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How an electronic newspaper could become profitable

Papers like The Seattle Times are in a tough spot: Online advertising revenue is a long way from covering expenses. Meanwhile, print advertising is vanishing. So why not ditch the presses and trucks and go electronic? It just might pencil out.
E Ink electronic paper, used for our imaginary publication.

E Ink electronic paper, used for our imaginary publication. None

The tech gadget of the moment, this moment anyway, is Amazon's new wireless electronic book-reader, Kindle. The wireless device can deliver any one of more than 88,000 books, including bestsellers, which Amazon sells for under $10 each. The text appears on Kindle with the same crisp clarity as print on paper, and the battery that runs the device will go a week before it needs a two-hour recharge. Amazon hopes Kindle will tear up the book business just like iPod tore up the music business.

But there is another business, newspapers, that ought to be closely following Amazon's bet on Kindle. Newspaper owners these days routinely issue gloom-and-doom financial forecasts, usually accompanied by announcements of layoffs and other cost-cutting measures. Draconian steps are necessary, they declare sadly, because newspaper revenues keep falling.

In these scenarios the Internet is usually portrayed as the villain, siphoning off print readers and ad money, but not adding online revenue fast enough to make up the difference. Last year, the Project for Excellence in Journalism, a Washington, D.C.-based research group, estimated that if online ad revenue kept growing at 33 percent annually, it would still take a decade to break even with much larger print-ad revenues, which were growing at 4 percent.

In fact, during the most recent quarter, newspapers' online revenue rose only 21 percent, year-over-year, and print ad revenue dropped by nine percent. By such metrics, the continuing gap between online and print revenue appears to make the Internet a poor bet to replace print any time soon.

Or maybe not.

What the Project for Excellence study, and others, ignore is the potential impact of Kindle and its kin on newspaper economics. Success for Amazon's device would validate Kindle's key technology, known as E Ink. In May, Crosscut wrote about Hearst Corp.'s plans to test-market a wireless online newspaper within the next two years, using E Ink technology. But unlike Kindle's small, hardback reader, Hearst plans to employ the technology on a flexible screen almost as big as a tabloid paper. The e-paper can be updated by simply touching the screen. Hearst, owner of the Seattle Post-Intelligencer, is an investor in E Ink, along with Seattle Times minority owner McClatchy, Intel, and Motorola.

Essentially, both devices are new delivery systems for old content. What Amazon expects Kindle to do for book publishing – eliminate production and distribution costs – is the same goal Hearst has for its E Ink newspaper venture. The E Ink technology, says James McQuivey, a newspaper technology analyst for Forrester Research, "is probably the single largest display innovation of this decade."

Sounds cool, but what about that online revenue gap? How much would a newspaper need to cut expenses to switch from dead-tree print to an e-paper? Individual papers guard their finances jealously, so Crosscut asked two newspaper trade groups, the Inland Press Association and International Newspaper Financial Executives (INFE), for some help. Using averages from their annual National Cost and Revenue Study, a widely used industry benchmark, we created a hypothetical paper, which we'll call the Bugle-Interrogator. Our paper is a composite of data collected last year from a dozen real papers, each with about 100,000 circulation. (For comparison, the Seattle Post-Intelligencer's circulation is about 128,000.) Our B-I employs 530 full-time workers–about average, according to Inland/INFE – including 130 in the newsroom.

Here's a quick-and-dirty breakdown of the B-I's finances for 2006, using Inland/INFE's averages:

  • Printing expenses: $6.7 million
  • Circulation expense: $10.1 million
  • Ink and newsprint: $10.4 million
  • Newsroom expense: $9.9 million
  • Advertising expense: $7.3 million
  • Building, General and Administrative (G&A): $27.6 million
  • Total annual expenses: $72.1 million
  • Total annual newspaper revenue: $83.9 million (includes $15.8 million in paid-circulation revenue and $3.9 million in online ad revenue)

Two things jump out from these figures. First, our B-I turned a profit of nearly 10 percent last year. The trend is down, to be sure, but most businesses wouldn't sneeze at that profit margin.


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Comments:

Posted Mon, Dec 3, 9:39 a.m. Inappropriate

Beyond ads: Interesting analysis, and I like the reductionist approach that you're looking solely at the evolution of existing expense and revenue.

However, if you look at the way in which online-only publications and various content sites have evolved, there's a lot more that can be done.

One of the big categories is retail. Newspapers currently wouldn't want to integrate themselves closely with an Amazon or Buy.com or other retailer because this would represent a conflict with Fry's and other traditional advertisers. Even offering a bidding deal where companies vied for the right to be the online retail partner wouldn't clear the air.

For an online-only local publication, however, there will likely be fewer advertisers (as you already note), which means that the likelihood of being a conduit for sales could be much more likely.

Some sites make a significant percentage of their revenue (if not most of it) from referring visitors to sites where they can buy things mentioned in articles or as part of sections. The New York Times does this indirectly by linking to Cnet reviews in its Technology section which, in turn, link to places to purchase the reviewed products which, in turn, leads to the NY Times getting a piece of that transaction. (I'm assuming since News.com has that arrangement for Cnet reviews with other publications.)

