The Newspaper is Dead. Long Live the Newspaper.

The US newspaper industry, bolstered by new investors, is being reinvented. What will it look like in the future?
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Beginning in 15th century France the phrase “the King is dead. Long live the King” signified a transition between monarchs. The phrase also signified a generational shift since monarchs typically ruled for life. I believe a similar transition is occurring in the newspaper industry as evidenced by John Henry, owner of the Boston Red Sox, buying the Boston Globe on August 3rd and Jeff Bezos, founder of Amazon, purchasing the Washington Post on August 5th. I thought it was generally agreed that newspapers were poor investments so why are Mr. Henry and Mr. Bezos bucking the collective wisdom?

We’ve been reading about the imminent demise of newspapers for over a decade. Newspapers, like other content-producing businesses (i.e. TV, music, movies), have been particularly vulnerable to the digitization of our world. However, the decline of the newspaper isn’t a recent phenomenon; subscriptions to daily newspapers in the US have fallen or remained the same every year since 1984. Digging further reveals that the total number of daily papers, including Morning, Evening, and Sunday newspapers, is at a 56 year low. But this total hides some interesting facts about morning newspapers in specific.

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Morning Newspapers

The latest year for which data is available, 2011, was a record year for total available morning newspapers. At 931 the total is at its highest point ever in the 68 years in this dataset. The second highest amount, 872, occurred in 2008, only five years ago.

This seems paradoxical – aren’t newspapers dying? From a logical standpoint I’d have guessed that the number of newspapers has been steadily declining. However, it seems that large, general-purpose newspapers are shrinking in circulation or dying off and being replaced with more niche papers that cater to an ever-narrower slice of the population. This is consistent with the fragmentation effect the internet has had on other industries (i.e. music and publishing). As content distribution moves online large media organizations who, in the past, determined what was and wasn’t worth your attention no longer have the distribution control necessary to do so. In the newspaper industry, this has taken the form of online outlets such as The Huffington Post, who was the first digital-only enterprise to win a Pulitzer Prize. If you’re interested in exploring this concept further there are two other IBR articles you should read: Macklemore & Fifty Shades of Grey: the Democratization of Taste and The Times Are Good.

This is just a hypothesis but one that the data seems to support. If it’s correct then the average circulation per morning newspaper would have declined over time. Since the total number of papers is growing, this indicates that circulation isn’t increasing as fast as new papers are being created. Lo and behold, this is precisely the case. Without circulation statistics for each newspaper it is impossible to prove this hypothesis definitively but we can be reasonably assured that each new paper caters to a smaller portion of the overall newspaper market than in the past.

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Advertising

Beginning this article with a discussion of circulation was necessary in order to understand the industry’s key source of revenue – advertising. The US has a unique position with respect to advertising; of the two major forms of revenue for a newspaper, advertising and subscription fees, advertising accounts for about 87% of total revenue according to the OECD. This split is much higher than in many other developed nations such as the Netherlands, Denmark, and Japan, who have a revenue split of 45%, 38%, and 35% respectively.

In 2000 the industry generated a record $ 66 billion in real advertising revenue (i.e. in 2013 dollars). Given that, it would stand to reason that the daily circulation numbers in 2000 should be among the industry’s highest as well. However, since 1956 there have only been 11 years with lower subscriber numbers than 2000. Not surprisingly, those years are 2001 – 2011. Advertisers are paying less and less on a per subscriber basis than in the past. As a result, many newspapers are relying on digital editions to offset, if not save, their advertising base.

Since this is the case the key question becomes: how quickly does digital advertising have to grow for it to fully or partially offset traditional advertising means over the next five years?

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Based on the above analysis, it appears unrealistic to expect Digital to be the industry’s white knight. Even if Digital advertising revenues grew at 18% per year for the next five years it would only offset 20% of the other advertising revenue the industry generated in 2012. This isn’t enough to make a material impact on the decay of advertising revenues, which have been declining at an annualized rate of 8% since 2000. If this rate continued for the next five years the industry’s total advertising revenue would decline to $ 17.3 billion by 2017, a total lower than any other in the last 57 years.

