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August 05 2010

14:00

The Newsonomics of the fading 80/20 rule

[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.]

Jim Moroney thinks he may be on to a new formula. It’s not as great — not nearly as profitable — as that old newspaper formula, but it’s one that may sustain his company into the future.

“The Dallas Morning News now gets 38 percent of its revenue from circulation, 54 percent from advertising, and 8 percent from contract printing plus,” the Morning News’ publisher tells me.

Those numbers are a far cry from the way it used to be for newspaper companies. They long used one of the many 80/20 rules out there: 80 percent of their revenue came from advertising, and 20% came from circulation.

Now, as ad revenue has been on a precipitous decline — down from almost $50 billion in 2000 to $24 billion in 2009, and still sliding a bit more — that old formula is out the window.

While the digital news world seems consumed with conversations about paywalls and memberships, it is old-fashioned print circulation revenue that is the gainer in the post-80/20 formulas. Sure, advertising’s ski slope decline has greatly altered the 80/20. So has, though, the significant up-pricing of both subscriptions and single copies over the past three years.

At the Morning News, Moroney — aided by research from consumer products company The Modellers — took monthly subscriptions from $18 to $30, in one fell swoop. Many other publishers have upped prices, though most have done it more gradually. Pick up a slim copy anywhere in your travels, and you see it now costs 75 cents or a buck; it used to be the “25-cent or 35-cent?” discussion that consumed executive committees.

The impact of the pricing moves is still uncertain. Short-term, they seemed to work. Though circulation continued to decline, circulation revenue was mildly up. The central notion: Get those with the newspaper habit to pay more of the freight, figuring that few would drop the newspaper because it cost two Grande Mochas more.

As we look at last quarter’s financial reports, we have to wonder how the up-pricing of circulation will work. As many companies showed a decline in circulation revenue in the second quarter as showed an increase.

A few of the numbers:

  • McClatchy: down 2.5%
  • Lee: down 4.4%
  • Gatehouse: down 2.5%

Moroney’s own company, A.H. Belo, of which he is an executive vice-president, reported a 6.6-percent increase. Additionally, The New York Times Company reported a 3.2-percent increase and Scripps a 4.5-percent increase (from 1st quarter data; 2nd not out until Aug. 9). Significantly, I think, each of those companies may have done a better job of minimizing newsroom cuts and reinvesting — at least a little — in that now higher-priced product.

While the jury is out on the stickiness of price increases, it’s clear the old 80/20 rule is gone.

Broadly, in research I conduct annually for Outsell, we track the global moves in ad, circulation and digital revenue. In 2009, circulation revenue was up more than a point over 2008 to 41 percent. Significantly, Japanese publishers continue to get a majority of their revenue from circulation, while much of Europe and UK see their percentages in 35-45 percent range.

ln the U.S., let’s just pull some data from the second-quarter reports. They show:

  • New York Times: Circ: 40%, Ads: 53%, Other: 7%
  • Scripps: Circ: 28%; Ads: 67%; Other: 5%
  • Gatehouse: Circ: 27% , Ads: 71%, Other 2%
  • Lee: Circ: 24%, Ads: 70%, Other: 6%
  • McClatchy: Circ: 20%; Ads: 76%, Other: 4%

Several factors will continue to push and pull the new ad/circ breakdown.

For one thing, we’re moving into an era of “reader revenue,” one that will roll up print subscriptions, single print copies, digital pay per view, digital subscriptions, all-access (across platform) subscriptions, memberships and more. For a next generation of reader revenue, tablet access is the big prize in the sights of publishers; witness, for instance, the likelihood of a News Corp. “iPad division.” Further, advertising will continue morph greatly, as digital marketing replaces some of that spend, enlarging and changing definitions.

Finally, don’t forget “other.” For A.H. Belo, it’s 8 percent now, but growing at at 35-percent clip. As news companies find “other” ways to make “other” revenue, we’ll see new formulas begin to make sense.

May 27 2010

14:00

The Newsonomics of wilting flowers

[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.]

Ah, the Dream of the Wilting Flowers. Like many web dreams, premature, premature, premature…and then, maybe soon, pop. A sensation, with lots of dollars involved. Our best current example: Steve Jobs’ “invention” of the iPad, which of course was dreamed up in quite similar forms, decades before, in the fancies of Alan Kay and Roger Fidler, among others.

