Updated: December 9, 2008
I introduce you to the fundamental problem of newspapers on the internet – The Krugman Paradox - named by me after watching PetMeds.com ads appear next to Paul Krugman for three days after it was announced he won a Nobel Prize. I couldn’t believe there wasn’t a better way to monetize his presence on NYTimes.com. Further investigation revealed that the Krugman problem was not unique. Here goes, I want feedback.
Definition:
The Krugman Paradox is a phenomenon referring to newspapers’ websites and the site’s inability to produce economically sustainable advertising revenue, despite their highest audience reach in the history of their industry. The paradox indicates that newspapers must increase the effectiveness of their online advertising if this is to be their main revenue stream.
Prior Art:
On April 7, 2008 Nicholas Carr put forth a theory he referred to as “unbundling”. Boiled down to its core the theory states that advertisements (bundled with content) in a printed newspaper produce a product worth more than the sum of their parts. The opposite is true online where ad performance must stand alone on a single web page. As he writes,
“As soon as a newspaper is unbundled, an intricate and, until now, largely invisible system of subsidization quickly unravels. Classified ads, for instance, can no longer help to underwrite the salaries of investigative journalists or overseas correspondents. Each piece of content has to compete separately, consuming costs and generating revenues in isolation.” -N. Carr
On September 10, 2007 Doc Searls wrote about the utility of traditional advertising, and how better ways of connecting customers to products and services have been created on the internet. He cautions newspapers who assume advertising will always be around at the levels prior to the existence of the internet. As he writes,
While rivers of advertising money flow away from old media and toward new ones, both the old and the new media crowds continue to assume that advertising money will flow forever. This is a mistake. Advertising remains an extremely inefficient and wasteful way for sellers to find buyers. I’m not saying advertising isn’t effective, by the way; just that massive inefficiency and waste have always been involved, and that this fact constitutes a problem we’ve long been waiting to solve, whether we know it or not.
…The holy grail for advertisers isn’t advertising at all, because it’s not about sellers hunting down buyers. In fact it’s the reverse: buyers hunting for sellers. -D. Searls
On April 22, 2008 Jay Rosen responds to Searls comments to highlight the idea that whether ad spending grows, shrinks, or stays the same:
Advertisers aren’t in business to advertise; they do it to reach customers making a buying decision. If there were some other way of reaching that person, some other way for buyers and sellers to communicate, advertising would become more and more superfluous.
-J. Rosen
State of the Art:
-despite the highest readership of any newspaper in the united states, the New York Times only generated $330 Million in online advertising in 2007. Total operating costs for that same year totaled $2.928 Billion. It is widely reported that total newspaper operating costs would be reduced by 35% if newspapers if newspapers eliminated their print product. Here is the precedent for print costs:
“Going totally online eliminates the cost of paper and circulation delivery and radically reduces production cost. By my back-of-the envelope calculations, based on Inland Press survey data, that might be about 35 percent of expenses.” -from http://www.concernedjournalists.org/pulling-plug-print Dec. 2007
“Paper and production costs account for nearly 25% of total expense. Circulation sales and billing together with fleets of trucks and delivery employees throwing papers on the front lawn account for 10% more.” -from http://www.stateofthenewsmedia.org/2008/narrative_newspapers_economics.php?cat=3&media=4 March 2008
I think some disparity in distribution numbers come from figuring in Circulation revenues which typically accounts for 30% of the top line. In the case of NYT Q3 2008 circulation represented 32.8% of total revenue. Production costs however consumed ~48% of total revenues. The difference is roughly a 10% cost or in this case 16%.
This leads in to a whole other problem that newspapers are fighting with. Newspapers are losing money delivering newspapers (distribution costs>circulation revenue). http://www.ajr.org/article_printable.asp?id=2539 June 2002. They relied on print advertising to make up the difference and it worked until now. Let’s focus on generating online revenue and solving The Krugman Paradox…
Assumptions:
-it is widely reported that total newspaper operating costs would be reduced by 35% if newspapers eliminated their print product. Using the NYT example again, costs could be reduced to $1.903 Billion.
-online advertising in general is growing approximately 12% year over year.
-the new york times is following this trend
-NYT online advertising revenue is projected to be ~$350 Million or $29.17 Million per month.
Audience:
-The NYTimes.com reaches an average 15.6million people per month (quantcast) and newspaper websites in aggregate reached 69.8 Million people (naa).
