Saturday, April 19, 2014

Newspaper industry revenue declines have slowed, but revenue hasn’t stabilized



Click to open full size

Some analysts argue declines in newspaper industry revenue are finally stabilizing. The Newspaper Association of American has released the 2013 revenue figures. I’ve prepared two pictures to see if it revenues have stabilized.


As readers of this blog know, the business model for Internet-based news organizations is unlikely to replace the thousands of journalism jobs that are vanishing at traditional media organizations. Newspapers have always been the major source of jobs for journalists who produce local news across the U.S.. Stabilizing newspaper revenue is critical for preserving some of the jobs that are left.

The chart above shows inflation-adjusted advertising and circulation revenues since 1991. Print advertising revenues peaked in 2000 at about $38 billion, followed by a brief decline.

In 2003 the industry added digital advertising revenue generated by newspaper websites to its advertising figures. Revenue increased slightly that year, and stabilized until 2006.
 
In 2007 the last recession began, and advertising revenue began a steep decline that devastated the newspaper industry. The recession exacerbated an underlying trend caused by the shift of advertising to websites and search engines. In 2010 the decline slowed, but digital advertising only accounted for 13% of the industry’s total ad revenue that year.

The steep decline in print ad revenue and the small gains from digital ad revenue forced the industry to reconsider its revenue strategies. In 2011, the industry added to its advertising base revenue from niche publications, direct marketing, and non-daily publications. Total ad revenue increased slightly that year, but declined again in 2012 and 2013.
 
The industry generated about $13.7 billion in inflation-adjusted ad revenue last year, or less than half of its peak revenue in 2000.
 
The chart above shows inflation-adjusted circulation revenue has been less volatile. In 1991 newspapers generated $8.6 billion from print subscriptions and single-copy sales. In 2013 newspapers generated an inflation-adjusted $6.3 billion from print and digital subscriptions and single-copy sales.

 
I’ve written before about the importance of charging subscriptions for access to newspaper websites and mobile applications. Digital subscriptions can slow the loss of print subscribers who will otherwise switch to free access on the Internet. Preserving print circulation is critical because print advertising still accounts for the largest portion of industry revenue.

Some newspapers now offer discounts to encourage subscribers to select bundled digital and print subscriptions. These bundled subscriptions are designed to slow or stabilize declines in print circulation.

Digital subscriptions can also generate new revenue to offset some of the losses from print advertising revenue. And the first chart does show that subscription revenue has stabilized, which may be partly due to double-digit growth in digital subscriptions.

The first chart also provides perspective on the second chart, which shows the ratio of circulation revenue to advertising revenue since 1991.



Click to open full size
This ratio declined throughout the 1990s when newspaper advertising revenue enjoyed its last period of sustained growth. In 2007, the ratio began a pronounced increase that continued until 2013. If the trend continues, newspapers will generate $1 from circulation for every $2 from advertising in the next year or two.

A naïve reading of this chart would suggest that circulation is on track to replace the advertising revenue that newspapers are losing. But the first chart shows the increase in the circulation/advertising ratio is mostly the result of steep declines in ad revenue.

So I’m not ready to agree that newspapers revenues have stabilized.

Advertising is still the industry’s primary source of revenue. Ad revenue declines have slowed, but they have not ended. Circulation revenue appears stable, but it still cannot replace the ad revenues that continue to disappear.

Even if inflation-adjusted revenue was steady from year to year, the industry would still be falling behind. An industry has to grow faster than inflation to be considered truly healthy.


I do expect that if enough newspapers adopt economically sensible digital subscriptions, those subscriptions will help stabilize industry revenues. But it’s going to take a couple more years of data before we can tell if that is happening.

Wednesday, April 16, 2014

Twitter's purchase of data firm an example of a new kind of media competition

I’ve been expecting Twitter to assert more control over the enormous volume of data generated by its users because the data can be sold to businesses, government agencies and academics. Yesterday, Twitter took a notable step to assert that control when it announced the purchase of Gnip, a company that packages and sells data generated from more than 500 million Tweets that are posted each day.

Twitter was losing money when it began selling stock last November, so Twitter has to show investors that it’s doing everything possible to make a profit. Twitter vice-president Jana Messerschmidt explained why Gnip will help Twitter generate new revenue:

“Every day Twitter users share and discuss their interests and what’s happening in the world. These public Tweets can reveal a wide variety of insights — so much so that academic institutions, journalists, marketers, brands, politicians and developers regularly use aggregated Twitter data to spot trends, analyze sentiment, find breaking news, connect with customers and much more.”
 
