04 Jan 10 Newspapers: Stop the presses?

The newspaper and magazine segments are the largest contributors in revenues to the global publishing industry – contributing close to 52% of global publishing revenues. It would therefore be safe to assume that of all the challenges faced by the industry, none would be as altering (in terms of revenues) as the challenges faced by these two segments. The newspaper and magazine segments have already lost considerable revenues on account of dip in ad revenues. This is directly attributable to the global economic slowdown, which has led to decrease in consumer and corporate spending.

Does a drop in revenues merit a need to re-invent the business model? How are publishers coping with the dip in revenues? Will the digital market provide a strong revenue source? Will this mean more outsourcing/offshoring?  Over two posts, I will answer these questions, starting with the newspaper segment.

The Newspaper Segment
The newspaper segment contributes 36% to global publishing revenues. The prominent revenue sources for newspapers come from:

  • Readers/Circulation (Subscriptions/News stand sales)
  • Ad sales
  • Classifieds

Circulation is one of the critical performance indicators for a newspaper publisher. It demonstrates the number of copies that a publisher sells and is often used as marketing collateral while selling ad space or classifieds (refer to the diagram below).

How circulation forms marketing collateralSource: ValueNotes

The need to boost circulation has often induced publishers to decrease subscription prices or single copy prices. While this leads to loss on subscriptions/news stand sales, it allows for more traction and leverage while negotiating ad and classified sales. Ad space sales compensates for losses made on subscriptions/news stand sales.

This over reliance on advertising increased the risk exposure of newspaper publishers in the wake of the economic slowdown. With companies cutting back on costs, advertising in print dropped significantly. Consumers, too, were cutting back and this in turn affected subscriptions and news stand sales.

WAN-IFRA surveyed publishers, editors, MDs, CEOs, etc. to better understand the state of the industry. Ad revenues dropped 20% in North America, 16% in Western Europe, 19% in Eastern Europe and 11% in Asia Pacific in 2009. The US, alone, experienced 29% decline in y/y advertising revenues!

The online market
Like with many publishers across segments, newspapers are looking at generating revenues from online offerings. However, this presents some inherent challenges:

  • Going completely online will result in publishers having to cut back on the scale of operations. While many newspapers have made the transition, I don’t see that happening with larger companies.
  • News reporting as a differentiator for newspapers no longer exists. Publishers will have to compete with news aggregators such as Google and Yahoo.
  • The dynamics of the internet will present a unique set of challenges that print publishers have to adapt to. A shift towards the way Net companies operate will be required.
  • Consumers have been consuming content for free. Paying for content online will require publishers to rationale with the consumer’s mindset and find ways to demonstrate value proposition that will convince consumers to pay.

Digital advertising will never match the value of print advertising as forecasted by PricewaterhouseCoopers (PwC) estimates:

  • The print advertising revenues to be valued around USD 182 b as of 2008 and digital revenues at USD 6 b.
  • By 2013, digital revenues will grow to USD 8.4 b. However, print and digital ad revenues will barely match up to the print revenues generated in 2008.

Adopting a hybrid model needs to be thought through. Publishers will need to identify and adopt a realistic mix in terms of revenues that can be generated through digital sources and print revenues that can be retained.

Content transition
Content will remain the core and Les Hinton, CEO of Dow Jones, is right when he says the newspaper has undervalued its content by giving it out for free. However, this does not hold true for news reporting. Publishers will need to push news reporting as one of the offerings and focus on opinions, analysis and back stories as the core.

This in turn will present an immediate challenge – generating highly analytic, opinionated content will require more focus and resources on part of the publisher. This focus and need for resources will ultimately translate as costs, and at this point publishers should look at outsourcing. I am by no means promoting outsourcing or offshoring, but I am looking at what outsourcing can do strategically.

The newspaper has already been outsourcing and has recently begun offshoring (sourcing has been from freelancers, third party players or in-house low cost offshore centers).  Publishers can therefore source production, printing, distribution and other process driven functions from third party players to not only reduce costs but also restructure internal operations to accommodate for more focus on core processes.

Sourcing is not without its challenges. Overcoming quality issues and inculcating cultural sensibilities still requires significant effort from service providers. However, this bottleneck in content services can be overcome by bringing more freelancers with the required capabilities into the mix. After all, if Wikipedia can do it, so can the newspaper industry!

Side Note: Some other interesting finds from the WAN-IFRA survey
The fear of ending up with a 50 page blog post prompted me to post these findings as a side note. I thought these were quite interesting and each might just merit a post of their own.

  • India is the largest consumer of newspapers. Pegged at 107 million copies daily, it contributes around 10% to the global circulation.
  • India, China and Japan accounts for about 60% of worldwide circulation.

I was really interested in how Japan has fared as a newspaper market. The Japanese newspaper market has been surprisingly robust witnessing only a 4% drop in circulation since 1998.  Japan also has the highest adult newspaper consumption with 612 newspapers sold per 1000 people. The market has also demonstrated that the subscription model works with 90% of newspapers being home delivered. This is in part due to Japan’s ageing population that will continue to sustain the industry in the short and medium term. However, the real test of the hybrid model will come in 2010, when Nikkei (a Japanese publisher) will start charging for online content.

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ValueNotes Research
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