The Heart of the Newspaper Problem

The monopoly disintegrates

I can remember when most towns had an evening newspaper as well as a morning one. Walter Cronkite put an end to that. The end of evening newspapers was the final stage of a long consolidation process that left just one newspaper standing in each city – and the print distribution monopoly was enormously profitable. I’ll never forget looking at my first newspaper group P&L. “I can’t figure this out,” I told my client. “It looks like your profit margin is 63%!” “Actually, it is 63%,” he replied.

But physical distribution barriers mean nothing to the Internet, of course. When the Internet shattered the cost barrier to local market media entry and digital insurgents invaded once sacrosanct turf, the inevitable result was a collapse in the price advertisers had to pay to reach local consumers. Suddenly, overnight, newspapers found themselves competing with highly-differentiated Internet search engines and portals and aggregators and vertical classifieds competitors and even high-traffic bloggers, all charging advertisers rates a hundred times less than what newspapers charged while delivering at the same time a more contemporary marketing environment and a higher degree of advertising accountability. Their advertising not only cost less, it was also more targeted, more measurable and therefore more efficient. For all but the largest consumer goods brand advertisers, the carpet bombing techniques of mass advertising were no longer relevant or economically attractive. Only the rifle shot mattered now.

In 1990, a three-line, one-time Sunday help-wanted ad in a mid-size daily newspaper would have cost an advertiser maybe $50. That ad would have been taken by a person on an order-entry system costing a couple of million dollars and capable of processing hundreds of thousands of advertising orders a day. It would pass through a pre-press process costing about $3,000 a page and end up being printed on a press that might have cost around $100 million – the cost of integrating composition tools, newsprint stacks and insert machines for that press might have added as much as $30 to $50 million to the capital outlay. The newspaper in which the ad was inserted would then be distributed with only minor variation across an entire geographic market.

The big piece of printing iron in the middle of town was expensive and it could print a lot of newspapers, fast. But it couldn’t print multiple versions of the product for different segments of their market. So even before the digital revolution, newspaper technology was at odds with the marketing forces driving advertiser interest in targeting through direct mail. As newspapers go on the block for the final time, that’s what is severely depressing the financial value of their subscribers. They still know little about their subscribers. To newspapers, they all look the same. But advertisers now want to know the differences among them.

Mass print reach is expensive to maintain, especially when you are under pressure to add more and more zoning beneath the mass reach umbrella to accommodate the only geographic targeting vehicle you have – pre-printed inserts delivered into zip codes. Most newspapers focused on the revenue impact of weak circulation rather than the underlying impact of the costs of distribution. But eventually they were confronted with the need to amputate limbs to keep the body alive, typically circulation in low penetration counties. That meant production and distribution infrastructure had to be downsized. That is almost impossible to do incrementally. The high fixed costs of the print newspaper model remained, like an anchor around the neck.

So newspapers cut costs frantically to try to match the revenue fall. But now it’s crunch time. You can only cut costs so far.  And if you don’t have a strategy to recover and grow replacement revenues through digital products, the sunk cost of print will do you in.

So now time is running out for daily newspapers. The big metropolitan newspapers are the most vulnerable, because the economies are now so out of whack. I used to think that several “national” newspapers might have sufficient brand strength to exploit the natural reach of the Internet and build new national – and international – replacement audiences. I’m not so sure anymore. Just today the New York Times Company announced that it would cut jobs, including about 7.5% of newsroom positions, as its print advertising revenue dwindles and new digital products fail to deliver.

This is a paper that got hung up on its own mythology and never got over it – and I’m not just talking about the symbolism of moving into a brand-new building in 2007, just as the Great Recession began to bite, a magnificent Manhattan trophy building designed by Renzo Piano. It always presented itself as a “national” media brand – but more than 75% of its print circulation was within the New York – New Jersey TriState area. It was never a genuine “brand” anyway. The Times had never deliberately crafted and nurtured a brand heritage, its market position was the accidental outcome of its own pretentions. It simply found a market with a narrow, literate, self-appointed elite – yes, I’m one of them, I subscribe – that it presents to national advertisers as affluent and influencing. There was no fooling New Yorkers – in its home market of New York City, the Times was forever in third place in print circulation behind the Post and the Daily News.

Digital distribution offered the chance to finally become a genuine national presence in news and opinion. They blew it. Only 750,000 digital-only subscribers had been captured by the end of 2013 – or about 50% of the nightly audience of Fox News – and growth has slowed. It’s also well behind all three major news aggregators, YahooNews, HuffPost and GoogleNews. Digital subscriptions accounted for $149 million in revenue but advertising losses were so drastic that overall revenue for the company declined by 1%. It’s stuck in a no-growth zone because it is congenitally unable to radically adjust its culture to better engage with today’s young affluent consumer, a consumer who viscerally objects to editorial condescension and will go running off to social media for news guidance and opinion at even the slightest whiff of it.

In today’s release from the company, it was announced that NYT Opinion, unveiled in June, is set to close down. The product offered access to commentary and op-eds in the app and on NYTimes.com. It was the second time the paper had tried to created a premium subscription option based around its opinion content, following the short-lived TimesSelect. But nobody under 30 cares what Brooks and Douthat and Dowd and Friedman think, even when their opinions are available for $6 a month. They want a mutually-respectful conversation and an informal voice, not tablets from the mountaintop.

So the Times has fallen back on mining its current “readership” with a variety of digital subscription packages. It will therefore continue to be compressed into a constantly diminishing niche. Soon it will run into a pricing ceiling and the game of transferring subscribers from print to digital and calling that “growth” will be over for good.

Even the Ochs-Sulzbergers are selling down. The family’s holding has gone from 20% to 12% in just the last four years.