The NY Times has fewer conflicts with retailers, typically only seeing limited retailer advertising in their home market, not nationally, and having more power over companies that wouldn't choose another outlet to advertise in.

Posted Mon, Dec 3, 10:11 a.m. Inappropriate

On-Line Revenue: The ad revenue picture is one that isn't really that solid. I am actually quite surprised that no one has stepped up to fill the 'yellow page' niche - the source you go to for a purchase that could be made locally, or nationally.

I guess Google is closest, but I'd not be surprised if a BBB or a Checkbook ends up winning based on the power of local connections. Those partnerships of course include existing media outlets.

One thing for sure, it will change. They have a word for it, Capitalism, and it is a good thing for dealing with change. Republicans who tell you otherwise are, as you might deduce, trash.

-Doug

Posted Mon, Dec 3, 10:44 a.m. Inappropriate

Sunday edition 80% trash by weight: What I really don't understand is the color ad flyers in Sunday Seattle Times. I counted 40 yesterday and was not finished; gave up and recycled. It seems implausible, but do enough people spend their Sundays pawing through these to make them a viable ad tool??

ctb

Posted Mon, Dec 3, 3:16 p.m. Inappropriate

SEATTLE TIMES Problem ?: I try hard to NOT purchase the AdPaper ! That entity should be
forced to PAY people to accept a bundle that is 90 % Ads and little
else. Sundays are the extreme example of this journalistic failure.

The other reason to avoid the rag is the left of center slant and
feeble level of reporting on serious state issues. You will NEVER
see the Times asking the democratic elite of this state the HARD
questions, let alone articles that FULLY explore the continual failures
of state government. The Times 'reporters' simply lack the background
OR education to write content which completely challenge the cleaver
ommissions that state department heads have come to use.

Example: The state department of health and it's failure to budget
one computer to track certain registered providers care or lack thereof.
At the same time, this health department seemed to have plenty of
money to fully fund an IT department that was 'web site' ready with bells
and whistles. Further, the department had on said web site a mission
statement that FULLY contradicted the silly excuse the department head
was offering for above failure. The Times 'reporter' didn't even bother
to do adequate research !

Posted Tue, Dec 4, 9:48 a.m. Inappropriate

Print drives online revenue: It's been estimated that 70+% of online revenue is derived from the upsell of in-paper classified ads. If the print product goes away, what happens to the upsell revenue? Where's the pricing power if you're now competing head on with Craigslist? How do you compete with free?

weston

Posted Fri, Dec 7, 10:22 a.m. Inappropriate

3 fundamental flaws with this article: I see at least 3 fundamental flaws with this article:

First, the writer assumes no software or electronic distribution development costs to distribute the electronic paper to readers (in lieu of the newsprint and print distribution cost savings). The last time I checked an electronic newspaper distribution partner such as Olive Software or even the Kindle, someone had to develop the alternative media to deliver the print paper in a form to assimilate the newspaper. At a minimum, a team of electronic delivery specialists (i.e., database analysts) would need to determine who, how often, at what rate, a subscriber receives electronic distribution of the paper just like an embedded circulation department develops pricing and delivers the print paper to subscribers. And like any ongoing software company or website, electronic distribution doesn't necessarily reduce the number of heads required to keep the software or website up to date with cutting edge features. (Of course, the writer kept the editorial staff in his or her assumptions, but I'm assuming that today's print journalists are not the same folks developing, managing, or building websites on the IT side).

Second, the writer largely overlooks the same fundamental challenge causing the overall reduction in print advertising, namely overall decling readership levels. I don't care which research stat you cite, overall readership levels are declining as seen in declining subscriber and circulation levels across the newspaper industry. It doesn't matter how many times the paper is touched by household members, the overall number of people reading print papers are declining, thereby affecting overall readership levels. In other words, regardless of whether the current print content is delivered via newspaper or Kindle, readership among traditional media is declining (excluding online). That being said, unless devices like the Kindle replace laptops, smart phones, iPhones, etc., these devices are just an electronic substitute for the newspaper .

And finally, third, the writer overlooks the basic fact that with print products, readers have multiple entry points to view ads depending upon their area of interest. In other words, readers can choose to skip particular sections of the paper to go directly to the Sports section, Calendar or Entertainment section, Business section etc. and in each of these sections, multiple advertisers are shown with basically equal opportunity to entice the reader, depending upon what ad size the advertiser buys or which page they place the ad on. In comparsion, with web based or electronic ads, there is initially one entry point, namely the home page or section home page, through which, subscribers navigate to their particular section of interest, wherein other ads can be listed. While the writer alluded to this with the discussion on partnering with one retail advertiser, this could be a huge impact as preprint advertisers will have to take a back seat to the ROP advertisers unless the electronic tool has a separate section entirely devoted to those preprint ads.
dokada

Posted Sat, Dec 8, 8:14 a.m. Inappropriate

E-publishing may be easier initially for weeklies -- or not: This is a very interesting analysis along the lines I've been musing over for our own weekly in Grand Coulee, Wash. The Star for which the numbers and ratios differ greatly. (For example, I find it incredible that a metro daily spends more on advertising than printing.)

