Monday Note

“Tomorrow will be the final edition of the Rocky Mountain News. (…) You all did everything right, but the business model of the press changed, the economy changed and the Rocky became a victim of that”.  Last Thursday, these were Rich Boehne’s (CEO of EW Scripps) terse words when announcing the end of the 150 years Denver-based newspaper.

By any measure, the fate of the Rocky Mountain News epitomizes the evolution of the American press: heavy reliance on advertising and strategic paralysis.  The latter demonstrated by the inability to transfer declining classifieds revenue from print to online and by keeping large staffs in spite of a steady readership erosion. Under those circumstances, expect no mercy when the recession hits. When many of your subscribers pay no more than 1 cent a day, even if you have a 36% penetration rate on weekdays and 46% on Sundays, you’re doomed. This is what befell the Rocky, an excellent regional newspaper, winner of many Pulitzer prizes (including this one in 2006 featuring the funeral of a Marine killed in Iraq).

Other US newspapers might follow. During the same week, Hearst Corporation hinted its intention to close the San Francisco Chronicle unless a buyer is found or deep cuts are made as the paper is loosing $1 million a week (see Alan Mutter’s Blog for details). Other major newspapers are under similar threats of closing overnight in big cities such as Seattle, Philadelphia, and Minneapolis, or in Florida.

Let’s dwell one moment on The Washington Post’s case, its quarterly earnings were released last week.
The Washington Post Co. is one of the best-managed US media company, built around strong brands.  One such pillar is the Kaplan Education property, so far recession-free : for the fiscal year 2008, it accounted for 52% of the group’s  $4.4bn revenue. Kaplan’s operating income ($206m) offset the losses in the newspaper division ($192m). Education revenue grew by 17% last year against declines everywhere else: -10% for the newspaper, -4% for TV and -13% for the magazine. Newsweek, by the way, is undertaking a major change, shifting to a smaller but higher-yield readership as explained in this story.

The company is supervised by a high-profile board of directors: iconic investor Warren Buffet — who suggested to buy Kaplan 15 years ago, hence guaranteeing the Post’s future –, Internet mogul Barry Diller, Lee Bollinger the chairman of Columbia University or Anne Mulcahy, Xerox’s CEO. With such real luminaries, as opposed to potted plants, boardroom discussions must be animated.

Let’s focus on newspaper operations. The Washington Post (print and online) revenue was $800m in 2008, versus $890m in 2007. Its losses now amount to 25% of its revenue.
More details, the evolution of print and online revenues:
- between Q4 2006 and Q4 2008, print advertising revenue decreased by 30%
- in the same time, online ad revenue increased by a mere 18%
- an even more cruel look, in dollars: for Q4 2007 versus Q4 2006, as the Washington Post increased its online revenue by one dollar, it lost 4 dollars of print revenue.
- things are getting worse: for Q4 2008 compared to Q4 2007, print is now bleeds 15 dollars for each dollar gained on Internet revenue.

These simple figures are the equation for newspapers in the US and in Europe. The underlying trends where already very bad in normal economic time, with online revenue only compensating for a mere quarter of the losses on print. Now, the gap has become an abyss.

How low can it go? Very, very low. Not only the Internet economy is unable to compensate for the decline of print, but its double-digit growth rate is now history. Again, to take the Washington Post Co. figures — way more tangible than marketing vaporware — in Q4 2007, its online revenue grew by 12% versus Q4 2006; a year later, this growth rate has shrunk to 5%. Less money is flowing on websites and those who get ads squeeze fewer dollars than ever before. Reasons are:
- a fattening inventory of pages putting pressure on prices
- the failure of audience measurement systems (it will be remembered as the biggest blunder of the industry)
- the rise of low revenue search ads controlled by one key player (its name begins with a “G”)
- the publishers’ lack of nerve; they prefer a fire sale, giving their pages to ad networks, rather than holding firm on prices, see Business Week. A year ago, 70% of the inventory was sold directly by sites themselves and 30% through ad networks; now it is more like 50/50. Translated into cash, a much larger chunk of web pages will loose their value: when a site is able to charge $8-$15 per thousand page views (that’s the CPM metric), an ad network will dump the same pages for $2 or $3 per thousand. This is a new definition of slow-motion business suicide.

This value depletion of web content is rooted deep in the very architecture of the commercial Internet. Today, starting a news web venture can be done with a blog platform that will be customized for $20,000 or less.  Frankly, tell me the difference in terms of user-friendliness, between this site — AllThingsD based on WordPress — , or this one — The HuffPo, powered by TypePad — and a big newspaper’s site with a $200,000 platform. From a user perspective, none.

The barrier to entry is lower than ever — especially since you can hire recently laid-off journalists for cheap. From a democratic standpoint no one should complain. News is now enhanced by a conversational/contradictory dimension that was absent before. But a sustainable business model has yet to be invented. The free for all has been thoroughly explored. Fact is: for big news operation, it doesn’t fly.  In the pre-recession era, a collective hallucination caused most of us to believe it would work – but it doesn’t. Let’s hope the current economic downturn will act as an intellectual stimulus for real alternative models.  —FF

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