Twitter also generates revenue by selling advertising. But Twitter knows that we are at the beginning of a data analysis revolution that already generates valuable insights for “hundreds of clients” in business, government, the media, and academe. Those clients will now be paying Twitter for access to Tweets and the analytical tools developed by Gnip.
 
Twitter is under particular pressure from investors to generate revenue because the initial price of its stock rose to levels that some analysts considered too high for a company that was losing money.

But I suspect investors paid those high prices because they believe Twitter is likely to be one of three companies –Google and Facebook are the other two - that will dominate Western Internet markets for information and advertising. When a small number of companies dominate a market, those companies may have pricing power – they can increase prices far above production costs to generate high profits.[1]

One way for Twitter to reassure investors is to take steps that rapidly increase revenue, which is why I expected the company to assert more control over the valuable data on its network. Investors apparently viewed yesterday’s announcement the same way – Twitter’s stock price increased over 11 percent, which Reuters called the largest stock price increase since the company went public.

Gnip is not the only company that purchased access to Tweets and then re-sold them to its clients. Twitter’s statement did not specify how its relationship with other Twitter data providers might change.

However, it’s unlikely that independent Twitter data providers will be allowed to compete away a significant share of the revenue that Twitter gains from purchasing Gnip. At the same time, it will be interesting to see if Gnip continues to offer data from Tumblr, which is owned by Yahoo.

Media companies have always competed for audiences and advertising. Twitter’s purchase of Gnip is an example of a new kind of media competition. The new prize is an endless stream of raw information detailing the characteristics, behavior and preferences of millions of people who use the company’s products.

[1] An oligopoly exists if a company can set a price above its costs, but must then account for the reaction of rival companies in the same market. This makes it possible for companies to earn economic rents, which are profits above the level of returns that could be earned from comparable investments elsewhere. However, economic rents are not assured. A rival firm might offer advertising and information at lower prices, triggering a price competition that ends when prices are just high enough to cover production costs.

Monday, April 14, 2014

Pulitzer Prizes an occasion to consider relationship of newspaper quality to economic success


The Pulitzer Prizes announced today offer a chance to consider three studies of the links between journalistic quality and economic success. The Pulitzers, newspaper journalism’s most prestigious awards for excellence, go to a small number of newspapers and websites each year.
 
Brian Logan and Daniel Sutter found newspapers that had won Pulitzer Prizes also had “significantly higher circulation [than newspapers without Pulitzers], even when controlling for the economic and demographic characteristics and media competition of the metropolitan area” where the newspaper circulated.
 
Publishers will only spend money to produce prize-winning journalism if the journalism pays for itself by increasing circulation and generating extra revenue. Increases in circulation at Pulitzer winning papers were probably large enough to generate that extra revenue, the study concluded.
 
Logan and Sutter argued that Pulitzer Prizes are an important “signal of quality” for consumers. News is what economists call a credence good. Consumers cannot evaluate the true quality of a credence good even after they have consumed the good. For example, consumers have no way to tell if the information in a news article is accurate. This forces consumers to evaluate quality based on a newspaper’s reputation, including the prizes it has won.

This was a careful study, but it used circulation data from 1997. We need newer studies that account for the shift of audiences to the Internet before we can be sure the Pulitzers are still associated with significantly larger audiences. The second and third studies are from a line of research that examines the overall quality of news instead of focusing on Pulitzer Prizes.
 
These studies  use the financial commitment model. This model states newspapers facing competition will increase their newsroom spending, or financial commitment to news. Increased spending results in a larger newspaper staff and/or an increase in the variety and depth of news that is published. As the quality of news increases, consumers receive more utility from reading the newspaper. This in turn leads to increases in the newspaper’s circulation and/or advertising revenues.
 
In the second study Stephen Lacy and I reviewed decades of research that supports the financial commitment model. We focused on newspaper reactions to declines in circulation as readers and advertisers shifted to news published on the Internet.
 
Papers might use any of three strategies to maintain profits when circulation declines. First, newspapers might try to offset circulation declines by increasing advertising prices. Second, newspapers might leave ad prices unchanged, which amounts to an increase since advertisers are paying to reach fewer readers. Third, newspapers might cut their newsroom costs and reduce the quality of their news.

We concluded newspapers that raised ad prices or reduced quality would probably accelerate the loss of circulation. However, newspapers that published quality content might stabilize or slow declines in circulation.