Another commenter mentioned the continual slippage in newspaper readership, but this is not at all accurate when you include the increase in their online readership. I don't remember their numbers, but the New York Times online readership has grown mightily and far surpasses their print readership.

Our own newspaper's circulation slipped over the last decade with local economics, then picked up a little in the last couple years as our economy improved; but our online readership now more than doubles the total.
As an independent weekly, we own no iron, no legacy investments in anything that would discourage us from going strictly digital. The Seattle Times, on the other hand, has huge investments tied up in such iron. Unlike the Blethen family, our only tangible links to the past are our hard-bound archives of past issues.

However, there are real restraints on dumping print. Our area, much of which has fiber available to every household, is pretty wired. But even here, clearly half the population is not yet totally at ease using a computer. They still find it much easier to bend over and pick up a newspaper off the front stoop than to turn on a computer and log in.

E-paper could some day solve that impediment, but I suspect it might simply replace our printing and (current) distribution expenses with new ones.
Furthermore, as I understand it, that technology is black and white. That's OK with me, but how would the lack of color affect our current hi-tech readers and advertisers accustomed to the whiz bang of the developing new media? It might be a bit of a let down to realize that this new cool gadget can't play video or even show you a color photograph.

At this point, even though our online readership is growing, I question whether the publication would have the same credibility if it weren't backed by a real (print) counterpart. The Star has been around a long time and has a great reputation and tradition in the community. If we stopped printing it, would The Star Onlinesuddenly become just another new media outlet with little more claim to legitimacy in the mind of the reader than some upstart who decides to start a decent blog for next to no money down?

If The Seattle Times or the NYT, for that matter, stopped printing in favor of an online only model, how much credibility would they lose?
What other hidden transition costs are not being considered as we think about a newspaper future that doesn't rely on dead trees?
scottoh

Posted Sat, Dec 8, 12:50 p.m. Inappropriate

E-papers Vs. Print: A lot of interesting comment here. Certainly nobody has this all figured out yet, but the Inland/INFE averages do provide a starting point for taking the debate on the future of newspapers into a new arena, with some new timelines. A couple of additional thoughts: The key, as some commenters have noted, is to convince print advertisers to move online and take advantage of both the new larger-format, color display technologies being developed by E Ink and others, and the unique digital ability to target their advertising. True, coupons might disappear, along with preprint revenues, but creative advertisers will quickly develop digital substitutes. And while print classifieds are pretty much already lost, an e-paper, offering portability and news, levels the playing field somewhat against digital competitors like Craigslist. I have no idea whether the commenter's 70% upsell estimate is accurate, but in a one-paper town, like most, convincing advertisers to move to an e-paper, with an established staff, coverage and columnists, would seem less daunting with no comparable alternative.
No doubt, as commenter dokada notes, there will be new costs for developing e-papers that will offset some of the savings from eliminating print overhead. But digital technology is easily replicated, offering its own economies of scale. As for readership levels, Harvard's Shorenstein Center noted in its August report on News on the Internet that there is a redistribution of online readership taking place, with "brand name" national news websites like the New York Times and CNN capturing more news-seekers while the growth of most local newspaper websites is flatlining or dropping. What Shorenstein's findings seem to say is that to succeed, local e-papers must find additional incentives for readers and advertisers alike, such as increased and more timely local coverage and interactivity, and the use of new audio and visual storytelling techniques, plus advertising incentives like e-coupons and targeted audiences. Given print-paper economics and limitations, that opportunity may be pretty much gone for traditional newspapers, but it may just be opening up for e-papers.
Bill Richards
richards

Posted Sat, Dec 8, 8:44 p.m. Inappropriate

books and newspapers are different: I'd hate to believe that the fate of e-papers rests on the success of the e-book about to be launched. books and newspapers hold two totally different views in people's minds. People, at least none that I know, keep copies of newspapers on their shelves, seek rare or specific copies of newspapers for rereading or decor, or cherish newspapers that they purchased years ago, at least not the way the do books. Newspapers typically get recycled at the end of the week, used to line litter boxes, serve as moving material...get the picture? As a book lover myself, I wouldn't invest in an e-book because when I decide to buy a book, it's usually for keeps and it goes on my living room shelf. And I can always visit the library if I don't want something so permanent. I could care less what happens to my newspaper at the end of the day. If anything, it's a total pain. It gets my hands dirty, it's awkward to fold, I lose my place sometimes or have to fumble through pages. It's an outdated mode of delivering news and information and it needs a revolution beyond the web. News websites are precious and needed. But I'd get a lot of satisfaction grabbing my e-paper and loading the latest edition, and curling up with that instead. I'd have the satisfaction also of knowing I wasn't contributing to such a dirty industry (have you ever seen a paper mill? They stink and they're huge polluters). E-paper seems like the only logical direction newspapers can head. Let's hope they do it right.

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