An Online Rescue for Newpapers?

Not so long ago -- three or four years -- online operations were a business afterthought at newspapers. Revenues from the sites were tiny, one percent or less of the total. Plus almost none were profitable. So online was a kind of placeholder, learning-curve venture for the uncertain digital future.

Since then circulation and readership have continued to decline, and the industry has experienced an ad crash, followed by a disappointing recovery. Online has been the bright spot in this otherwise dreary picture, recording successive years of 30 to 40 percent growth and going into the black at most mid-sized and large papers.

That prompts revisiting a question that once seemed ridiculous on its face. Could the continued fast growth of online, still from a small base, together with slow circulation losses and small revenue gains at the mother paper eventually generate a dual business base? Could that in turn support a decently staffed newsroom delivering in both mediums? 

I ran the numbers. Unfortunately, they provide little cause for cheer.

Drawing on estimates from Borrell Associates for all public newspapers companies, current through mid-2004, I generously rounded up, as a starting point, online as 3 percent of revenues. To keep the math simple, I assume online revenues will continue to grow by a third every year. The Newspaper Association of America (NAA) has reported 4 percent growth in the industry's traditional advertising this year and projected the same for 2005. We'll round up the circulation revenue stream (actually growing more like 2 percent lately) and assume that papers can sustain a 4 percent growth rate.

Take a hypothetical, mid-sized to largish paper with $3 million in online revenues and $97 million in traditional revenues during 2004. When do the lines cross, and online equals and passes the print paper? In 14 years -- 2018.

Look at the year-to-year projection (see left) and you can see how slowly the revenue shift picks up steam. By 2009, online revenues are still only 10 percent of traditional. From another, brighter view, however, online becomes an equal source of growth by 2010-2111 and a larger source of growth in the years after.

Of course, there isn't any reason to believe any of these numbers will remain steady state over time. Most obviously Google, Yahoo, Craigslist and come-from-nowhere competitors we haven't yet thought of can be expected to launch missiles into the media mix as soon as 2005 and 2006. It doesn't look like the industry has a 14-year or even five-year window of calm weather to reinvent its business model.

For perspective's sake, though, it is worth noting that by growing online revenues a third a year, newspapers are outstripping the pace of total online ad growth -- a bit under 20 percent in 2004 and projected to be similar in 2005.

So while newspapers don't match the growth of the meteor-hot companies, they are getting their share. However, a report out this week suggests that local advertising will grow 46 percent in 2005, so maybe newspapers have some room to grow even faster.

The comparison also suggests that sustaining the current pace of growth is far from automatic. Picking it up substantially looks challenging.

On the traditional newspaper side, sustained ad revenue growth is conjectural. As I reported in December and The New York Times documented in detail in an article earlier this month, the quality of circulation (that is, the part fully paid) is falling along with the numbers. In theory, advertisers could push back hard on rate increases, though my sense is that an advertising presence in the newspaper remains a necessity for many. Also, the fifth of revenues that comes from circulation revenues could decline instead of increase. It already has at companies that looked to bolster numbers with price cuts.

My analysis is of revenues, not profits. Margins vary widely but they fall well short of the 20 to 25 percent most companies feel obliged to generate from the paper. Also, modest profitability has often been achieved by very tight staffing. That could change  -- margins might range even higher as they do at Google and Microsoft. Broadband streaming video and making space for more ads and content have driven up online production costs over time. But no paper costs and no home-delivery costs remains as attractive an alternative to the traditional way of doing business as ever.

Also left to the side in these projections are the host of voguish niche publications most papers are starting. If that is a sustainable mode of expansion, hyper-targeted offerings of the future most likely will be online -- so let's look at it as a potential after-burner for fast revenue growth the industry is seeking.

One more feature of online growth is that the best performers are beating the 30-35 percent average. Gannett grew online 60 percent in 2004, McClatchy 50 percent, Knight Ridder 45 percent. Those faster rates of growth take the segment to business significance sooner. They also indicate a fresh source of leverage for the big companies in acquisitions -- the scale and know-how to get a lot more out of online than present management.

The imperative suggested here to grow faster than fast is not news to knowledgeable online insiders, nor to those in the executive suite. There are indicators, if you are watching, of an effort to kick into a higher gear.

For instance, the NAA announced in December that it was joining the American Society of Newspaper Editors to steer readership research in new directions. First up is sharp focus on online audience, developing a more generally accepted way to measure it and building the case that the total "footprint" for newspapers is expanding not declining.

NAA's Randy Bennett and Rob Runett told me that the research emphasis is a match to very aggressive goals companies are setting for 2005 for their online operations. And there is a lot more to it than selling more ads as papers explore an array of target marketing options and mediating efforts to guide a newspaper's ad customers into effective online programs.

Six months ago, Runett wrote that there seemed to be no comparable energy in developing online content. If not a turnaround, he now detects at least a pickup. The finalists for the Digital Edge awards suggest that metropolitan papers, and some small ones too, are moving to a multimedia online display for big projects in which they have made a major investment.

On balance, the online rescue scenario doesn't add up just yet. But neither is the industry snoozing through an era where the commercial and editorial potential of the medium has become both obvious and critical.


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