The third study had unusual access to 12 years of  internal revenue and circulation data from an individual newspaper. The study looked at newsroom spending, subscription revenue, and advertising revenue from the print and online editions of the newspaper.
 
The study used subscription revenue instead of circulation because advertisers value subscribers more than they value readers who don’t pay for the paper. Subscribers are more likely to read the paper carefully and register advertising messages, argued authors Yihui Tang, Shrihari Sridhar, Esther Thorson and Murali K. Mantrala.
 
Results showed increased newsroom spending resulted in increased subscriptions to the newspaper.  The subscription increases then resulted in increased print and online advertising revenues. A simulation showed opposite effects – reductions in newsroom spending could lead to reductions in subscriptions, resulting in reductions in both online and print advertising revenues.
 
These last two studies accounted for the Internet. However, the three studies are just a beginning.
 
Many newspapers still rely on print editions to generate the bulk of their advertising and subscription revenues. Online revenue is a distant second when it comes to generating profits. More empirical research is needed to produce additional recommendations that can help newspaper managers who are trying to survive in this difficult environment.

Friday, April 11, 2014

Cortez the Killer (Neil Young interpreted by Warren Haynes/Dave Matthews Band)




The power of virtuosi in live performance. Nothing to discuss, just a nice example of what the Internet is for.

Late night TV replacement hosts were selected to avoid declines in audience ratings


Creating a network television schedule is similar to assembling a portfolio of financial investments, according to a useful paper by the late Barry R. Litman and Seema Shrikhande and Hoekyun Ann. Like investors who try to balance financial returns from different investments, network programmers try to balance the audience size for different programs.
The goal is to build an audience that attracts local and national advertisers throughout an entire evening of television programs.
Network programmers assemble a portfolio of programs that is designed to minimize risk, the study concludes. Risk can be measured by the variation in audience size from one program to the next. Programmers try to minimize risk by minimizing the variation in audience size.1
Efforts to minimize risk are particularly apparent when new programs are created. Programmers try to select new programs that will attract audiences that are similar in size to the audiences for the network's existing programs, the study says.
This desire to avoid failure can be seen in the selection of replacements for late night hosts Jay Leno at NBC and David Letterman at CBS. Leno has been replaced by comedian Jimmy Fallon. Letterman, who will retire in 2015, will be replaced by comedian and satirist Stephen Colbert.
These replacements represent the continuation of a decades-long strategy featuring late-night hosts who are white, male, and offer a reliable mix of stand-up comedy and interviews. This strategy still draws a combined late-night audience for NBC and CBS of more than 6 million viewers.

It’s not surprising that neither network wants to experiment with a host who doesn’t fit the established conventions for the 11.30 p.m. timeslot. Programmers at both networks surely recall how audience ratings at NBC declined in 2010 when it briefly replaced Jay Leno with Conan O’Brien.

Audiences for local television newscasts are influenced by the late night shows that follow those newscasts. So programmers must also try to avoid changes that could cause declines in the audience for local news, which is a critical source of advertising revenue at television stations throughout the U.S.
Jimmy Fallon and Stephen Colbert seem like safe choices that will help the networks avoid a loss of audience. Both replacements combine an appeal to younger audiences with a sensibility that seems unlikely to alienate older viewers. (Objections to Colbert made by politically conservative commentators will fade into irrelevance if, as expected, Colbert drops his persona as a political satirist when he arrives at CBS.)
But I wonder how long these safe programming choices will continue to work for late night television. This has nothing to do with reaching audiences who would rather watch these programs on the Internet. Both replacement hosts and both networks are adept at producing material for the Internet.
Meanwhile, the demographics of the country are rapidly and inevitably changing. States like California, where the combined minority population outnumbers the white population, represent the future. Will Fallon and Colbert have the same long-term audience appeal that their predecessors enjoyed?  Or will changing audience preferences undermine the safe choices made by network programmers?
1 A portfolio is used to balance risks. A program with large variations in audience size has a large risk. If the programs has an unusually large audience, the risk is rewarded with increased advertising revenue. But if the program has an unusually small audience, ad revenues will also be small. Programmers could use programs that consistently attract larger audiences to balance the risk of adding programs that might result in smaller audiences. But the study found programmers are reluctant to include risky programs in their portfolios. Programmers create portfolios to minimize the variation in audience size, which minimizes any instability in their ability to generate ad revenues.  