-65.4% of NYTimes.com Readers come from USA
-NYTimes.com is reaching approx. 3.3% of the us population (15.6million x65.4%) =10.2024million/(305million)
Revenue per person:
-$29.17 Million month/ 15.6 Million unique monthly visitors = $1.87 per unique per month.
-each unique reader is worth $22.40 annually in online advertising revenue (a far cry from the 1 subscriber = $1000 which is what it was before the arrival of the internet)
Problem:
-The gap to break-even is still a whopping $1.553 Billion.
-If advertising rates stay the same, The New York Times needs to raise its unique audience 5.437 times in order to break even. Here is how it breaks down:
-5.437 X 15.6 Million uniques per month =
-84.82 Million uniques per month X $1.86 per unique =
-$158.6 Million per month X 12 months =
-$1.903 Billion annual online advertising revenues =Break Even NOT YET PROFITABLE
-Look at this graphic from Dr. Joe Webb, August 2008, to highlight the revenue shortfall.
Questions for further examination or The Stalin Problem (reality):
-Is it unrealistic for NYTimes.com to grow their national audience reach much more than 3.3% considering their print audience reach is ~1million or roughly .3%?
-Generating 84.82 Million uniques per month would make NYTimes.com the number 5 website in the entire world, ahead of Wikipedia.org
Preliminary Conclusions:
-Assuming The Krugman Paradox is real:
-Analysis of The Krugman Paradox suggests that pursuing online audience growth strategies to grow revenue may not be the best way to grow revenue
-Analysis of The Krugman Paradox suggests that absent online advertising innovations, newspapers must seek alternative revenue streams to achieve economic sustainability.
-Robert Ivan
Notes about my data:
-NYTimes internet revenue figures include nytimes.com, about.com, boston.com and other company websites. I’m not too concerned though, because parsing out this data would only make their revenue numbers WORSE.
-”Correlation does not imply causation”, further investigation needs to be done to find out if The Krugman Paradox is real.
-Of course further research needs to be done in order to see if this situation is representative of the industry as a whole.
I welcome feedback.
UPDATES:
1. This article now published on seekingalpha.com See Comments at SeekingAlpha.com
2. The penultimate version of my MA Thesis investigating The Krugman Paradox is located here.
3.ContentNext Media research supports the notion that seeking growth strategies in an of themselves is not an economically sustainable business model for general interest news sites. -Dec. 17, 2008
Related posts:
- 2007 NAA Mid-Year Media Review: Newspapers Report Audience Up, Circulation Down . Internet Continues Growing Strongly.
- Forget Newspapers, All Advertising Reliant Businesses Are Hurting
- Newspaper Thesis Part 1 Of Many
- Christian Science Monitor Editor John Yemma Explains Print and Online Costs
- APT, Yahoo’s New Digital Ad Platform – Good for Newspapers?
Interesting analysis, but perhaps you are assuming that some things will remain static will not: for instance, if enough competing news outlets die off, there may actually be *increased* competition for premium online ad space. (Hopefully more advertisers will also realize that the large buys they make of crap inventory on crap sites aren’t doing them any favors, either.)
See more here, “Why The Media Will Be Fine”
http://slipr.com/2008/12/03/why-the-media-will-be-fine/
Another thing that will (hopefully) not remain static: the types of advertising appearing on websites. The Times already moved to larger right-column ad positions that have higher clickthroughs, and they’ve been using full-page takeovers for a while (I think).
Nor do you consider the (admittedly still somewhat unproven) possibility that add targeting will get better and clickthrough rates improve.
If advertising were so terrible, advertisers would have abandoned it long ago. Text link ads on Google are a fair analog for what you describe — the desire of advertisers to reach buyers at a decision point — but what about that greatest of american past-times: convincing people to buy things they don’t really need? For that, I predict we’ll always need good old fashioned advertising.
There’s a Firefox plug-in called AdBlocker – it strips out all the ads on a page. Quite popular. My brain does the same thing – focuses only on content, ignores the ads completely. Really, the current advertising model is ineffectual, inaccurate and in need of a rethink. It relies on a shotgun approach.
Don’t waste my time or your money trying to sell me something I don’t need. Figure out what I may be interested in and provide me a way to access your products when I need it. Call it advertising if you will – I call it easily accessible products.
As Christopher Mimms notes, you leave some factors fixed which would probably not be.
