Virtual editions and news-payment models

One thing that’s become apparent about the imploding newspaper business model is that the decoupling of advertising and journalism lies behind it.

The most intelligent and articulate examination of this was New York University professor Clay Shirky’s talk at Harvard University’s Nieman Journalism Lab a few months ago. In it, Shirky describes how advertising-supported journalism in the public interest is a historical anomaly, which existed for about half the 20th century simply because newspapers were literally the only way for advertisers to reach audiences for certain purposes. The rich stream of revenue supported all kinds of effective public-service journalism, a revenue stream that is now shrinking dramatically. This is because as soon as the interactive nature of the Internet made it possible to bypass newspapers, advertisers did so. As Shirky colorfully but accurately puts it, Best Buy never signed up to help pay for the Baghdad bureau in the first place.

So increasingly the question becomes: how can the industry get audiences to pay for the journalism, rendering the advertising support less crucial. Usually this is called erecting a “pay wall.” The conventional wisdom has become that pay walls just won’t work because simple economics states that the ability to charge a price for something is related to scarcity of the good, and there is no scarcity of journalistic information out there.

But something that I recently saw got me thinking about all of this, and led to some ideas for how getting people to pay for the journalism might work in a typical metro market – exactly the markets being hit worst by the collapse of newspaper business models.

This came about as I was looking at a virtual edition of my hometown newspaper and [disclosure] former employer, the Rochester N.Y. Democrat and Chronicle. The D&C, a Gannett property, doesn’t make this virtual edition widely available. Curious about it, I asked a former colleague, who told me that it’s used for some special purposes such as the NIE program. But when a huge snowstorm hit Rochester a week ago, making it difficult to deliver printed papers in a timely manner, they disabled the login wall and let anyone who was interested take a peek. I really liked what I saw, which led to the thinking described in this post. (This is what the login page looks like; it's the best I can do as far as offering a look at the product.)

On the screen, this virtual edition looks exactly like the printed paper in one part of the screen; clicking on an element such as an article or photo puts it into an adjacent space in expanded form for easier reading. I don’t think there is anything unique about this; I believe products such as Times Reader from The New York Times work similarly.

Now, I’m an old-time newspaper guy. I’m still a seven-day print subscriber to the Democrat and Chronicle. But as I sat there looking at the virtual edition, what came to mind was how close it was to reading the paper in print. It had the same typography, layout and organization. The experience was essentially the same: scan a full page, focus in on one element of it, i.e. an article of interest, and read it. Flip through the pages; find another article of interest. It was even printable; I printed out the day’s crossword puzzle just to be sure.

“I’d pay for this,” I thought – perhaps even as much, or close to as much, as I pay for the print edition (about $18 a month, charged to a credit card for ease of payment). The virtual edition even would have certain utility that my print paper doesn’t, which includes that it could have a later deadline, could be delivered more reliably (my print paper NEVER comes on time), and could save me a walk to the end of the driveway in the snow.

And that’s what set off my thinking about newspaper business models. The D&C has a print circulation of around 125,000 daily, and a bit more on the weekend (145,000 Saturday; 183,000 Sunday). If every one of those subscribers were paying the same $18 a month as I am, that’s about $25 million in annual revenue. (That is a very rough guesstimate, since there are various pricing models for the paper including weekend/holiday-only subscriptions, single-copy sales, etc.) Since the “rule of thumb” in the business is that circulation revenue is about 25 percent of total revenue, that puts gross annual revenue for a paper such as this one at somewhere around $100 million a year. That’s an even rougher number, but for purposes of this “thought experiment” these general ballpark figures are sufficient. The salient point is that this paper, and others comparable to it, have nine-figure revenue streams and still have undergone layoffs, reduced the size of the paper (both width of the page and number of pages), and been forced to do other economizing because it’s an expensive business and advertising support for those expenses has declined dramatically.

But suppose we tried to construct a model based around a virtual edition where audiences interested in getting just the journalism could do so in efficient manner, and had to pay for all of it – but not pay for a great many things that are baked into the cost of producing a print newspaper. Any discussion of pay walls generally is infused with a comment or two along the lines of “It costs money to do good journalism – reporters and editors deserve to collect a decent paycheck, y’know – so giving content away for free is something news organizations literally can’t afford any more.” No argument there. So would what would it take, in terms of costs and revenues, to do good journalism and get readers to pay for all of it?

Well, let’s run some numbers and make a few assumptions – the first of which is that the virtual edition would be the ONLY way to get the news. It would not be offered on paper or on the Internet. People who want news from the organization traditionally known as “the local paper” would have to get the virtual edition of it. Period.

Would a substantial part of the audience be willing to subscribe in this manner? Well, given how much these virtual editions can be made to look (if not feel) like the traditional paper, and given how comparable the reading experience is, I think a lot of people would. (Assumptions about attrition rate are stated below.) Not having it available in print or other online venues creates the scarcity for the product that is currently lacking from the business equation. It would make sense to maintain an accompanying Web site, but it basically would become a portal and promotional tool for the virtual edition and a repository for good multimedia work (interactive graphics, videos, databases) that would be behind the same pay wall erected for the virtual edition.

Losing the ink-on-paper version means giving up a big revenue stream – the revenue that’s currently keeping the industry afloat, in fact. But ditching the printed product also means losing huge amounts of costs: ink and paper, of course, but also all of the capital equipment costs (presses, plate-makers, stuffer/folders, trucks, real estate to house it all) and the costly wages of all of the people who run all that equipment.

