Monday Note

For quite a while, I’ve been advocating a newspapers price hike. My take: the news market is undergoing an irreversible split. On one side, digital distribution (on web, mobile and tablets) will thrive through higher volumes and deeper penetration; revenue is not easy to squeeze out of digital subscribers and advertisers but, as some consolation, serving one or ten million customers costs about the same.

On the other side, print is built on a different equation: gaining audience is costly; every additional reader comes with tangible industrial costs (printing, shipping, home delivery). Having said that, each print reader carries a much better ARPU than its online counterpart (bet on a 5 to 15 times higher yield, depending on the product). And, for a long time, there will be a significant share of the audience that will favor the print version, regardless of  price (almost). Those are super loyal and super solvent readers.

Last week, my little solo tune about price hikes received independent support of people much better equipped to define prices and value. Global marketing consultants Simon-Kucher & Partners released conclusions from an in-depth study of newspaper price evolution and its impact on circulation (PDF summary here). The headline: “Calling all newspapers: A premium model is your best hope”, which the authors, Andre Weber and Kyle Poyar, sum up thusly:

Newspapers are in an unenviable, but not uncommon position: raising print prices may shrink their already anemic readership base, but may also be their best hope for staying afloat.

Headquartered in Germany, with 23 branches across the world, Simon-Kucher specializes in marketing, sales and pricing strategies. They rely on thorough analysis and models to help their clients value a wide range of products and services. For this study, they surveyed the 25 largest US newspapers (ABC’s listing here). Before that, they’d worked on quality newspapers in the UK. Their findings:

– When technological disruption causes an irrevocable market decline, “it’s almost prudent to raise prices”. To support their claim, SKP mentions AOL which, at a critical point of its existence, raised its rates and generated large amounts of cash. This helped the online service finance major shifts in its business. To the contrary, Kodak continuously lowered the price of its film products, found itself unable to invest in a digital turnaround and finally went bankrupt.

– There is no elasticity in newspaper prices. In other words, a significant price hike won’t necessarily translate into a material drop in circulation. But the extra money raised in the process will provide welcomed help for investments in digital technologies.

– Raising prices discourages price wars. Many sectors are engaged in a downward spiral that doesn’t always translate into higher volume, but guarantees weaker revenues.

They conclude:

The print business is not your legacy, it’s your bank.

For publishing companies with struggling print divisions, SKP’s shibboleth might appear a bit overstated but it still contains valuable truths.

Let’s come back to the price elasticity issue. It’s an endless debate within publishing houses. Fact is there is none. For the US market, here are the effects of specific price hikes on circulation revenues:

…In an earlier UK market study, SKP looked at the consequences of price increases between 2007 and 2010 for these quality papers:

                Price        Variation in     Variation in 
                Increase     Circ. volume     Circ. revenue
 The Times        +54%         -24%             +16.7%
 The Guardian     +43%         -19%             +15.8%
 The Independent  +43%         -21%             +13%
 The Telegraph    +43%         -25%             +7%

When I spoke with Andre Weber and Kyle Poyar, the authors of the study, they were reluctant to evaluate which part of the circulation drop was attributable to the natural erosion of print, and which part was linked to the price hike. Also, they were careful not to venture into the consequences of the drop in circulation on advertising (as ad rates are tied to the circulation.)

However, they didn’t dispute that the bulk of the drop in circulation was linked to the erosion of print caused by the shift to digital. If there is any remaining doubt, watch this chart compiled the Pew Research Center:

With the left scale showing the percentage drop (!), the plunge is obvious, even though a change in the counting system by the Audit Bureau of Circulation embellishes the situation a bit.

The price equation for print newspapers can be summed-up as follows:

#1 Price hikes –both for street price and subscriptions– only marginally impact circulation already devastated by the conversion to digital.

#2 Additional revenue coming from price hikes far outpaces the loss in circulation (which will occur anyway). Ten or twenty years ago, US newspapers drew most of their revenue (70%-sometimes 80%) from advertising. Now the revenue structure is more balanced. The NY Times, for instance, evolves into an evenly split revenue structure, as shown in its Q2 2012 financial statement:

#3 There is room for further price increases. When asked about the threshold that could trigger a serious loss in readership, Andre Weber and Kyle Poyar opine that the least loyal customers are already gone, and that we have not yet reached the critical threshold that will discourage the remaining base of loyal readers.

#4 Advertising is indeed an issue, but again, its decline will occur regardless of circulation strategies. The main reason (other than difficult economic conditions): the adjustment between time spent and advertising expenditures on print that will inevitably affect print ads.

(source: Mary Meeker’s State of the Internet, KPCB)

#5 High prices on print versions will help maintain decent prices for digital paid-for contents, through subscriptions, paywalls, etc. As Weber and Poyar point out, for a publisher, the quality of print and digital products must remain connected, the two must work together (even though digital subscriptions will always be substantially lower than print.)

#6  When it comes to pricing strategies, quality rules the game. Simon-Kucher’s conclusions applies for high-end products. The New York Times, The Guardian, or The Sydney Morning Herald won’t have problems raising their prices by substantial amounts. But for tabloids or low end regional papers filled with cheap contents and newswire fodder, it’ll be another story.

#7 Pricing issues can’t be insulated from distribution.  In many countries, publishers of national dailies should consider refocusing their distribution map down to major cities only. The move would save shipping costs without too much of an impact on the advertising side as the solvent readership — the one dearly loved by advertisers — is mostly urban.

–frederic.filloux@mondaynote.com

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