Monday Note

Could the New York Times be viable as a digital-only operation? What a ridiculous question: With almost a million copies sold every day, why would this preeminent newspaper even consider such a drastic withdrawal from the physical world?

Truth is: there is no urgency, no need to initiate, nor to accelerate the switch — at this time. But, in the coming years, like other large dailies, The New York Times will be afflicted by the melting iceberg syndrome: no matter how large the iceberg is at the beginning, it inexorably dissolves as it drifts toward warmer latitudes. The progression is barely visible but, at some point, as the exposed part liquefies under the sun, the iceberg’s center of gravity moves upward and it suddenly capsizes without warning (that’s why there is no permanent manned base on icebergs): “As an iceberg melts, the resulting change of shape can cause it to list gradually or to become unstable and topple over suddenly”. (From The use of catastrophe theory to analyze the stability and toppling of icebergs Annals of Glaciology, 1980).

Granted, the metaphor is a bit over-the-top in a column about media economics. Still. Replace the heat and irregular currents that undermine the iceberg’s stability with readership erosion and advertising migration, and you see how it applies to large newspapers.
For the latest US market trends, consider the following, based on recent data from the  Newspaper Association of America :

• Over the last five years (2005-2010) advertising expenditures (print + digital) for US newspapers have dropped by 48%.
• For print-ads only, the drop is 52%.
• Symmetrically, digital advertising spending rose by 50%.

Unfortunately, digital ads still represent a small fraction of the advertising revenue, one that grows slowly: it went from 4.1% of total ad spending in 2005 to 11.8% in 2010. (For further analysis of NAA’s stats, read Alan Mutter’s column titled Newspaper ad sales hit 25-year low in 2010).

By themselves, such numbers explain why publishers are obsessed with paywalls (see last week’s Monday Note about the NYT metered system). For the short to medium term, there is no hope digital advertising will offset the depletion of print. One way or the other, readers will have to contribute.
Coming back to the New York Times, the paper is good at extracting revenue from its readers. Last year, copy sales brought $684m, or 44% of total revenue, vs. $780m (50%)  for advertising. This ratio is way above the national average where newspapers rely on ads for 80% of their revenue. As for digital advertising, its revenue reached $160m last year, that is 20% of the NYT’s total ad revenue, and 10% of all sources of income.

Let’s stop a moment and behold the printed New York Times’ true gem: its Sunday edition. It changes everything in our look at the paper’s digital equation:

• Sunday circulation is 54% higher than on weekdays (1.35m vs. 877,000).
• It’s an expensive package: $5.00 in New York, $6.00 elsewhere in the country.
• Sunday copy sales bring five times more money than any weekday.
• Advertising-wise, some analysts say the Sunday NYT accounts for about 50% of the paper’s entire advertising revenue.

Altogether, between circulation revenue and ads, it is safe to say that NYTimes’ weekend edition makes the same amount of money as the rest of the week combined. (For a good analysis of the subject, read The newsonomics of Sunday paper/tablet subscriptions by Ken Doctor, on the Nieman Journalism Lab blog).
Just as important, reader engagement is much stronger on Sundays: with an average reading time of 53 minutes for the Sunday edition vs. 36 minutes on weekdays. In parallel, demographics are spectacular: the Sunday reader’s median household income is $112,154. A strong number for the sales team’s pitch to advertisers.

Now, suppose the NYT Co. keeps its Sunday cash-cow but stops printing on weekdays. Combined copy sales and print ads revenue is cut by half to $730m. On the internet side, the 32 million domestic monthly unique visitors will be growing as a result of the cut. By how much? Let’s assume the Times is able to convert one third of its former print readership (remember: no more weekday paper) into paid-for website users spending on average $15 a month or $180 a year. This is about 300,000 people, bringing roughly $50m in revenue. In the meantime, we can assume the non-paying audience will also rise. With each “freeloader” carrying an ad-related ARPU of about $5.00 per year like today, an extra 10m UV (which is conservative) would bring another $50m. To sum up this very rough back-of-the-envelope calculation:

I’m not touching the $92m revenue in the NYT’s Media group P&L. Nor am I projecting any circulation growth for the Sunday edition (and it will grow, obviously). Under these assumptions, the NYT would make roughly $1 billion a year in revenue versus $1.5bn today.

Turning to costs. How much the company would be able to save is difficult to say. Google’s chief economist Hal Varian says switching to full internet distribution could cut production costs by at least half. In our case, we are keeping the thick Sunday edition but the entire production organization would have to be reinvented. Dumping weekdays editions would lead to major staff reductions at every level. Printing contracts with third-party operators would replace to the current cathedrals owned by the company. This would result in a great deal of savings when replacing today’s heavily unionized machinists, mechanics, engravers, drivers, typographers, paper handlers, electrician, pressmen, mailers, etc.

Let’s simply say that a significant part of the current 3,094 employees of the New York Times Media Group won’t be needed anymore. The same will apply to the current 1150 editorial staff. Even with a sizable weekend edition and no compromises on the journalistic quality, a staff of 800 writers and editors would be sufficient for both the digital operations and the Sunday paper.

A 1500-1800 persons company, reaching about 50m readers/viewers worldwide, making a billion per year sounds doable. Whatever the timeline is, the move will happen eventually. And preparations have to start now. The iceberg won’t stop melting.

—frederic.filloux@mondaynote.com

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