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January 20 2011

18:30

The Newsonomics of Mr. Murdoch’s Daily

[Each week, our friend Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of the news business for the Lab.]

Let’s pause for a moment and reflect.

It’s a daily newspaper being taken to the web. And: It’s the sensation of the moment. After 15 years of decrying the re-purposing of print newspapers for “online,” we’re making quite a fuss about a product — Rupert Murdoch’s digital outlet, The Daily — that is proudly leveraging the newspaper metaphor, creating a mostly (we think) daily edition, with some updating.

At first blush, it seems like a 2001 idea, dressed in new 2011 clothes. But maybe it’s the clothes that make all the difference, and that make Mr. Murdoch The Man. The new outfit, after all, is the iPad, the hot device of our time — the one that seems to be playing havoc with what we thought we knew about digital news reading (“The Newsonomics of tablets replacing newspapers“).

It is impossible, of course, to make much sense of The Daily until we can actually read it. With iPad products, we’re often into that crazy first blush associated with any new digital device, confusing the device itself with the product.

We think The Daily will now launch in the next couple of weeks, as Apple finalizes its work around subscription offerings. Maybe Rupert won’t get his two-shot with Steve Jobs, given Jobs’ new leave of absence, but we know The Daily will greatly benefit from the great shelf placement Apple is bound to give it as it opens its subscription store. (And News Corp., of course, has plenty of its own owned properties to help in marketing, as well.)

So what might The Daily be?

It could be the USA Today of 2011, 30 years after that newspaper started its own category of national papers identified by nuggetized journalism and color-coded, easy-to-grasp presentation. As the first digital news native in the tablet space, The Daily certainly offers that possibility. Or it could be just New York Times lite, with its timing, by coincidence or purpose, blunting the Times’ own efforts to charge for digital content more generally and for the iPad specifically. Or it could be a next generation of “The National,” a white-hot star of a national sports daily, crammed with talent, that burned out within a year and a half in 1991. And it could read like either a newspaper or a magapaper, given its hiring of some magazine hands.

If you are the Huffington Post or the Daily Beast or Slate, you’ve got to be asking the question of why The Daily could charge and why it couldn’t. Is the value in its web (desktop/laptop access) lineage — or is portability just how we, readers and publishers, think about information now? As seems increasingly true, the tablet in general is upending lots of ways we think about digital news.

So let’s take a quick look at the Newsonomics of The Daily, tempered by our partial knowledge of it.

Budget

We’ve heard the $30 million number, which covers two-plus years of operation. (That’s close to the $31.5 million that Murdoch sunk into Alesia, as Jeff Bercovici has noted.)

The $30 million would be a big investment for many newspaper companies these days, but not for News Corp. Consider, just as an example, the $33 billion (in revenues) the company takes in through its 20th Century Fox division. Marmaduke, “a dog of a movie,” came in fourteenth on the company’s 2010 grossing list, at $33 million, behind Unstoppable, Knight and Day, and Vampires Suck. And Avatar (“The Avatar Advantage: Big and Bigger Media“), the top grosser, took in $408 million.

So the $30 million for The Daily is pocket change, at worst another big R&D project.

Costs

We’re hearing that about 150 staffers are assigned to the project, about 100 — or two-thirds of them — journalists. Let’s take $90,000 as an average FTE cost, a valid estimate given the New York (with L.A. as a bureau) siting of the product. That’s $13.5 million in annual staff costs. We don’t yet know how much News Corp. is leveraging its well-developed and ample advertising sales staff, its technologists, or its marketing people — or how the costs of “borrowed” News Corp. or Dow Jones resources are being allocated internally (echoes once again of USA Today). News Corp. could be devoting significant marketing dollars here, as well, to better leverage its Apple relationship and its first-in-format launch.

Figure a first-year run rate between $15 and $20 million, and maybe a tad less for a second year, and you’ve got $30 million.

Subscription revenue

On revenues, as well, the hypotheticals are intriguing. The Daily is a U.S.-centered, iPad-based product; its only web presence will be promotional. We think that Apple sold over 10 million iPads last year, mostly in the U.S., and — though numbers vary widely — forecasters estimate another 50 million in iPad sales between 2011 and 2012, and 70 million tablets overall (again in the U.S.). So let’s say, roundly, that by the end of 2012, there are around 80 million tablets extant in the U.S. Getting just 1 percent of their users to subscribe to The Daily (and, yes, some households will have multiple tablets, but let’s let that go for the moment) would mean 800,000 subscribers. And a quarter of those would be 200,000 subscribers.

