Is 4 million a lot?

Your question about real estate is reasonable, though I suspect the kind of space needed for a 4 million/yr budget would not be all that expensive.

My main point is that the minimum cost of running a real online newspaper is very high. I think this is Goldy’s real point. Once you dispense with the scarce resource of a printing press and paper, it may also be true that you no longer need a single news gathering operation that covers everything from cotillions and college sports to the stock market and senate.

The new media may emerge as a consolidator or websites that are like newspaper sections but each is self financing. Things like sports and society probably can pay for themselves.

The bigger issue is how to support investigative journalism and p[olitical opinion?

Every newspaper in the world thinks it loses money on circulation, but that’s only because of the way costs are structured between advertising and circulation. And there are lots of reasons for that. If costs are allocated appropriately, circulation is more of a money maker than most publishers are willing to admit.

But what I’m saying — and have been saying — is that AP is essentially right. The newspaper journalists are the horse that way, WAY too many people are riding. That’s the crisis in journalism today. That’s the ONLY crisis in journalism today.

NOBODY WANTS TO PAY FOR THE REPORTING…

And there doesn’t seem to be a viable way to develop circulation revenue on line (or over the cable or airwaves for that matter)

In the meantime, I feel like the brother in the “Home Alone” movies, which tries to list things using numbers and letters out of sequence.

I can’t even begin to guess how the P.I. is faring in terms of revenue right now from it’s online-only operations. I wish I knew.

And yes, the current debt level of the Seattle Times is a big part of their problem, as was reported last year. They made some extraordinarily bad investments in buying the New-England newspapers, overpaying for them by any evaluation and purchasing just as the big drop in newspaper fortunes hit.

But I don’t think the Blethens really have to answer to investors (which may be part of the problem). I’m not sure who funded their acquisitions, but I believe it’s in the form of debt, not capital investment. As long as the bankers get their payments of principle and interest on time, they don’t care whether the profit picture allows for dividend payments or capital appreciation. Adn as long as the Blethens keep enough revenue going through the system to pay their working family members a substantial salary, and the rest of the family lives off the proceeds of the substantial salaries and dividends they received in the past, it doesn’t matter to them that the net value of their company is close to zero. (Well, of course it MATTERS to them, in that they care about it, but not enough that they are forced to make significant changes to change the situation). What really matters to them is the potential loss of prestige and influence which would accompany shutting down the Times as the daily paper for Seattle.

But I think we will eventually see the Seattle Times in Chapter 11 whether it migrates succesfully to the web or not – there is no way the current newspaper economic environment is going to allow it to pay off the current debt, and it’s not going to get any better. The best it can hope for is to keep making payments on that debt over the next decade or so, putting off the day of reconning as long as possible. The real question is whether it can ever emerge from Chapter 11 as a viable news organization. The longer they put off making needed changes, the more difficult their problems down the road.

One quick comment ..

For personal reasons, I have done some research into the economic1s of this sissue and have three suggestions to make:

While Goldy is right about the evolution of newsPAPER, I do not think he is right about the current issues of cost.

I think there are two major costs in running newspaper.

*talent .. editors, writers, etc.
*leverage capital.

I think the latter is the biggest impediment to evolving a new model. Most of the old media is heavily leveraged. Moreover it was built on the capital gains model, that model is based on our tax code and drives businesses to increase their stock price rather than their profit margin. Perennial losers .. radio stations, athletic teams, get to deduct their operating losses while making a huge profit on the capital value of their endeavors. One extreme version of this is the real estate bubble.

The problem for something with real operating costs occurs when the capital value does not grow fast enough to justify the leverage .. eg to pay of the investors either as interest or dividends. If it is clear that the investors will no longer make money, then they will want to move their investments.

2. Real operating costs. One evening at DL, Joel and I did a back of the envelop calculation of what ti would cost to run the PI as a non-profit and with NO printing costs. The minimum estimate we came up with was $4million/year!

I know this seems high but the reason its is high is that to be effective a new-website in Seattle would need:

writers, editors, photographers, investigative reporters. This includes categories of specialist that may not be all that interesting to Goldy … local sports, local business, the UW and local social scene are EXPEN$IVE to cover.

PAID access to national/international newsfeeds.

