Monday Note

22% of Internet users in the United States said they stopped their subscription to a printed newspaper or a magazine. Why? Because they could access the same content online, according to a study released last week by the Center for the Digital Future. And it was only one in a string of bad news for the industry. Most of these items came from the US but, to a large extent, apply to European media as well.

Newspapers need to regroup and take a breath. Both in Europe and in the United States. They need protection. Not the temporary protection of a bankruptcy, but a durable one based on alternate business models and a drastic change in their capital structure. Look at this chart:

The stock market tells us we’re going through a liquidation of newspapers publishing houses. As Business Insider likes to put it, quoting analysts, “New York Times stock may be worth zero” based on the depleting cash-flow and the double burden of $1.1bn in debt and $500m in unfunded pension liabilities. As for the Washington Post Company, on Friday, its stock dropped by 12% after the release of its Q1 earnings revealing the following for the Washington Post newspaper unit:
•    22% year-to-year drop in revenue
•    Widening loss from –$1.2m in Q1 2008 to –$54m in Q1 2009
•    33% (!!!) drop in print ad revenue, again, year-to-year
•    8% decline in online revenue, mostly due to a 23% drop in classifieds
•    And, something analysts didn’t like at all, a slight drop in the operating income for the Washington Post Company’s cash-cow, the Kaplan education unit. Kaplan accounts for more than half of the group’s revenue.

All of the above occurred in the context of a continuing decline in the circulation of American newspapers where 23 titles of the top 25 are losing readers. The two winners are the Wall Street Journal  — attributable, said a bitter New York Times to an increase in bargain subscriptions — and the Denver Post, benefiting from the death of its local rival. Overall, 11 out of 25 fell more than 10% from March 08 to March 09, and big players such as USA Today lost –7.5% and the NYT –3.5%.

This could drive one to start drinking gin, aquavit, or pastis at 9 in the morning.

Jeffrey Cole, head of the Center for the Digital Future, which issued the study quoted above, remains bullish on the news business. More than ever, he says, Internet users read newspapers online: about 53 minutes per week, out of 17 hours per week spent online. That is about 5% of the time. But Cole is making a crucial distinction between light users (2.8 hrs/week online on average) and heavy users (42 hrs/week); the latter, Cole says, “spend 65 more minutes reading online newspapers than do light users”. Interesting (and rather encouraging) as they are, these data points are not consistent with Nielsen numbers, which, unfortunately, rule the advertising market. In France for instance, Nielsen shows a reading time of less than 15 minutes per month for the largest dailies! This, in itself, points to the crying need for reliable data in the news sector. Still, according to Cole, the appetite for news remains intact, but the migration toward digital has become a life-and-death issue:
” We’re clearly now seeing a path to the end of the printed daily newspapers — a trend that is escalating much faster than we had anticipated.  The decline of newspapers is happening at a pace they never could have anticipated. Their cushion is gone, and only those papers that can move decisively to the Web will survive”.

Then, the question becomes: which business model will allow newspapers to “thrive” online, and above all, what could be the ideal corporate structure for such a turnaround? In the last months, two ideas have shown some persistence. The first one is the resurgence of the paid-for model. Jean-Louis and I have already given it some thought here. In a nutshell, yes, a paid-for model is a credible option for digital news. However, a must for the move from credible to real is a friction-free payment system, one in which the mental cost of a transaction becomes close to zero. And, to help with the emergence of new behaviors, new platforms such as the iPhone or Amazon’s Kindle will help.
The second idea lies into the non-profit concept. A new study titled “A Nonprofit Model for the New York Times” will be presented at a conference on Nonprofit Media held May 4-5 at the Duke University in North Carolina. The document is downloadable from this story in the New Yorker.
The author, Penelope Muse Abernathy, examines four possible models:

1. The establishment of an endowment to support the editorial costs of the NYT
2. A Foundational support for some of portion of NYT journalistic coverage (foreign coverage that costs about $60-70m a year)
3. The acquisition of the paper by a university
4. The sales of the paper to an “angel” investor.

A quick review.
#1 (the endowment) is fine but it requires a lot of money ($5bn to fund the $200m a year newsroom). In the high educational system, such amount is not absurd: 18 majors US universities have endowment of $5bn or more. But raising form scratch a capital reserve of this size – in addition for an ailing sector – is another story. Plus it does not solve the profitability problem. It can be made to work if the NYT becomes mostly an online news business, with perhaps a strong weekend edition on paper.  The latter makes a lot a sense, since half of the NYT’s revenue and profits come from its 1.45m copies Sunday edition!

#2 (funding only the “noble” part of the coverage), makes sense if we consider that the foreign presence of American newspapers has shrunk by 25% in a couple of years and that the Baghdad bureau itself costs the Times $3m a year (just to put things in perspective, $3m is half of the total budget of a major political news site). But again, this is a band-aid, not a sustainable solution for the NYT’s expected, “mandatory” as in the paper’s mandate, all purpose news coverage.

#3 (purchase by a university). This could have been a great idea a few years ago, when Harvard’s endowment weighed as much as France’s high education and research budget. But, by the end of June, university endowments will show erosions of 25% to 30%. Harvard, the biggest of all, might be (relatively) cash squeezed, but its endowment remains at about $29bn. Compares this number to a Times’ valuation of about $1.2bn (plus  $1.6bn in liabilities). In normal circumstances, the purchase by a university could fly — especially considering possible tax breaks -– but, now, endowment directors are preoccupied with matching today’s expenses with declining resources.

#4 (the rich, “angel” investor). A good idea in light of Forbes ranking of 946 worldwide billionaires. One of them, Carlos Slim, a Mexican wireless carrier entrepreneur of sulfurous repute, owns already a chunk of the New York Times (bearing a 14% interest rates, no free lunch here).

Whether it happens trough a foundation, an endowment, or an acquisition by one or several educational institutions, in order to transform themselves, newspapers need capital-structure protection. Although necessary, cost-cutting won’t be enough. In Europe or in the US, we are beyond that stage. A major transformation is needed. In most instances, it will involve closing down print activities — or willingly accelerating their decline — to make room for fast-growing online businesses. Many newspapers will have to shift to a once or twice-a-week publication, transferring most of the news stream to digital media (paid-for or free, probably a hybrid form). Printing plant cathedrals will have to be shut down.  This acutely painful transformation can’t happen in ten years, it needs to take place in less than five. It can’t be done with stock analysts and creditors breathing down the neck of boards and managers. For company structures as well as business models, something courageously new has to be invented. Quickly.    —FF

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