If the old business model works only for print, what’s the next step for news media companies that must keep revenues coming in? Here are six pillars of the new media value chain from a Columbia University research initiative.
The newspaper industry’s financial health is almost hopeless. Traditional media has survived with water through its nose because it has failed to prioritise investments in digital media.
But there is salvation. Traditional media needs to create new sources of revenue to make up for what they lose in the digital life with advertising and circulation revenues.
I conducted research at Columbia University that remains very current. Called “The Business Model for Digital Journalism,” the report is subtitled with a hopeful phrase: “How newspapers should embrace technology, social, and value-added services.”
In this year of 2015, Johannes Gutenberg’s printing press – one of modernity’s most important achievements – turns 576. Over the span of almost six centuries, a business model has developed and been improved upon to make journalism a powerful, respectable, and profitable industry.
Without a doubt, one of the best examples of this strength is The New York Times, internationally acclaimed for the quality of its journalism.
In 2000, the last year of the 20th century, the newspaper’s parent company earned revenues of US$3.5 billion with operating profit of US$636 million. Net income was US$397 million or 11% of revenue for a very solid margin as compared to other industries, where the average margins of Fortune’s largest 30 publicly traded companies were 8.5%.
These figures derive from the acquired capacity to compose revenue from advertising and newspaper sales that covered the cost of a reporting team of more than 1,000 editors and reporters around the world.
Fourteen years later, in 2014, the same company saw revenue fall to US$1.5 billion with operating profit of US$92 million and a net income of US$33 million for a margin of 2%. If those figures still seem almost reasonable, consider that extending this trend to project revenue (falling) and expenses (even falling with cost cutting), the newspaper’s days are counted.
This problem in some way impacts the traditional media industry as a whole, but especially newspapers. Cost cutting, falling ad revenues, declining readership, and smaller sizes have plagued the business in recent years – since the news emergency brought on by technology and Internet communications.
Major revenue lines for the The New York Times and primarily print ads fell by almost two-thirds in 14 years. Ad revenue fell by 74% while digital media competitors crushed revenues from classified ads. Paid circulation revenue (single sales and subscriptions) did grow during this time: 10%. But the company’s operating income fell 86% — a disaster.
Growth in circulation revenue improved in 2011 as the company was able to reverse the downward trend with digital subscriptions and win back subscribers to its print version. These achievements were the result of The Time’s adoption of a porous, or flexible, paywall whereby readers may become paying subscribers after enjoying a given number of articles. The newspaper now charges users who wish to access more content in an effort to stem the debacle.
However, this solution is still one that operates using the old news industry value chain, merely transposing the old Gutenberg formula and the same business model onto digital media.
The newspaper publishes the same content on its Web site as in its print editions and that content remains peppered with ads (what little there may be), with distribution migrating to digital subscriptions.
Though what follows may be controversial the fact remains that these tactics cannot guarantee the industry’s survival. They will not work for the industry as a whole even as they have breathed new life into The New York Times because they use the old value chain. With its global reach, The New York Times is not a good example for either the old or new value chains.
If the industry wants to re-invent digital media, it must become a digital news outlet using strategies that diverge from the digital version, which is a now bankrupt marriage using the modus operandi of the bygone Gutenberg days.
“It’s very hard for these organisations to duplicate their print revenue models,” says Bill Grueskin, a co-author of one of the most complete studies on digital journalism, “The Story So Far: What we know About the business of digital Journalism,” published on May 10, 2011 on the Columbia Journalism Review Web site.
Look at the example of another giant, The Wall Street Journal, with average circulation of 2.4 million copies on weekdays. Internal data shows 56 million visitors to its Web site in August of 2013.
“Never in the history of the press have so many people consumed so much of what we do as today,” says Raju Narisetti, senior vice president of strategy for News Corp, the parent company of The Wall Street Journal. “For me, the problem isn’t that people don’t want our content. The problem is that it has been very hard for us to make money with it,” he adds to me in a interview for my report in 2013.
The conclusion that newspapers cannot make money even with the enormity of digital readers is dramatic.
To earn profits in digital media, the industry must reinvent itself. The solution begins by understanding the new value chain. Newspapers must re-envision the way they relate with people and respect the news ways they consume information and related services.
The old formula no longer works. It is valid only for print media. It cannot work for digital products.
My report presents a possible strategy for news organisations to shape a profitable business model in the digital age. Observation of disruptions in this industry suggests a business model in which news companies are able to produce quality journalism with independence and keep a critical eye on powerful institutions.
With some examples and market data, my research suggests the formulation of a strategic business model, detailing how it is possible to run advertising in this new scenario — which is dominated by giants, with the remainder dispersed among many small companies, lacking a large advertising network comprising quality publications.
Paywalls are part of the solution. But there is a third fundamental element in the strategy: the production of value-added services – a term borrowed from the tele-communications industry – in a movement that transforms the traditional information enterprise into a service company.
Over the last two decades, it has become clear to news companies that the golden days of the industrial era are over. They can still make some money with the classic news operation at the expense of cost cuts added to transferring the classic model to digital operation. On the other hand, revenues decline and margins — and profits — narrow.
News media companies are condemned to move ahead in the digital environment if they want to survive. To produce quality journalism and perpetuate their role as independent, critical moderators among increasingly diffuse centers of power, they must come to terms with a new business model and another value chain.
To make matters worse, they must do so in the midst of disruption.
From a strategic point of view, the fundamentals of this new value chain rely on six pillars:
- Don’t be afraid to re-invent the company, start from scratch, and seek the collaboration of young people (the digital natives).
- Understand that the journalism industry in the industrial era was a distribution business and that the new reality calls for a service whose management of the digital relationship with consumers becomes strategic.
- Invest in technology.
- Produce information in the spirit of minds that were born digital (not analog), aiming to capture younger audiences.
- Attune the news company to the reality of information sharing and superdistribution, creating scale on the network.
- Expand the traditional service portfolio, offering new products and services.
News media companies must do all this without fear of making mistakes. Because mistakes are part of the business.
The plausible business model for digital news companies combines revenues from three separate operations:
- Advertising, in its various forms, but based on a broad network that gives it scale and the ability to generate CPTs for premium content.
- Sales and/or subscription of digital content.
- Value-added services, including commissions from the sale of third-party products and services.
However, this model will only be successful if revenues serve a content platform suitable for the new environment, with a vocation for sharing and created for providing services.
My research aims to diagnose the mistake of transposing the old media business to the new digital format, proposing a new business model for the new environment. A structured business plan within this new reality must take into account the feasibility of technological investments (or how to use a partner’s technology) and the team necessary to run the newsroom and the network of services chosen to compose the company’s portfolio.
There is no escape for those who bet only on one source of revenue, such as advertising, unless the scale guarantees an inventory capable of generating revenue not only from major advertisers but also mid-sized and small advertisers, considering the model that helps sustain the world’s most successful digital ventures.
Likewise, there is no way out for those who think their own advertising revenue, without the help of a network, plus revenue from subscribers via paywalls can be a general solution. Yes, it can work for some companies with global impact. Surely it will not work for all.
There is also no way out for a model oblivious to the new way of acquiring knowledge, strongly digitally oriented, oblivious to the needs of younger generations — those born digital and oblivious to the spirit of our times.
The full report can be found here.
Caio Túlio Costa is journalist, expert in digital media. He holds a PhD from Universidade de São Paulo and is aProfessor at ESPM-SP (Superior School of Marketing and Advertising, São Paulo).
He was a Visiting Research Fellow at Columbia University Graduate School of Journalism in New York during fall 2013, and can be reached at: email@example.com. He tweets as @