Balls to the Paywall

04.26.13

The New York Times Co.’s Quarterly Earnings Report: News Isn’t Cheap

The New York Times Co.’s recent quarterly earnings report illustrates the power of the pay-for-content model of journalism. The survival of newspapers, says Daniel Gross, now hinges on getting people to pay—and pay a lot—for what they read.

The future of good newspapers is expensive. The products that once were a metaphor for the democratization of information— remember the Penny Press?—are evolving into luxury products for high-end consumers. And whether they come in paper or digital form, they will likely be even more expensive in the future.

At least that’s my takeaway from the New York Times Co.’s quarterly earnings report, posted on Thursday. The company eked out a small profit on essentially stagnant revenues.

The gray lady’s results are much watched not just because of the paper’s prominence and quality, but because of the bet the company has made. Over the last few years, management has sold non-core assets—units like About.com (sold to IAC, parent of The Daily Beast), regional newspapers, and its stake in the Boston Red Sox. The idea: to raise cash to support and invest in The New York Times. By putting up a paywall, it has told online readers that they will have to pay.

Faced with competition from the Internet and the erosion of print dollars, the Times has summoned up the courage to charge customers. The paywall experiment, it seems, is actually working. “Circulation revenues rose nearly 7 percent, led by continued strength in our digital subscription initiatives,” noted CEO Mark Thompson, who arrived last year from the BBC. “Paid digital subscriptions across the company totaled approximately 708,000 at quarter end, an increase of more than 45 percent year over year from the end of the first quarter of 2012.”

The Times has also been engaged in another, less publicized effort to boost nonadvertising revenues by jacking up home-delivery charges. I now pay about $600 per year to receive the paper at my house.

The heightened focus on digital and print circulation revenues is changing the business of the paper. Once upon a time, print publications essentially gave away circulation. The goal was to get the magazine or newspaper in as many people’s homes as possible and then turn around and charge advertisers a hefty premium for reaching such a large audience. That strategy was revealed as a loser when print advertising began to plummet, and fall, and then fall again.

The Times has sought to make up for it by focusing on circulation. And in the most recent quarter, the strategy showed some results. For the New York Times Group (the paper), circulation revenue rose 8.2 percent in the current quarter from last year, to $202.5 million. But advertising revenues fell 11.4 percent, to $153.5 million. (Miscellaneous revenues came to $21 million, bringing the paper’s total revenues to $380 million.) So this year, advertising accounted for about 40 percent of revenues, while circulation accounted for about 53 percent. Dial back to the first-quarter earnings report, and you’ll see a slightly different picture.

But for newspapers like the Times, it will have to be the customers. Forget about increasing profits. Mere survival will require getting more people to pay—and to pay more—for reading what you produce.

Revenues for the Times were exactly what they were this quarter, about $380 million. But advertising revenues were $173 million, about 46 percent of the total, while circulation revenues were $185 million, or 49 percent.

This trend should continue in the future. Why? The answer lies embedded in the report. It wasn’t just that print advertising revenues fell by a double-digit rate. That’s to be expected. Rather, across the company’s newspaper operations as a whole, including the Boston Globe, digital advertising revenues actually fell 4 percent in the first quarter from last year, to $46.5 million. The company blamed it on the “ongoing secular trends and an increasingly complex and fragmented digital advertising marketplace.”

There’s an endless supply of content online— mobile, social networks, a gazillion websites. And it’s difficult to keep pricing up and maintain market share. If you’ve got a large base of revenues, it is tough to add to them meaningfully. It’s likely The New York Times produced more pages of digital content in the most recent quarter than ever before and racked up more page views than ever before. But all that work led to less digital advertising revenue than last year.

The upshot is this. If you’re a big company with a global footprint—a huge headquarters building, a big network of bureaus, and lots of production staff—it is going to be very difficult to sustain a news organization based on advertising. For some big websites attached to cable news organizations (think CNN.com or MSNBC.com), the reliable alternative source is the carriage fees that cable operators pay. But for newspapers like the Times, it will have to be the customers. Forget about increasing profits. Mere survival will require getting more people to pay—and to pay more—for reading what you produce.

Indeed, the Times acknowledged this yesterday. As part of its new initiative for growth, the company announced that it is developing wrinkles to its paywall that include a lower-cost version for more casual readers. (Translation: the paper will try to get a lot of the people who aren’t paying anything now to pay something.) And it is working on “an enhanced tier that would offer extras at a higher price point to “all digital access” and print subscribers.” Translation? It will try to get a lot of the people who are already paying a lot to pay even more.