If the online readership increased as you suggest, due to the elimination of the paper edition, the paper advertisers would need to move their advertising to the online version. Unless the mix / spread of online advertised is already a mirror of the paper edition this should result in increasing interest by advertisers. Competition for advert placement would drive up the pricing.
With regards to “AdBlocker”, I agree with Brett that our brains will perform the same function – but that still applies to the paper issue too, so there would be no net difference (what was the advert in the prime placement on the right-hand page the last time you looked at a paper – nope, I can’t remember either)
Another assumption which you need to consider is the split between visitors to the site viewing one article (typically referred from another website), compared to an analogue to the paper subscriber, who *reads the paper* – not necessarily cover-to-cover, but many pages per day. Is this reader more valuable to the paper and/or advertisers than a user interested in a single article?
@Chris
Using CPA and CPM display ads, supply of available ad slots on ever growing web pages will marginalize the the volume of quality advertisements to fill those spots. Data from Pubmatic shows display ad pricing falling ever since they began measuring the data. imagine a small town newspaper that serves up 50k pageviews a month and having 3 ad spots on every page. That’s 150,000 ads per month. What could they possible charge without bankrupting their advertisers? Now what do they need to charge themselves without going bankrupt?
@Dan
I have seen nothing to indicate that “lost” newspaper advertising will translate to newspaper website advertising. The internet allows all manner of connecting businesses with potential customers. Company websites, free listings on Yahoo local, Google maps, networking sites like Linkedin and of course powerful search engines like Google which allow people to find businesses and services better than fumbling through a newspaper website.
Robert,
Your comments about newspaper advertising are well taken. While I claim no expertise in the economics of our industry, I am still saddened by the discussion that we’re only discussing a newspaper’s declining ad revenue as if it is the only asset. The discussion surrounding newspapers needs to move beyond academia and industry circles because if it does not move into a community discussion, there are some very real consequences as those sources of knowledge disappear.
What price do we pay when no one is covering local issues? As I’ve said in previous posts, I wonder how many other journalists have ever been the only one at the school board meeting, the plan commission meeting, the city council or the county board meeting besides the elected officials. What price will our businesses and our community member pay if we don’t demand strong journalism?
Words mean something. They enlighten, define, and connect. I believe words should linger and be tampered with and corrected when needed. They should serve us and help us comfort one another. Just because advertising revenue is declining does not make the information less valuable. I wish communities really knew what they were not getting when they don’t spend the time to search out credible sources of information whether its via a blog or a media source. I really don’t care who is doing the reporting as long as its fair, accurate and credible information.
I’m waiting for the rest of the 27,000 journalists who have been laid off in the last 18 months to come to get angry about what is happening and wonder what we could do to bring this to the public because quite frankly I don’t think people really get what we aren’t doing anymore… whether it’s on the Internet or not.
Denise
Salon had $1.98 million in revenue in its quarter ending Sept. 30 (that revenue wasn’t enough to offset expenses, though, and Salon reported a $1.28 million loss to the SEC).
http://adage.com/mediaworks/article?article_id=133541
You sparked a couple of thoughts.
1.” what about that greatest of american past-times: convincing people to buy things they don’t really need? For that, I predict we’ll always need good old fashioned advertising.” But what happens in a global economy if consumers move from spend to save? There’s a growing body of evidence that we may be at the front end of big shift.
2. The power of Google is the contextualized ad. While they are still finetuning the algrorithms, the idea is to present information at the time when the question is being asked. It’s just the old saw about the right offer to the right person at the right time. If the Times had the ability to control which ad appeared next to Krugman’s column, it might help resolve the Krugman paradox. Sort of “people who read this, read that.” Then develop[ the analytics to make some good guesses about what what people who read this and that might be interested in buying. For Krugman, I’m thinking it’s probably books. Or maybe the NYTimes guide to the economic crisis over the last four months.
3. The other power of Google is the ability to make the ad buy very easy. By doing that they have brought millions of new, smaller advertisers into the game. My bet is that as the software work with local advertising matures, newspapers will be surprised to find that the market for advertising at the bottom of the pyramid and in Print and web, will make at least some of the revenue problems go away.
4. The web buy is a great add on to the Print buy. Small advertisers understand the value of the Print piece that sits on their counter. If , for X dollars they also get a place on the web, nice. Of course this works the other way. I’ll sell you the web ad, and give you the Print ad.