Let’s say The Daily could get to 200,000 at $52 a year. (It’s priced at 99 cents a week, out of the chute.) That’s $10.4 million in subscription revenue. Apple, which presumably will be doing all the e-commerce for this tablet-only product, would take 30 percent of that, leaving $7 million in net annual returns.

There are a couple of early caveats here. First, The Daily, an old-fashioned news idea, will likely have to use old-fashioned selling approaches: lots of free sampling and discounts. (That’s one of the many issues Apple must work out as it decides what it means to be a subscription-offering company.) So the 200,000-multiplied-by-$52 math won’t be a straight line. (And, of course, if it’s successful, News Corp. can raise rates.)

Second, let’s fast-forward six months from The Daily’s launch. It is now challenged by a number of paid digital news products: those of the Times, the Journal, magazines, and regional newspapers. Those products, all with non-tablet roots, have lots of ways to promote both themselves and their digital/iPad subscriptions. The Daily, with no web presence — and so, presumably, little search engine optimization — may be at a significant disadvantage from that perspective. On the other hand, it can use News Corp. promotional assets (but those do have real costs) or continue to invest in marketing to keep awareness high. Of course, if The Daily is a great product and its social axis (Facebook, Twitter, Linked In) works, social search could offer a great deal of help there and cheaply.

Ad revenue

Early tablet revenue was off the charts, an effective cost-per-thousand rate of 10X website sales. Much of that early shine is wearing off, say some tablet news publishers, with some placements tossed into a print/online bundle in 2011. Does that mean that tablet rates will swoon to low website ones? Not necessarily, but we don’t yet have enough data to know. Sponsorship (given high brand value and lower traffic) will inevitably be joined by a full array of video pre- and mid-rolls, behavioral targeting and re-targeting, and still-ascendant pay-for-performance — all the modern tricks of the trade.

So if the cost run-rate is about $15 to $18 million a year, and subscription revenues net at $7 million, News Corp. would need $8 to $11 million a year in ad revenues to break even. Certainly possible, if that 200,000 number is hit and sustained, but that could be a tough proposition as tablet newbies sample widely and are confronted by a world of paid choices.

Bottom line: Yes, The Daily can work. But for Murdoch, whose moxie even the biggest detractor from Fox News can admire, The Daily represents another test, another foray. His success has been mixed. Alesia, his news portal, didn’t work, so he abandoned it. MySpace is being sold off, at a low point in its trajectory, while the Dow Jones/Wall Street Journal buy may indeed find significant new business success in the tablet age. And now there’s The Daily. It’s a grand lab for Murdoch. And the rest of us.

August 26 2010

16:00

The Newsonomics of news orgs surrounded by non-news

[Each week, our friend Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of the news business for the Lab.]

The Washington Post Company has been much in the news recently, but not because of its flagship paper. It’s making news around its other holdings. It has shed Newsweek, staunching a $30 million annual bleed. More importantly to the company’s finances, its Kaplan “subsidiary” has been much in the spotlight, under investigation by the feds, along with other for-profit educators, for fraud around student loans.  Those inquiries have rocked The Washington Post Co.’s share price, sending it to a year-to-date low.

The Post’s case has also refocused public attention on how much the company is dependent on Kaplan revenues. Those revenues now amount to 62 percent of revenues, and 67 percent of profits. It became clear to even those who hadn’t been watching closely that the Post was more an education company than a newspaper one, though the family ownership of the Grahams clearly intend to use that positioning to protect and sustain the flagship paper.

The Post case is not an isolated one. Fewer news companies are, well, “news” companies in the way we used to think of them. More news operations find themselves within larger enterprises these days, and I believe that will be a continuing trend. It could be good for journalism — buffering news operations in times of changing business models — or it could be bad for journalism, as companies whose values don’t include the “without fear or favor” gene increasingly house journalists. That push and pull will play out dramatically over the next five years.

Let’s look, though, at the changing newsonomics of the companies that own large news enterprises.

Here’s a chart of selected companies, showing what approximate (revenue definitions vary significantly company to company) percentage of their overall annual revenues are derived from news:

News Corp.: 19 percent (newspapers and information services); 31 percent (newspapers and broadcast)
Gannett: 94.3 percent (newspapers and broadcast)
New York Times: 93 percent (newspapers and broadcast)
Washington Post: 21 percent (newspapers and broadcast)
Thomson Reuters: 2.3 percent (Media segment)
Bloomberg: <15 percent (non-terminal media businesses)
AP: 100 percent (newspapers and broadcast)
McClatchy: 100 percent (newspapers and broadcast)
Disney (ABC News): <14 percent (broadcast)
Guardian Media Group: 46 percent (newspapers)

The non-news revenues may be a surprise, but here’s one further fact to ponder: News, over the past several years, has continued to decline in its percentage contribution to most diversified companies. Given all the trends we know, it will continue to do so. Movies, cable, satellite, and even broadcasting all have challenges, structural and cyclical, but overall are all doing better than print and text revenues.