It’s all timing, right?

So it’s a good time to get a sense of what’s happening in local mobile commerce among news companies.

A friend visiting the exhibition hall at the NAA Orlando convention in April told me he’d been besieged by mobile commerce vendors. Then there’s the group (mobile commerce) grope, symbolized by the Groupon craze. Get a whopping good deal — but only if you can get enough of the crowd to go along with it as well. Of course, iAds are on the horizon, with Apple offering a sweet-smelling twist on walled-garden marketing pitches. Google’s AdMob — the leading mobile ad network — just got the thumbs-up from the FTC and has launched AdWhirl, its open-source (take that, Apple) “mediation layer” to facilitate mobile commerce. You can’t stay on top of all the mobile-marketing plays these days, no matter how much you try.

Let’s look at newspaper companies and what they’re doing with mobile commerce. Talk about timing: When Dan Finnigan ran Knight Ridder Digital a decade ago, one of his favorite mantras was the Dream of the Wilting Flowers. As in: It’s 4:30. You’re driving down the street. Your phone knows where you are, of course, and coming up, on the right is a florist…with a perishable commodity, flowers that will be worthless within 24 hours. Your “smart” phone, knowing where you are, who you are, your flower-buying habits, and maybe your spending proclivities, sends you the florist’s coupon for half-off, if you stop by within the half-hour. Satisfied merchant, satisfied customer, a perfecting of supply and demand.

It’s still a great vision, with a new generation chasing it, and getting closer. Talk to newspaper companies, though, and you’ll hear the answer is “we’re not yet there.” Closer, but not quite there.

Bill Ganon sees that wilting-flower dream, but he’s drilling down into something more basic: mobile sales training and the establishment of mobile pricing standards and analytics. Then, maybe by the end of the year, he says, the location-aware capabilities of smartphones may start to smell the daisies.

Ganon is the general manager for local market development for Verve Wireless, and Verve is the newspaper industry’s biggest mobile play. Spurred first by AP investment and partnership in summer 2008, many newspaper companies have turned to Verve for mobile content and, now, ad solutions. Verve now powers more than 400 mobile news sites for newspaper and broadcast companies including MediaNews, Hearst, Belo, McClatchy, Freedom, and Lee.

Verve is making a new ad push, after seeing its first forays fall flat locally. That push is predicated on scale. Its network — the Blackberry has just been added to the iPhone, with Android and iPad applications on the way, says Ganon — has grown dramatically. Year over year, for April, it has grown to 8.9 million uniques (from 2.9) and 130 million page views (from 51 million).

When Ganon — a veteran of old media sales at Newsweek and Sunset, as well as eight years with Qualcomm — took over local sales eight months ago, he found a ragtag group of local mobile efforts. Now, as Ganon describes his work, we can see the emerging newsonomics of local mobile pricing. As the mobile commerce world explodes, Ganon is focusing on the basics. He says Verve can now count 75 local sites beginning to make consistent sales, up from around 20 when he came on board. The basics of the push:

  • Training: Verve’s local market sales team of four is spending lots of time training newspaper and broadcast sales staffs on how to sell mobile. That’s reminiscent of the ongoing training done by Lem Lloyd’s merry band through the Yahoo-powered Newspaper Consortium. (In fact, with all the Yahoo, Verve, and marketing-services training ongoing, I’d wager that newspaper sales people have gotten more training in the last two years than in the previous two decades.) Verve’s training focuses on taking the mystique out of mobile: “Advertisers don’t like stealth solutions. They like to know what’s behind the curtain,” says Ganon.
  • Pricing: Ganon urges a $15 CPM (cost per thousand) floor for selling mobile. With that guideline, he says Verve-powered sites are averaging $19 CPMs, which would be about twice the average of what news sites on getting on the desktop web. Says Ganon: “This is your time to define metrics.” In other words, try to establish a price, not allowing prices to fall to low single digits as inventory is sold by middlemen, as has happened in the main digital business. Right now, most newspaper companies can count no more than five percent of their digital revenue, coming from mobile. Most of that total — maybe $100 million — is going to bigger, national brands like The Wall Street Journal and The New York Times. That’s out of maybe $500 million involved in mobile advertising overall in the U.S.
  • The Pizza Sale: Salespeople are being trained to sell the crust (a banner ad), the sauce (a landing page, tailored to action off the ad), and the toppings (call-to-actions, whether “click to call” or map directions). Pricing is still impression-based, though, Verve sees cost-per-click and cost-per-acquisition offers down the road.

