Thursday, July 22, 2010

The Plight of Newspapers and the State of Journalism

The founder of Business Insider, Henry Blodgett, has a great analysis of the problems print newspapers now face, and will face with greater intensity in the years ahead. He also makes some important remarks about the state of journalism in light of the crisis at print newspapers. Here's a snippet:

....the digital business just won't support the same cost structure as the print newspaper business, no matter how successfully a newspaper company "transitions" to it.

To hammer this point home, let's look at the respective revenues generated in 2009 in print and digital by the New York Times (round numbers, our estimates).

The New York Times Media Group (the division of the company that includes the NYT and International Herald Tribune) generated $1.6 billion of revenue in 2009. Of this, $800 million came from ads, $700 million from paper sales, and $100 million from other stuff:


Advertising: $800 million
Circulation: $700 million
Other: $100 million
TOTAL: $1.6 billion

Of that revenue, we estimate that the paper's online division generated about $150 million of revenue, almost entirely from advertising. (The New York Times Company says it generated about 14% of its overall revenue from its online operations last year. Once you strip out, that leaves about $210 million of online revenue. We estimate that the bulk of that comes from the New York Times.)

So, with that estimate in hand, we can compare the respective revenue of the New York Times print business and the New York Times digital business:


Advertising: $650 million
Circulation: $700 million
Other: $100 million
TOTAL: $1.45 billion


Advertising: $150 million
TOTAL: $150 million

Now you can begin to see what the problem is. Even with all the New York Times content available online, plus a dedicated New York Times Digital staff, plus an awesome web site with 18 million unique visitors a month, New York Times Digital is only generating $150 million a year. Meanwhile, the NYT's newsroom alone is said to cost $200 million a year.

Okay, But Won't Paywalls Save Us?

The NYT is about to implement a paywall. Won't that boost online revenue?

Actually, no. NYT management says the paywall is expected to be revenue-neutral: It will increase circulation revenue but decrease advertising revenue.

But let's say the NYT paywall does much better than that. Let's say the NYT gets 1 million people (same number as its print circulation) to pay it $100 a year for the online paper. And let's say it retains the entire $150 million of ad revenue. Then the NYT digital revenue will look like this:


Advertising: $150 million
Subscriptions: $100 million
TOTAL: $250 million

Now, $250 million of revenue will support a perfectly respectable and viable business. In fact it will support a downright huge business relative to most other digital media companies (We would be thrilled to have $250 million of revenue). But $250 million is NOT ENOUGH REVENUE TO SUPPORT THE NEW YORK TIMES'S CURRENT NEWSROOM, which costs an estimated $200 million.

How big a newsroom could $250 million of revenue support? In our opinion, a newsroom that costs about $75-$100 million. Even if the NYT's paywall strategy is wildly successful, therefore, we estimate that the paper will eventually have to cut its newsroom costs by at least one-half and probably two-thirds.

How do we get to that estimate? For now, the NYT is not a non-profit, which means that, eventually, it has to produce a reasonable profit margin--say 20%. There are also plenty of costs in addition to editorial costs that that $250 million of revenue has to support: Sales costs, tech costs, bandwidth costs, design costs, management costs, administrative costs, etc. In fact editorial costs should eventually amount no more than a third of revenue. That's where we get $75-$100 million for the NYT Digital newsroom.

So those are the economics of the digital business.

Even if the New York Times "transitions" successfully to digital, in other words, its news-gathering costs will likely have to shrink by at least half and probably two thirds. Those who support their families based on a salary from the New York Times Company should probably take note of that.

Is There Any Hope?

Now, is there ANY WAY the New York Times and other newspapers can escape that fate?

Read Blodgett's full analysis here, which includes his take on journalism, given the collapse in the newspaper industry,


  1. Remember, NYT is paying a loan at 15% interest to a business guy from Mexico.

  2. In one of my favorite John Wayne movies, the local sheriff is reading JW's character the riot act for attracting trouble makers to his town and trys to sum up his complaints by saying: "to put it in a nutshell..." to which JW responds: "you couldn't put it in a bottomless barrel, your the biggest windbag I've ever come across..."

    Blodgett often reminds me of this great description and his analysis, although not bottomless, is way too wordy. He gets the jist of the problem he just takes too long getting there. The internet has radically reduced the cost structure for delivering information which has opened up a fierce amount of competition which the print newspapers have not responded to.