Remote bureaus .. these seem like a luxury but certainly there is a need for someone to cover DC?

Now, unlike bloggers, a professional website would likely ALSO need copyeditors and researchers. Moreover, asa business, you need to support many of these people with support staff … HR, secretaries, security, etc.

Finally, as a business you need to add in business folks .. accountants, ad salespoeple, etc.

ALL of this is before you cut down a single tree!
*************************

So, a successful e-newsmedia is going to need to either emerge from bankruptcy or be new so it does not to cover old investments.

Even then, I suspect that there is a huge need for efficiencies that get around the business model above.

I should also mention that one of the obsticles to newspapers moving over more rapidly to the internet format is the advertising agencies.

Advertising agencies are given a budget by their clients. The advertising agencies then make their money two ways. First, they charge the client a percentage of the total budget. Second, they get substantial kickbacks from the media, depending upon the amount of business they deliver to them. Some agencies credit their client’s budget back for the kickbacks, but most don’t. So their primary goal is to convince the client to increase the budget, and a secondary goal is to negotiate the best kickback deals possible from the media outlets.

Providing effective advertising for the customer helps it achieve the first goal, but only indirectly – a really good advertising agent can convince a client that his agency’s advertising is effective, even without any real evidence to support that assertion.

Getting a few awards for creative and memorable advertising certainly helps a sales presentation to the ad agency’s customer, but it doesn’t necessarily sell more product. A famous example of that was the “Mama Mia, that’s a Spicy Meatball” commercial from the 1970’s. Consumers loved the commercial, but testing later showed that few remembered it was an advertisement for an antacid tablet, most thought it was for some spagetti sauce.

So be aware if you try to buy advertising space in major newspapers, radio, or television, you are going to get the “public” rate. The ad agencies get the “discount” rate, which is the public rate minus kickbacks. Some entreprenours figured this out quite some time ago and found ways around it. Residents of the Seattle area for many years might remember Jack Roberts, who made very cheesy appliance commercials with his wife. He had his own ad agency located in Bothel, so he could save on the commissions and get the kickbacks as well.

Anway, it’s in the best interest of these ad agencies to keep the customers advertising budget as large as possible, with trackable results being avoided. So they favor print and television media, insisting to their clients that their own emperical studies prove them to be the most effective. They talk down internet advertising, arguing that it’s not effective. Some even have the gall to argue that the low rates for interenet advertising prove that it’s not effective, which is at best circular reasoning.

Mail-order merchants have long ago realized that print advertising rates are unreastically high. They crafted their advertisements so that the results are easily tracked, sometimes using PO Box numbers with extra digets added after the dash so they could tell which ad to which the customer was responding. The same with telephone sales, they would use multiple extension numbers so they could track the ad which was the original source of the call (who answered the call was irrelevent). In the internet age, they can easily track results online to specific links and sites which forwarded the sale to them. They have been very reluctant to pay for print advertising’s basic rates, realizing that they aren’t cost effective.

So you currently have big advertising agencies continuing to peddle suspect or outdated data arguing that newspaper advertising, with price variations based only on size, location, and subscriber numbers, is a reliable and cost-effective advertising technique. But the smaller competitors who HAVE to have effective advertising to compete with the larger retailers are realizing that print advertising isn’t as effective, and are moving toward interent advertising instead.

This is a basic problem which the Seattle Times can’t avoid.

In maximizing revenue from interenet advertising, the first thing you have to know is that the revenue usually comes in three different models:

The first is “pay to display”, where the advertisor pays a one-time fee to display their add in a specific location for a specific time period. This is something newspapers understand easily, as it is the basic concept of advertising in print media.

The second is “Screen Views”, where the advertisor pays a tiny amount for each time the ad shows up on a viewers screen. This is safer for the advertisor, in that it ensures he is only paying if someone actually has a chance to see the ad. But it requires a good IT department, or third-party software, or an outside service to track and bill for those screen views. Some newspapers are reluctant to make that investment, or don’t understand it’s advantages, or prefer to re-direct their advertisers back to the original “Pay to Display” model.

The third revenue model is “Pay to Click”. This is where the newspaper (or any website) gets paid if the customer actually clicks on the ad for more information or to make a purchase. Advertisors, especially small businesses, love this form because they know that they are only paying for real sales leads.