Sunday, April 6, 2014

Coordination costs can make it difficult to create synergies at media firms

Media firms have for years tried to reduce their costs by centralizing the production and marketing of a variety of content. But the cost of coordinating centralized activities can be considerable, large enough in some cases to offset the savings that firms hope to realize.
 
For example, firms that own multiple newspapers have for decades tried to reduce costs by centralizing the production of news or centralizing administrative tasks. Efforts to centralize news production have also been extended to newspaper websites and mobile editions.
 
However, centralization can be difficult to coordinate if individual newspapers use different computer systems or software to manage and publish their digital editions.
 
Technically, these companies are trying to create economies of scope, colloquially known as “synergies.” Economies of scope exist when the joint production of two or more products is cheaper than producing the products separately. 
 
Technically, it’s also much easier to say you are creating economies of scope than it is to actually reduce costs this way. The successful creation of economies of scope often requires that a firm re-arrange details of the production process.
 
If, for example, a multi-media news story is distributed to multiple papers with different publishing software, the story might have to be re-formatted for compatibility with each individual paper’s software.
 
Media firms are also trying to collect and analyze data about how audiences interact with the firms' web sites and mobile applications. This kind of analysis might also be expensive to coordinate if different websites use different measurements or data collection techniques. Trying to reconcile differences in the ways that numbers are collected can be a lengthy, frustrating and sometimes impossible task.
 
Firms might have to make significant capital expenditures to eliminate inconsistent software or other internal barriers to coordination. Some newspaper companies are buying or creating new software platforms for distributing digital news and advertising. Some of these initiatives may be intended to resolve coordination issues, if so that is a hopeful sign.
 
Problems coordinating activities inside a media firm are not likely to draw much attention outside these firms. But there is a reason multiple economists have won Nobel Prizes for examining coordination costs (here, here and here).
 
Media firms that centralize internal activities to save time and money will find it worthwhile to include coordination costs in their analysis of what it takes to make those efforts work.

Thursday, April 3, 2014

Shifting production to the Internet creates new problems that newspapers must solve


As newspapers shift from print to the Internet, they are hoping to significantly reduce production costs. These companies are trying to offset declines in advertising revenue by reducing the amount they spend on printing presses, newsprint and delivery trucks.

But the benefits of this change are not guaranteed. Reducing offline production costs is a complex problem to solve.

Most of the industry’s advertising revenue – about $21.8 billion in 2012 – still comes from print publications. So newspapers must maintain that revenue source at the same time they are moving to the Internet.
 
Production costs might be lower on the Internet, but they are not zero. Newspapers must pay to build and maintain websites and mobile applications. But Internet advertising and other digital sources accounted for just 11 percent of the industry’s total revenue in 2012.[1] Newspapers also face significant competition from digital firms for online revenue.
 
To make the transition succeed, newspaper companies must keep digital production costs low enough to be competitive and attract enough online revenue to cover those costs. Meanwhile, the companies must continue to produce the print products that generate the bulk of their revenue for as long as those products remain profitable.
 
And economic survival isn’t likely to get easier for newspaper companies that do leave print behind. Those firms will have to manage new kinds of competition. 
 
There was an important reminder this week of just how difficult the transition can be. Digital First Media, which owns 75 newspapers, has a strategy of moving quickly away from print to digital distribution on the Internet.
 
One high-profile piece of the Digital First strategy has now failed. The company is closing a centralized newsroom that used digital production to provide national stories for its newspapers across the U.S.
 
Rick Edmonds notes the failure is a valuable reminder that even digital news production is expensive:


It is myth, embraced by digital future-of-news enthusiasts, that Web publishing is close to free. [Digital First CEO John] Paton seemed of that view early in his tenure when he asked newsrooms to use mainly free tools to put out their reports for a week. 

But in his most recent manifesto/speech to the Online Publishers Association in January, he said he was looking for another $100 million to invest in the company’s digital activities on top of an earlier $100 million. 

Digital First is a private company, so it's hard to tell what the implications are for other newspaper companies. There is reason to be cautious because Digital First has complex finances – it was created by merging two other companies that had both been gone through bankruptcy. A hedge fund is a major investor, and that fund may be looking for a quick return on its investment.
 
Other companies with stronger finances or different investors might have more flexibility in managing the transition from print to digital. But it won’t be easy for any company to do.


[1] An estimated $4.2 billion of $38.6 billion in total industry revenue according to the Newspaper Association of America.