own split-screen experiments. The U.S. magazine industry ("The Newsonomics of Next Issue Media's All-You-Can-Eat Kiosk") is testing the all-you-can-eat, cross-title buffet, bringing some its titles down to as long as 37 cents a month (if you consumed all 27 "basic" titles) through the kiosk, but $39, or $59, or $79 a year if you buy a single title directly through a publisher.

It's a fool's paradise of pricing out there in the digital world, right now, at least for wily consumers. The Department of Justice's ebook suit and related settlements only complicate things. Five and ten years ago we were wondering whether people would ever pay for digital media - Newsweek's Steven Levy took us into the terra incognita in "Meet the Napster Generation" back in 2000. But now the question isn't whether people, young and old, will pay - it's how the hell to figure out how much to charge them throughout what we politely like to call our multi-platform world.

Content no longer demands to be free. It wants a fee - but how much of one?

Consumer pricing is not a core competence of many media companies. For decades, media pricing was on automatic. Newspapers picked a quarter or fifty cents, and then re-programmed the coinboxes. Magazines kept prices low enough to build audiences to reap substantial ad rewards. Book publishers did some minor stratification. Music companies picked a couple of price points, and let the vinyl and CDs fly.

In the digital era, though, pricing is confronting - and confounding - media companies. Just what in the digital world of vanishing manufacturing costs is digital media worth? Now with those 20th-century costs - printing, manufacture, distribution, shipping - passing into the night, the question of price, and value, is making itself loudly heard.

We can certainly identify the wrong-headedness of the Department of Justice's price-fixing suit against book publishers and/or point out how the DOJ had little choice in pursuing the case, neither of which is a surprise. The law has struggled unsuccessfully to keep up with business changes wrought by the Internet, from fair use to antitrust to media monopoly. Oft-earnest American regulators find themselves falling farther and farther behind, trying to track technology's dominating nature and make new sense of it. Often, European Union regulators take a more forthright stab but end up retreating.

Create a new legal framework that better balances producers, distributors, and consumers? Forget about that in this age of politics where stalemate and status quo is the order of the day.

Publishers of all media are on their own, then, and they'd better make sense of pricing. It's core to their survival and future sustainability. Sure, the Amazons of the world will try to monopolize book pricing, returning closer to its pre-"agency pricing" market share of 90 percent from its current paltry 60 percent. Yet, publishers - especially of news and feature media, news organizations and "magazine media" - have many pricing plays to try as customers discover content near and far from traditional outlets.

I'll call this the newsonomics of 99-cent media because that's the world into which we have moved. Today let's look at that 99-cent model, and next week we'll delve into the early lessons that pricing's practitioners have stumbled across as they've moved into paid content.

At first, it looks like a tyranny of 99-cent pricing (or the parallel expected tyranny of $9.99 Amazon book pricing). Will 99-cent pricing cause brand damage? Will it last? If the U.S. follows Canada and forsakes the penny, then the 99 cent pricing may fall into history. For now, though, it's got a certain consumer magic.

"Ninety-nine-cent introductory offers have done wonders for take rates," says applied economist Matt Lindsay, president of Mather Economics. His company has worked with more than 200 titles - about 75 percent of them newspapers - on pricing and related strategic issues. Take a look across media pricing, from The New York Times to Hulu Plus, and 99 cents (or its derivatives of $1.99 to $7.99 to $9.99) are everywhere.

Take rate is simple: What percentage of customers click yes - and provide precious credit card data - when confronted with an offer. Offer readers the ability to start a "trial" for 99 cents, and you'll see results two to three times any other number, says Lindsey. At 99 cents, readers "take that as a signal. They understand that you want them to adopt this product. By setting the full price at a high number, you are basically saying, 'This is the true value of the product.'"

Steve Jobs understood signaling in a parallel way. As Chris Anderson described well in Wired last November ("The Magic of 99 Cents"), one of Jobs' great successes with iTunes and the iPod was that 99-cent pricing for songs. He could get the hardware and software right, but in the not-quite-post-piracy age, 99 cents was the third leg of the value equation. It worked as a signal: somewhere in between free and too much.

Start with 99 cents and you can conquer the world. As they set off on that quest, what are some of the pricing guideposts for publishers?

• 99 cents is a beginning and not an end. For newspapers used to being paid $200 or $400 a year, 99 cents seems like a declaration of cheapness. Put some round 0s on pricing; it just seems more honest. The oft-cited example of Louis CK's $5 video is a case in point. Five bucks says authenticity. Yet media that answer thousands of reader questions every day aren't comedians. Just because you set an intro price of 99 cents, the down-the-road price sends thatother important signal to value. Ultimately, says Lindsay, it's true that "people take price as a signal to quality."
• If you have lots more to sell, then 99 cents isn't a price, it's a price of admission. Responding to my recent column about "small things" adding up, Rob Pegoraro asked, on Twitter, how The New York Times' earnings results related to the notion. "I think NYT 454K dig subs become great market for 'small things' like ebooks, events+," I responded. David Johnson then added, "You pay to be in a market. These business plans resemble theme parks and non-profit fundraising strategies." That thought fits perfectly here: it's not about the money, large or small, an even buck or 99 cents - it's about establishing a new relationship. Or, to use the vernacular, 99 cents is gateway-drug pricing.
• Get ready to sell lots of stuff. So if you are Six Flags, or The New York Times or the L.A. Times, you'd better be able to leverage that new relationship by selling lots of stuff. Maybe not yet 100 products a year, but at least a half dozen to start. Ebooks, of course, fit perfectly here, as add-on products offered to members or subscribers. Sure, use some, as The Boston Globe is doing with Sunday Suppers, to reinforce subscriber/member value. But price others to match potential value. A guide to Boston-area colleges from, who else, the Globe, could be a $19.95 solid seller, given the $100,000-plus parental investment ahead. "Ebook," though, is much too limited a name to put on it, and sounds like something not current. Wonderfactory founder and creative director David Link made this basic but hugely important point when we talked last week: There really isn't a fundamental difference between an app and an ebook. "From an agency and a technology's point of view, it's only in how you create them. Talking about a recent product Wonderfactory worked on, "You go to the ebookstore, and it's just text. You go into the app store and it's got the text with 50 percent app-like sauce." So, right now, publishers and their creative people are having to create multiple forms, but essentially the same product is both an app and an ebook. The technologies, and the costs, will clarify, as will the marketplaces for all the digital paraphernalia of our lives. The point for publishers selling more stuff is clear though: solve audience needs better than someone else, create products for the devices of the day, and price accordingly.
• It's not just the content we're paying for. That's a tough, tough lesson for literal newsies. As with the music revolution Apple wrought, it was the combination of convenience, ease, presentation, pricing, and wonder that rationalized (for good and bad) the digital music industry. Today's first batch of digital news subscriptions rely as much on convenience and mobility values as they do on the words and pictures.
• We're all in the same business. Think of your own media purchases. A little music, more and more video, selective news and magazine subscriptions, increasing numbers of ebooks. Yes, the marketplaces for ebooks and apps, alongside this kiosk and that e-store, are confusing. Media, though, is media, and the pricing schemes are forming in a remarkably similar way across movies, music, newspapers, and magazines. We all like, for instance, the notion of All Access; we'll pay once and get our stuff everywhere. So news and magazine publishers must look through the assorted lessons of the music and movie industries, those lessons still in much progress. News pricing is not an island.