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



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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.1

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

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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. This increases the industry's reliance on circulation, but circulation revenue is not yet increasing enough to replace the ad revenue that is being lost.

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.
1 The amount of revenue from digital subscriptions has not been released. The report only includes percentage changes in revenue. Without the base numbers, it's impossible to know how much real growth has occurred.

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.

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[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.

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.

Thoughts on the proposed sale of Newsweek and what it means

The Washington Post Co., a bastion of journalistic excellence, wants to sell Newsweek because the magazine keeps losing money.

This development illustrates why some proposals for preserving first-class newspapers and magazines are unlikely to succeed.

The company has owned Newsweek since 1961. The company's record of journalistic excellence rests on reporting in both the Washington Post newspaper and in Newsweek.  Despite this fact, the Post Co. has for years not relied on either publication to ensure its economic survival.

The majority of revenue at the Post Co. comes from the educational testing giant Kaplan. The long-term decline in print advertising revenues has forced the company to use Kaplan's earnings to offset losses from the continued operation of Newsweek and the Post newspaper. This could not be sustained, so the Post is now forced to try and sell Newsweek.

What does this mean for other journalistic organizations?

First, Newsweek has tried to adapt to the digital world where a week's delay publishing news or commentary is far too long to satisfy audiences. This report says Newsweek's "digital side" generated just $8 million last year, too little to pay for the magazine's production.

The cost of producing print newspapers and magazines is relatively high.  But advertising revenue per reader in print is also relatively high.  The cost of producing digital news is much lower, but ad revenue per reader is much, much smaller than print revenue. Print journalism organizations face the problem of transitioning from high-cost high-revenue markets where audiences are still sizable, but stagnant, to low-revenue markets where audiences are growing.

Newsweek probably had unusual support for making this transition because the Post Co. is controlled by the Graham family, which has a commitment to journalism.  The family was probably more willing than other Post Co. stockholders to subsidize losses at Newsweek while trying to make the transition work.

But in the end, no company can afford to keep losing money in one division and subsidize the losses with profits from another division. At some point, the company's ability sustain itself will be questioned.

So the second lesson is that suggestions for subsidizing journalism -- with profit-making parts of a company, with donors or endowments, or with government funds -- ignore a fundamental economic reality. Journalism that cannot sustain itself economically will always be at risk of economic failure.

A first reaction to the New York Times' plan to charge for some web access

The decision to charge for "frequent web access" to the New York Times web site is almost certainly not intended to generate enough revenue from readers to cover the newspaper's costs.

Instead, the plan to offer access to a few articles free, but charge a fee for more extensive access appears to have three other goals. First, stem the loss of print readers who have shifted to the free web site, second, prepare for distribution over mobile devices such as Apple's new Tablet computer, and third, gather the kind of detailed information about readers that can make the paper more competitive in advertising markets.

The article hints at some of this saying:

Company executives said the changes would wait another year primarily because they need to build pay-system software that works seamlessly with NYTimes.com and the print subscriber database.

Why print readers still matter

Subscriptions are nothing to sneeze at, but U.S. print newspapers have for decades depended on advertising to generate more than 75 percent of their total revenue. Especially telling, industry statistics show the average price of subscriptions has not increased after adjusting for inflation.

So it's not realistic to expect any general interest newspaper will generate significant amounts of reader revenue in the far more competitive market for news online.

The Times will not charge print subscribers for access to the web site. This suggests the paper has recognized that loyal print readers will move to the web if they can get free access there.

And print subscribers are still far more valuable than web readers. The advertising revenue per subscriber in print is almost certainly much higher than ad revenue per reader on the web, so the Times needs to stem this loss.

Betting on mobile distribution

As for distribution on mobile devices, the Times is probably hoping consumers find electronic readers preferable to the smaller screens on mobile phones, and will therefore pay a bit to have the newspaper delivered in a superior format.

The companies that make these devices, Apple, Amazon, and others, are probably hoping semi-exclusive access to the Times will attract buyers for their devices. Of course, if this works those same companies will be able to extract a hefty fee from the Times for the privilege of appearing on their device.