Tying it All Together

Our analysis has established the following:

A)     Circulation numbers have been declining for nearly three decades and are unlikely to rebound

B)      Total Morning newspapers are at a record high but are catering to more niche segments

C)      Advertising revenues are declining and digital isn’t likely to make up for the decline

Given all of this, I believe the newspaper is dead.

That is to say, I believe the traditional view of newspapers is dead. Historically, newspapers were responsible for all three components of the value chain:

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This closed-loop business model led newspaper to believe they could charge for their content simply because it cost to produce. However, the internet has disaggregated components of the value chain (i.e. today’s paperboy is the Verizon installation technician), shifting the traditional view of content. What this means is that the internet, allowing for many quasi-journalists to create content, has rendered obsolete a major component of the traditional newspaper value proposition: providing basic background information on a news story (i.e. who, what, when) either through basic reporting or opinion pieces that include the basic information they are discussing. For example, as noted above, general-interest newspapers are losing subscribers and advertising because they are charging for content that others are providing for free. This is the view of newspapers I believe is dead.

The New York Times echoed this sentiment in commenting on the August 5th sale of the Washington Post: “This week’s announcement that the Graham family decided to sell the Washington Post and most of its assets…surely quashed and lingering doubts that the old model is all but dead”

From its ashes I see a new type of newspaper arising; one that isn’t burdened with an analog cost structure in a digital world. One that focuses on offering PICA (Perspective, Interpretation, Context, and Analysis) instead of commodity-like articles on who, what, and when. One that is willing to experiment with different business models such as usage based pricing or premium content pricing. This is the type of newspaper I’m looking forward to reading. This is also the type of newspaper that doesn’t currently exist – at least not in a major, recognizable way; the paper closest to claiming the title is the Financial Times.

I’m eager to see how Mr. Bezos transitions the Washington Post to increase the value of its content, which it arguably didn’t have an issue with, and then translate high content value into a profitable business, which WaPo most definitely had an issue with. In comments to his newly-acquired newspaper on September 2nd, Mr. Bezos outlined how he plans to implement the Amazon point of view:

We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient….If you replace ‘customer’ with ‘reader,’ that approach, that point of view, can be successful at The Post, too.

Though the point of view sounds simple, Mr. Bezos is one of the few people positioned to successfully implement the last two components: “Invent. And be patient”. He has already argued that paywalls aren’t the answer making it necessary to find new business models to ensure financial viability. Having built a career from successfully transitioning physical businesses to digital ones Mr. Bezos is uniquely suited to the task at hand. However, given the paper’s inability to find a viable model thus far it’s unlikely that a solution will be found quickly – especially when, according to Mr. Bezos, “‘[q]uickly’…would be years.”  This is where the connection to the latter point, “be patient”, comes in; with a net worth of around $ 24 billion Mr. Bezos can provide the financial patience necessary to invent over many, many years. Mr. Henry has yet to provide an indication of his plans for the Boston Globe but it’s likely he has similar concerns to Mr. Bezos, namely how to convince readers to pay for valuable content whose creation is time-intensive.

More broadly, I believe the sale of the Washington Post is another sign that newspapers, though weakened, still have a vital role to play in our society. The argument here isn’t purely financial; I don’t believe Mr. Bezos will add significantly to his already considerable net worth with his investment. The technology industry, and the moguls it created, is increasingly turning its attention towards journalism and media as a societal issue. Google, who has been criticized for profiting from content created by others, now sponsors 8 journalism fellowships per year through Google Journalism Fellowships. Craig Newmark, founder of Craigslist, helped finance a book about journalism ethics. Chris Hughes, a co-founder of Facebook, bought the New Republic, a 99-year old political magazine, in 2012. Despite the generally dismal outlook for the industry these investors still saw something of value beyond just economics. According to the New York Times “helping print journalism adapt to a changed era is becoming a cause du jour among the technology elite” and I believe Mr. Bezos is another case in point.

As venerable institutions like the Washington Post change hands from the print media entrepreneurs who created them to the digital entrepreneurs who helped bring about their demise I feel like nothing describes the transition better than a 591-year-old phrase:

The Newspaper is dead. Long live the Newspaper.

 

 


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