7/11/12

Digital journalism reaches sustainability, but transitional business problems interfere

The income streams of digital news providers continue to grow and many have now reached the point of sustainability. Fundamental financial and business problems, however, are keeping publishers from moving out of print and becoming digital-only operators.

This leads many publishers and journalists to continue bemoaning the fact that digital media do not provide as much income as print and many still argue that organized, regular newsgathering and distribution cannot survive in a digital-only environment. They point to the fact that digital advertising produces only about 15 percent the income of print advertising—largely because it does not appeal to retail, display advertisers--and that paid circulation for digital products is growing slowly.

Their analysis is flawed, however, because publishers do not require as much revenue online as offline because the costs of digital operation are so different.

Editorial operations account for only about 10-15 percent of total costs of operation of print newspapers, but they are the primary cost for digital operations. About half of the costs of print are taking up by printing and expenses for getting papers to readers; when the costs of paying for and maintaining buildings and land used to house presses and circulation equipment are factored in, those costs rise to about 60 percent of total costs. Expenses to maintain the large advertising operations found in print newspapers add another 10 percent to overall costs and the managerial costs due to the large number of personnel and functions in non-editorial activities add about another 5 percent. Thus, switching to digital operations can take out at least three-quarters of the costs of print newspaper operation, making the lower revenue of digital operation sustainable.

A growing number of newspaper companies are already generating 15-20 percent of their total revenue from digital operations, making nearly enough money to sustain the kinds of journalism practiced by legacy news media. So why does negativity about the future of journalism remain so high and why are newspapers not yet moving to digital-only operation?

There are three primary reasons:
  1. Print newspapers still continue producing above average returns compared to all industries. No publisher is willing to throw away those operating profits even if the costs of print operation are higher than digital.
  2. Retail advertisers get more return on investment from newspaper advertising than any other form of advertising, including digital. As long as they remain willing to advertise in newspapers, no publisher is willing to give up the revenue stream and operating profits that they now provide.
  3. Owners of print newspapers have a great deal of capital tied up in facilities, printing and distribution equipment that cannot be withdrawn because few buyers want to acquire the used equipment today.
The fundamental challenge today isn’t that digital journalism has not reached sustainability; its how does a publisher transition from the print to digital-only operation in a way that is financially feasible and desirable.

The transition is critical for society because it will bring with it the reportorial strength and organization that exists in newspapers. That is something that digital startups do not provide because they generally lack the capital to build and sustain staffs as large as those of print newspapers and because they lack the reputations and brand identity of established papers.

Newspaper owners, publishers, and journalists then need to stop decrying the digital revenue problem and start focusing on solutions to the business challenges of when and how to realistically reduce and end the print operations. It will happen at some point in the future; the problem is how to plan and manage the switchover.

4 comments:

Christoph said...

Nice read. I wonder though if the buiness should actually make a transition.

From my experience, consumers like their news however they want it. For some it's print, for some it's one form of online, for others it might be text messages.

I think all these delivery methods have a place. Though how they are being utilized could probably change.

Amy said...

This is a thoughtful post, but I'd like to see you break out the digital costs in more detail. In my experience, the editorial team does not handle the development, maintenance or support of digital products. The costs for this important part of the business aren't as high as the editorial payroll, but I believe they could add up to more than the 5% non-editorial figure listed for print. Do you have any data for this?

Robert G. Picard said...

There certainly are IT costs involved in digital media, whether a web site or tablet/mobile based service. Their share of overall digital costs varies depending upon the size of the editorial operation and the extent to which editorial staff are able to handle some of the functions. In some small startup, I have these costs equating to 15-25 percent of total costs, but with scale they go down. For most newspaper scale operations they tend to around 5-10 percent if full accounting is use.

3B said...

Nice Blog, The income streams of digital news providers continue to grow and many have now reached the point of sustainability. Fundamental financial and business problems, however, are keeping publishers from moving out of print and becoming digital-only. Just be yourself. Good advice for people, but maybe good advice for news organizations too? Many times consumers like their news however they want it. For some it's print, for some it's one form of online. Sometime the editorial team does not handle the development, maintenance or support of digital products. Market Research