The real goal of the Times is probably access to user information collected by Apple, Amazon, et al. An example is information about a user's location that comes with access to wireless networks that readers use to download newspapers and books. I will be surprised if Apple's device does not include GPS to improve the quality of tracking data (Yes, I know consumers also use GPS and might turn it on and off).

Knowing someone's reading habits and where they go to read is, of course, the kind of information advertisers crave because it can be used to make a precisely targeted pitch for a product.

Gathering reader information on the web

The Times will also be using its website to gather equally detailed data about its most loyal readers, those willing to pay for access. Just imagine the advertising-friendly statistics that might generated when information from print, the web site, and mobile distribution is combined.

Philly paper clarifies its plans for print vs. online

Executives at the Philadelphia Inquirer have issued a second memo clarifying plans to restrict online publication of some expensive or exclusive stories, apparently in response to a barrage of often ill-informed criticism.

Yesterday, I argued the paper's plan to delay online publication of some stories makes economic sense because revenue per reader is still very small online. The paper did not say it would never publish the stories on its website, just wait until the stories had a chance to circulate in print.

The new memo says these stories will instead "appear online concurrent with print publication." The memo also clarifies the kinds of stories that will be published immediately on the web, such as breaking news or time-sensitive stories that help readers plan for a night out.

The original plan made sense because it tried to separate readers into groups based on the amount of revenue the paper earns. Print readers are far more valuable than readers on the web. Publishing a story in print first might therefore limit the number of readers who abandon print to read the story on the web.

The new plan to publish stories "concurrently' may have a similar effect if some stories don't appear on the web until the paper's print deadlines. Print deadlines are often very late at night, when many readers are either watching television or getting ready for bed.

Meanwhile, columnist Will Bunch at the rival Philadelphia Daily News has a good suggestion for using web videos to promote stories the Inquirer wants to delay publishing online, building anticipation to increase readership once the article finally appears.

Bunch, unlike many others who responded to the original memo without much thought, gets this one. It's all about the revenue, ...

Information may be free, but that doesn't make it cheap

Monday's New York Times took an unjustified swipe at a sister paper for plans to delay web publication of expensive to report or popular to read stories until after those stories appear in print.

Times media columnist David Carr sought out an entirely predictable quote from a former newspaperman turned "Web evangelist" denouncing the Philadelphia Inquirer for delaying online publication.

But the Philadelphia Inquirer's new policy to publish "signature investigative reporting, enterprise, trend stories, news features, and reviews" in print first, and then online, makes good economic sense.

Many newspapers still make startlingly small amounts of revenue on the web. I suspect that is the case at the Inquirer, so delaying publication of their best material is a smart move entirely consistent with the economics of new media.

It's the revenue, ...

A bit of arithmetic using statistics from an industry survey shows some newspaper web sites were earning only $0.33 to $0.83 per visitor for the entire year in 2006.¹

I presented these calculations last week at a conference, and the next day heard an executive at a major metropolitan newspaper cite figures for their current web operations. The paper earns less than $4.00 per visitor each year. Revenue per reader in print is probably much higher at all of these papers.

Publishing a story online probably increases the number of readers compared to a story published only in print. But some print readers will also move online to read the story, reducing the revenues earned in print.²

This means any online gains in readers and revenue have to be large enough to offset losses of print readers and revenue. And the very small online revenue numbers suggest this is unlikely to happen if the story is published both places at the same time.

So the Inquirer is probably doing the right thing economically. Withholding publication of expensive to produce investigative and enterprise stories will limit the immediate loss of print readership. Meanwhile, the paper plans to keep publishing breaking news on its website, which is probably what most online readers are looking for in the first place.

Several newspaper and television employees responsible for publishing online and in mobile media spoke at the conference, and all complained about having small staffs. The majority of journalists at these organizations still work in the print or broadcast part of the operation.

But this is also sensible so long as revenue per reader or viewer is much higher for distribution in print or over the airwaves. Keeping web operations small when online revenues are also small shows these companies are economically rational.

That may not satisfy the naive view that Carr promotes in his column, but it should make everyone at the Inquirer and elsewhere feel a little better about what their bosses are trying to do.

1 Newspaper Association of America: Newspapers Online Operations – Performance Report 2006.

2 Wildman, S.S. (in press). "Interactive channels and the challenge of content budgeting." The International Journal on Media Management.