News Corp., the largest company by news revenue in the world with publications on three continents, is a great example. After all, although it is eponymously named, it is not really a “news company.” With only one in five of its overall dollars coming directly from traditional news, it’s much more dependent on the success of the latest Ben Stiller comedy or the fortunes of a blockbuster than on the digital advertising growth of The Wall Street Journal or the paid-content successes — or failures — of The Times of London. These matter, of course, but let’s consider the context.

In February, I wrote about the “Avatar Advantage” that News Corp.’s Wall Street Journal held in its increasingly head-to-head battle with The New York Times. At that point, Avatar had brought in $2 billion in gross receipts for News Corp., whose 20th Century Fox produced and distributed the movie. Now that number has grown by $750 million, to $2.75 billion in total. News Corp. shares that revenue with lots of hands, but what it keeps will make an impressive difference to its bottom line — and to what it can pour into The Wall Street Journal, as CEO Rupert Murdoch desires.

Compare that financial flexibility with the Times, and it’s night and day. The Times Co.’s total 2009 revenues: $2.4 billion, less than Avatar itself has produced. The Times is all but a newspaper pure play, deriving about 5.5 percent of its revenue from non-news Internet businesses, like About.com, after shedding TV and radio stations and its share of the Boston Red Sox.

It may be a one-of-a-kind pure play, in that it is the leading standalone news site and reaches vast audiences globally. Yet its pure-play nature can feel like a noose, which was tightening in the depth of the recession and only feels a lot looser now. The Times’ planned paid-content metering system, for instance, is a nervous-making strategy for a company with relatively little margin of error. Compare that to the revenue trajectories that News Corp.’s London papers may see after their paywalls have been in place for a year. Whatever the results, they’ll have de minimis impact to News Corp. fortunes.

Likewise, McClatchy — another newspaper pure play, like MediaNews, A.H. Belo, Lee, and a few others — is now betting wholly on newspapers and their torturous transition to digital.

While Gannett is heavily dependent on print newspapers, in the U.S. and UK, it has been benefited by the 13 percent of its revenues that come from broadcast. Broadcast revenues — buoyed by Olympics and election-year advertising — were up 18.6 percent for the first half of 2010, while newspapers were down 6.5 percent for Gannett. Broadcast may be a largely mature medium, too, but for the print news companies that haven’t jettisoned properties gained in an earlier foray into broadcast diversification, it has provided some balm. In addition to Gannett, MediaGeneral and Scripps are among those holding on to broadcast properties.

For the bigger companies, the consequences are more nuanced. I call these large, now globally oriented (in news coverage, in audience reach and, coming, in advertising sales) The Digital Dozen, twelve-plus companies that are trying to harness the real scale value of digital distribution.

The Digital Dozen’s Thomson Reuters is a great example. Until 2007, Reuters was a standalone, a 160-year-old news service struggling with its own business models in this changing world. Then, with its merger with financial services giant Thomson, it now contributes less than a tenth of TR’s annual revenue. That kind of insulation can be a good thing, both as it figures out how to synergize the Reuters and Thomson business lines (a complex work-in-progress) and to allow investment in Reuters products and staffing, even as news revenues find tough sledding. Meanwhile, its main competitor, AP, may have a strong commercial business (broadcast and print) worldwide — but it’s a news business, with no other revenue lines to provide breathing room.

National broadcast news, too, has seen rapid change, and much staff reduction in the past few years. GE, one behemoth of a diversified company, is turning over the NBC News operation to another giant, Comcast. ABC News is found within the major entertainment conglomerate Disney.

Meanwhile, Bloomberg — getting more than eight out of 10 of its dollars via the terminal rental business — is moving aggressively to build a greater news brand; witness the Business Week acquisition, and its push into government news coverage, formally announcing the hiring of 100 journalists for its Bloomberg Government new business unit. Non-news revenue — largely meaning non-advertising dependence — is what may increasingly separate “news” companies going forward. So we see the Guardian Media Group selling off its regional newspapers to focus, as its annual report proudly announces, on “a strong portfolio [of non-news companies and investments] to support our journalism.]

Journalism must be fed — but inky hands will be doing less and less of the feeding.

Image by John Cooper used under a Creative Commons license.

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