The fourth type is “Pay for Sale”. This is found in many affilite programs where a webmaster posts a link or ad on their site, and receives a commission for the sale. Usually this requires a third-party monitoring and payment service for everyone to trust the process, although Amazon has done well on it’s own (it was one of the early pioneers of this type of advertising). But it is dependent upon the customer purchasing online so it can be tracked – it doesn’t work for customers walking into a a brick-and-morter store.

An online newspaper doesn’t have to choose between these revenue models. It can use a combination of all of them. But once it’s revenue is tied directly to the revenue of the customer, it has to be a lot smarter about making sure it’s ads are delivered effectively. It’s no longer just an ad-delivery vehicle, it’s a salesman. So it needs to have both automated and manual systems in place to ensure that the ads which appear along with each article are most likely to appeal to the reader of the article.

Of course, newspapers have been doing that forever, to some extent. Funeral home advertisements appear near the obituaries, and car ads appear in the automotive section. But the internet allows a lot more discrimination in picking the ad to be displayed. For example, an article about the new Mercedes might be accompanied by ads by Mercedes dealerships, but it might also include ads by it’s competitors which specifically target those who are considering that general class of cars. “I wish I had bought a Volvo instead of a Mercedes” the ad headline might read, imposed above the face of a remourseful buyer.

One of the advantages newspapers have is that it’s articles provide content, and on the internet “content is king”. The content can last long beyond it’s original publication date, as internet searches (or bookmarks or links) can lead viewers to articles written weeks or months or even years ago, long after the print version has been discarded in the recycling bin. A smart nespaper can make sure that current advertising appears along with the article which is relevent to the content.

Of course, the Blethens seem to think that Google is their enemy, when they should look at it as a role model and take advantage of the lessons it provided. Google earns money on several different levels. It makes money from display advertising. It also makes money from “pay to click” advertising, which appears on search engine results under the Google Adwords program.

But the real marketing genius of Google was in it’s Google AdSense program, whereby it pays webmasters for posting Google links or ads on their own sites. So everytime you click on a google link appearing on a website, the website owner makes a few pennies, and the advertisor sponsoring the link gets charged several times that amount. This is what allowed Google revenue to expand dramatically, as every website owner was able to make at least a little money without having to hit the streets selling ad space.

But the early days of the internet have made it almost impossible to sustain a subscription model to online news. Early web viewers realized that the cost of delivery was almost nill, and weren’t prepared to pay any significant additional cost for something they could get elsewhere for free (if nowhere else, then as part of their subscription ISP service). There was also a strong “the internet should be free” philosophy among early internet users and developers. This has made it almost impossible for newspapers to successfully build a subscription-based online model.

Not that a number of newspapers haven’t tried it – I still encounter some, mostly small papers in the middle of the country and the south, which have insisted on blocking online access unless you subscribe to the print edition. Some experimented with allowing access to their current edition, but any news stories in their archives could be accessed only after paying a fee. I had to chuckle at one small paper, they wanted to charge $15.00 bucks to access a obituary from a year ago, but they didn’t have credit card processing on the websight – they wanted you to mail them a check, and then they would mail you back a password allowing you to access the article. I doubt they generate much revenue that way. But the number of papers trying this tactic have dropped off considerably over the past two or three years.

So the most promising revenue model for newspapers on the internet seems to be, like AOL, television, and radio, based upon advertising. Newspaper publishers complain that it’s not as much as they are accustomed to receiving for print ads, but as I argued above, the costs are dramatically cheaper, and the print ads were probably overpriced anyway. As the migration from print to internet continues, I expect internet advertising revenues to rise.

But newspapers have been slow to catch on the advantages offered by internet delivery, and use them to maximize their revenue. (continued in next post)

I don’t know that that’s true. Imagine a total rethinking of the Seattle Times: no presses, no delivery trucks, no honor boxes, no subscription sales department, and for the most part (I’ll get there in the next post), no advertising sales. Imagine the enormous cost savings if all the overhead that evolved due to the demands of print, are eliminated.

I mean, it’s often said that the subscription price doesn’t cover the cost of printing and delivering the paper…