What’s apparent is how early we are in local mobile selling — and how far away it is today from adding appreciably to news site revenues. The deals are small, and even the best-performing sites can count no more than 20 advertisers, with most having far fewer on their sites at any one time.

And the Dream of the Wilting Flowers? Ganon says Verve should be able to add in location-aware selling, maybe by the end of the year, but he believes that it “will be a major breakthrough.” So, 2011, maybe. When that breakthrough comes, the big question is who will benefit most: the local newspaper and broadcast companies, or Apple, or Google, or Yahoo, or maybe Verizon or AT&T?

Ask Walter Sanchez, publisher of BQE Media in Brooklyn and Queens and a Verve client, and he’ll tell you it’s an uphill climb. I met Walter at a recent New York Press Association conference, and his marketing efforts were way ahead of the curve, among publishers. He’s busy selling social sites, SEO, SEM, and mobile sites, he’s proud of getting such small businesses as Beach Bum Tanning sold on mobile ($500 a year for a landing page and 3,000 short-text messages). But he’ll tell you that most local merchants are indeed still mystified by the web, and they’re slow adopters: “When those 21-, 22- and 23-year-olds start buying their own businesses, in a few years, then, we’ll see real adoption.”

February 25 2010

17:00

The Newsonomics of profit: Google’s and newspapers’

[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.]

Last Friday, Google finalized a modest acquisition. It bought On2, a video compression company for $124.6 million. A few days earlier, it bought reMail, a company put together by Google alums that has perfected a better email app for the iPhone, price undisclosed.

In the few months before that, it bought social search startup Aardvark, display ad tech company Teracent, collaborative real-time editor AppJet, VoIP provider Gizmo — and, most significantly, mobile ad network, AdMob, the latter for $750 million, in November.

Basically, Google’s been buying up companies at at least the rate of monthly, as CEO Eric Schmidt had bluntly forecast last September.

Of course, Google can buy lots of companies. That buying power is a rare commodity these days, especially if you compare it to what newspaper companies can do.

Google’s buying profit derives from its out-sized profits. Those profits reached almost $2 billion in the fourth quarter of 2009 alone, and totaled $6.5 billion for the year — and that the year of the Great Recession. Yes, Google hit the pause button as the country and the world tottered on the economic brink, but ticked the play button quickly as soon as it was clear the worst was over.

Google’s acquisitions in the last six months total something more than $1 billion.

Now let’s compare Google’s profit to that of newspaper companies.

Gannett — the largest news company in the US and second worldwide after News Corp — reported total revenue of $1.5 billion in the fourth quarter, and profits of only $133.6 million in the same quarter. Of course, the fourth quarter was Gannett’s best. For 2009 overall, profits totaled $441.6 million, after special items were taken out. That’s less than a half billion dollars in profits, or about 7% of what Google earned. And that’s the biggest U.S. news company.

The New York Times eked out a yearly profit of $19 million. McClatchy, a gain of $54 million. Media General, a loss of $35 million.

Positive or negative, those are all small numbers. They all point to the same reality: newspaper companies’ place in the business world is greatly reduced. They simply don’t have the wherewithal to acquire businesses that will be the building blocks of tomorrow’s growth. Their low profit numbers are proxies for their reduced horizons, their reduced reporting impact and their reduced institutional and community clout, as well, though those are issues for another day.

For Google, its profit has allowed it to lay the groundwork for growth. Its financial performance is hugely impressive today, but almost all of its revenue has been based on desktop/laptop paid search. As many have said, it’s a one-trick pony, but with the best trick found in the 21st century digital business. It knows that business is maturing, so we can see the theme in its company-a-month buying spree: mobile, social, video. That combo, what I call the new trifecta for this digital decade, anticipates where digital use — and ad spending — is going. Google is not only providing us pictures of our urban topography through StreetView, it is laying new roads for its own highly profitable future.

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