But the key fact here is that print advertising is a shrinking revenue stream, a trend that’s not likely to be reversed as circulation declines continue – driving down rates—and as advertisers get even more savvy about reaching audiences without the printed paper. The revenue already is out of balance with the costs, so lopping off the presses and ancillary costs associated with them is where we start in making the costs of the journalism smaller so that it can pay for itself.

The other major assumption is that advertising wouldn’t be a part of the mix. This reduces revenue further but cuts additional costs in terms of sales and administrative staff, advertising designers, etc. Remember, what we’re trying to do is make this model as lean as possible: just the journalism, and then get people to pay for it directly.

Now suppose … just suppose (and here’s where my “thought experiment” really begins) … that three-fourths of the subscribers in a typical market Rochester’s size -- rounding off, roughly 100,000 -- were willing to pay half what they pay in print to get a virtual edition. Using the cost of my print subscription as a benchmark, that would generate a little less than $11 million in revenue ($9/month = $108/year x 100,000 = $10.8 million). Note that this is allowing for a 1/4 attrition rate from current subscribership because some people just aren’t going to make this jump, though cutting the price in half is designed to keep as many of them as possible. What we’d end up with is probably about a tenth of the current revenue stream supporting this paper. So would $11 million a year be enough to do good journalism?

Well, let’s make a few more assumptions. A standard “rule of thumb” for newspaper staffing is to have one journalist for every 1,000 units of circulation. Research has shown that this varies widely, with the ratio generally less for smaller papers and greater for larger papers. (Of course, this research was done before big papers such as those in Chicago, Los Angeles and New York started cutting newsroom jobs by the hundreds.) A 1-to-1,000 ratio seems like a reasonable place to start, so our 100,000 circulation virtual edition would need 100 journalists.

The mean salary for newspaper reporters is around $40,000. But let’s assume a slightly higher average given that some of those 100 journalists are going to be editors, who tend to be paid more. So let’s work with $50,000 as an average salary -- recognizing that there would be lots of variability around that mean. Editorial assistant "news clerks" probably would earn in the $25K range; senior editors might approach or surpass $70K or $80K.

And even if press operators and ad sales reps are no longer a part of the staff, this news organization is going to need some level of support beyond the journalists: info technology people to tend to the computers, a human resources staff, a finance and accounting group to manage the subscriptions, etc. This can be a fairly lean group, but let’s assume another 30 people, and let’s assume the same average salary. So that’s 130 people x $50,000 each (on average) for a payroll of $6.5 million.

Benefits vary by industry, but a typical benchmark is that benefits are about 30 to 35 percent of gross salary; if we pegged it at around 31 percent of the payroll that would add $2 million, for a total of $8.5 million in personnel costs.

That would leave $2.5 million out of the $11 million in annual revenue for overhead: office space, utilities, computers and other equipment, wire services, travel, etc. This is a pure wild guess, but nearly a quarter of a million dollars a month seems like enough to support the activities of 130 people doing this work.

This is a break-even scenario, of course, whereas commercial entities require a profit margin. So let’s go to a $10 per month subscription (actually, $9.95 might be more appealing, but $10 makes the math easier) and assume the same cost structure. Revenue climbs to $12 million; with costs of $11 million the profit margin is about 9 percent. That’s below the license-to-print-money-along-with-printing-newspapers environment of a few years ago, when newspaper industry margins were in the 30 to 40 percent range. But 9 percent is respectable … well above retail and many other businesses.

Now, this has been a chain of conjecture built upon guesses supported by assumptions. But that’s one of the nice things about “thought experiments;” they can take some flights of fancy. But as fanciful – made up – as some parts of this are, I have tried to be fairly realistic and reasonable about how the numbers would work. I think something like this is deserving of serious consideration in journalism’s future.

When I meet people and they learn that I teach journalism, they often ask my opinion/guess about the future of the newspaper industry. My typical, admittedly flippant, response is that my crystal ball is as clouded as everyone else’s. But I think I’m going to change that to talk about some of these ideas. Part of the problem with the pay wall discussion is that it assumes payment would be attached to the type of news now typical on the Internet. No one is going to pay for access to a Web site that, for many news organizations, is a cacophony of links and images, loads slowly because of all the blinking/spinning/moving ads, and is impossible to navigate.

Giving readers a virtual version of the paper they’ve come to know and respect, on the other hand, could well be something they would find worth paying for. The value added – what makes it worth paying for – is the familiarity of form to go with the content.

It might even be “meatier,” and thus provide more value added. Many papers have shrunk their printed product because of the costs of paper. What's usually trimmed is high-quality syndicated material, such as news analysis pieces from the wire services or syndicated columnists, that the organization has paid for but just has no room to place in the shrunken paper. Adding pages to a virtual edition using such material wouldn’t cost anything more than the time of the copy editor assembling them. This means the disappearing Op-Ed pages and dramatically shrinking wire reports common across the industry could grow back to where they were a few years ago for many papers .

And, maybe best of all, this model would be very amenable to tablet delivery. A lot of commentary has been made lately about the impact of Apple’s new iPad on the news industry. But an even stronger model, in my view, would be to use a dedicated tablet that the news organization would supply for free or at a deep discount in return for a certain subscription guarantee – say 2 years, akin to wireless phone plans that include the phone hardware for little or no money. This would answer the portability question, and make the virtual paper equivalent in nearly every respect to the current printed one.

Think it could happen?