Why The iPad (and kin) Is Unlikely To Yield Consumer Savings

I’ve been thinking about business models for online content (text and images), given Apple’s introduction of the iPad and Amazon’s infamous battle with Macmillan. I’ve argued that digital subscriptions should be less than their analog counterparts, basing my argument in large part on the fact that traditional print is vastly more expensive than digital distribution.

I’ve been wrong. At least in the short run.

Not wrong about the difference in distribution costs. That’s a no-brainer.

But I was wrong to expect an immediate drop in monthly (or annual) subscription fees. I was unconsciously holding constant the advertising revenue side of the equation. Let me explain.

Let’s imagine a (very simplified) budget for a newspaper that looks like this (roughly based on data from Media Economics):

  • Revenue: 70%, advertising; 30%, subscriptions
  • Costs: 40%, printing/distribution; 20%, overhead (administration, advertising, circulation); 30%, taxes, profit, interest; 10%, editorial

In this model, if subscription income went to zero and advertising income stayed constant, theoretically the shift from print to all-digital would result in savings that should mean the organization could break even. But in the interim — or maybe for the foreseeable future — there will be demand for a printed product. So we have to add costs — the web server, bandwidth, employees to manage the web. The ideal model might look like this:

  • Costs: 45%, printing/distribution/web; 17%, overhead (administration, advertising, circulation); 30%, taxes, profit, interest; 8%, editorial

But we know that operating margins are down. So a more realistic model might be:

  • Costs: 50%, printing/distribution/web; 20%, overhead (administration, advertising, circulation); 20%, taxes, profit, interest; 10%, editorial

We also know that advertising revenue is down-down-down. So today that revenue model might look like this:

  • Revenue: 40%, print advertising; 15%, online advertising; 45%, subscriptions

In other words, subscription income becomes more important as advertising revenue falls.

I’m pretty sure that the demand for core newspaper subscribers is inelastic: that means that a 1% increase in subscription prices will yield less than a 1% decline in subscribers*, but it will yield a decline. Each time there is a drop in print subscribers, the per unit cost of an individual newspaper rises, as the product is characterized by high fixed costs: the cost to create the content is the same for 100 as it is for 1 million copies. This model reflects what economists call public goods; it is a characteristic of any information good, from software to TV shows, from music to movies.

That’s why I think that traditional magazines or newspapers delivered via the iPad or Kindle must be more “costly” than they would be if they existed solely in a digital form. So don’t be surprised to see a digital subscription equal the print one. I don’t like it — especially since I hold a bias that a handful of executives drive up overhead costs and that the relatively modern goal of 20+% ROI is not only unsustainable, it’s unreasonable.

I am not saying that I believe the iPad and Kindle will “save” newspapers. I think a break up of the news media monopoly in the U.S. would be a good thing. I’m saying that I think I understand why subscription fees are going to be relatively high in the short-run. Remember, every time print subscriber numbers fall, the per unit price of the printed paper goes up for everyone else.

This back-of-the-envelope analysis also helps explain why small(ish) companies are able to launch successful online-only news products: limited overhead, limited distribution costs, and access to advertisers that were priced out of the daily newspaper market. Finally, this analysis could also be used to support various (generally unpopular) proposals that Congress throw a bone to the newspaper industry.

Somebody please show me that I’m wrong.

*It also means that a 1% drop in subscription rates will yield less than 1% increase in number of subscribers. See this paper from 1976 (pdf).

Addendum:
My hypothesis about digital subscriptions is that they are elastic. This means that they are price sensitive: a 1% decrease in price yields more than a 1% increase in subscribers. Elasticity of demand for the digital subscriptions is not part of this analysis and would play a large part in per unit pricing, but not in the need for subscription income in the wake of declining advertising income.

Cross-posted at Newsvine, TheModerate Voice, and Flip The Media

3 thoughts on “Why The iPad (and kin) Is Unlikely To Yield Consumer Savings

  1. Permalink  ⋅ Reply

    kegill

    February 17, 2010 at 11:35am

    Thanks.

    You’re right – I didn’t address the bundling/debundling aspect. That the LP was a marketing tool and a way to “bundle” content so that there was more perceived value in the first (expensive to produce) record that came off the press. That’s why a “single” cost so much (relatively speaking) … I am of the “45 and LP” era (big hole/little hole!).

    :-)

    This was the first time I had thought through the change in the composition of the current revenue model.

    I’m moderately more optimistic than you — I think there is a market for a bundled product that is relevant and that contains information not easily found elsewhere. Think convenience — paying for time. And think “exclusive content” — some people will pay for that. (Don’t pretend to know if enough will pay.)

    The new market is not going to be as lucrative as having a monopoly on eyeballs, that’s for sure. It’s not going to “save” the current media structure (which is so incredibly top-heavy and atoms-heavy). And you’re right – simply moving the print publication to a tablet delivery isn’t a savior.

    I’m worrying, a bit, about all the folks who aren’t connected — of course, I probably shouldn’t be. Those folks are probably getting their news from TV, anyway. :-/

  2. Permalink  ⋅ Reply

    yelvington

    February 17, 2010 at 8:22am

    I think you’re right that we will not see subscription-based newspaper/magazine packaging on the iPad that will save consumers money — but my reasoning is a little different. I don’t think such packaging is going to work at all.

    The iTunes store broke the back of the music album model and led to legal 99-cent music, which simply wasn’t possible in a world of physical distribution of compact discs.

    But you won’t see something like that happen with news on the iPad, because the disintegration of the traditional news product has already happened.

    Subscriptions and single-copy sales are dead on the Web, and the basic “newspaper” product model has been eclipsed by single-item consumption of almost universally free content, driven by search and social link referrals.

    In the next 12 months you’ll see many attempts by publishers to collect reader revenue, but they will be marginal in their effects. You can’t put the free content genie back in the bottle.

    There’s way too much excitement about the iPad from “printies” who imagine it to be a replacement medium that will enable the old content, presentation, and revenue models to thrive. Not gonna happen.

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