Over the last seven years, for each dollar added to online revenue, the WaPo lost five dollars on print. During that time, the Post has lost $88m of print ad revenue and it improved its online business by only $18m. This leads us to a key realization, a sobering one: there is no hope current online revenue stream will someday offset the past decade’s tremendous losses. – Monday Note
Once upon a time, newspapers monopolized (relatively) cheap access to a community’s eyeballs and, by extension, its checkbooks. They served up advertising that, unlike television and radio, did not require the potential customer to be tuned in “right now.” Retail businesses loved them. As in all unregulated monopolies before and after them, newspaper executives used this market power to extract what economists call monopoly rents: more profit than they would have garnered had there been “competition.”
The economics of newspaper production contributed to this enviable market position. All the costs of acquiring ad revenue and the news, comics, op-eds, sports scores and weather were the same whether there was one paper coming off the press or 1 million papers. The variable cost — ink and newsprint — were minor in the overall scheme of things. Bundling all of that content into a package that cost subscribers less than the issue of the newspaper cost to produce made it an attractive product.
From the State of of the News Media 2004:
While declines in circulation and in the number of newspapers became a fact of life in the 1990s, the industry remained economically robust. In 2002, newspapers had advertising revenues of just over $44 billion… According to Morton Research, a market analysis firm, in the first half of 2003, the 13 major publicly traded newspaper companies earned an average pretax profit margin of 19 percent.
While such margins are high compared to some industries (such as retail or automobiles), in fact they are lower than some others (such as software). That sort of comparison, however, may miss the point. Such profit margins are what Wall Street has come to expect of any public newspaper company, and what lenders and many owners expect of any privately held newspaper company as well.
Despite the Internet, with its predictably disruptive potential, in 2003 papers were still wildly profitable.
Flash forward six years. From the State of the News Media 2010:
After advertising revenues fell by a total of 23% in 2007 and 2008, they tumbled 26% more in 2009.
Ad revenue in 2009 had fallen to 1985 levels, in nominal dollars. In real (deflated) dollars, that $25 billion in revenue from 2009 was equal to only $12.5 billion in 1985. Conversely, 25 billion inflation-adjusted dollars in 1985 is equivalent to $50 billion in 2009. In real terms, ad dollars were cut in half. With the Internet came Craigslist, Monster.com and eBay: kiss those classified ads, which were a hefty chunk of advertising revenue, a permanent good-bye. But that is only part of the story.
Papers built web sites and put content online, where their customers were going in droves. But the minimal distribution costs (paper, ink and delivery trucks versus Internet connectivity and web servers) did not offset the challenge presented by unbundled content. Advertisers shifted from placing an ad in “the paper” to inserting one on “a story” and the reader, well she more easily skipped all those bits and pieces that posed no interest. But now the advertisers knew she had skipped. John Wanamaker’s adage about advertising was now measurable.
What Frédéric Filloux demonstrates in The Publishers Dilemma, using data from the Washington Post, is that online advertising revenue will never reach the levels of print advertising. His argument is not new. Lots of us have been saying this for a long time. But we were (at least I was) talking theory: Filloux has put numbers in place that validates the theory.
Clayton Christensen argues in The Innovator’s Dilemma (required reading in my economics of digital information class) that incumbent organizations don’t react to disruptive innovation until it is too late. Watch this 1981 news clip from KRON (San Francisco) to see how well Christensen’s theory applies to newspapers (and the news business):
Imagine, if you will, sitting down to your morning coffee, turning on your home computer to see the days newspaper. Well, its not as far-fetched as it may seem.
Even though there is little new ground plowed in Filloux’s essay, it’s still a good read. You do have to hit incumbents over the head, time and time again, if you have any hope of instigating change.
Filloux has hit them with a cannon ball.
- MythBusters: Subscriptions Don’t Cover Salaries, March 9, 2010
- Digital Information: Business Models In Flux, January 27, 2010
- Newspaper Consumers Have Never “Paid” For Content, January 4, 2010
- Thinking About “Free”, October 22, 2009
- The Future of Journalism Discussions Need Reality Economics, May 18, 2009
- Follow Up Note On “No More Free Content”, March 15, 2009
- “No More Free Content”, March 8, 2009
- Print Model Shifting, November 20, 2008
- Publishers Experiment With Online Editions, February 10, 2008
- Economics of Scarcity, November 6, 2006