The tech gadget of the moment, this moment anyway, is Amazon's new wireless electronic book-reader, Kindle. The wireless device can deliver any one of more than 88,000 books, including bestsellers, which Amazon sells for under $10 each. The text appears on Kindle with the same crisp clarity as print on paper, and the battery that runs the device will go a week before it needs a two-hour recharge. Amazon hopes Kindle will tear up the book business just like iPod tore up the music business.
But there is another business, newspapers, that ought to be closely following Amazon's bet on Kindle. Newspaper owners these days routinely issue gloom-and-doom financial forecasts, usually accompanied by announcements of layoffs and other cost-cutting measures. Draconian steps are necessary, they declare sadly, because newspaper revenues keep falling.
In these scenarios the Internet is usually portrayed as the villain, siphoning off print readers and ad money, but not adding online revenue fast enough to make up the difference. Last year, the Project for Excellence in Journalism, a Washington, D.C.-based research group, estimated that if online ad revenue kept growing at 33 percent annually, it would still take a decade to break even with much larger print-ad revenues, which were growing at 4 percent.
In fact, during the most recent quarter, newspapers' online revenue rose only 21 percent, year-over-year, and print ad revenue dropped by nine percent. By such metrics, the continuing gap between online and print revenue appears to make the Internet a poor bet to replace print any time soon.
Or maybe not.
What the Project for Excellence study, and others, ignore is the potential impact of Kindle and its kin on newspaper economics. Success for Amazon's device would validate Kindle's key technology, known as E Ink. In May, Crosscut wrote about Hearst Corp.'s plans to test-market a wireless online newspaper within the next two years, using E Ink technology. But unlike Kindle's small, hardback reader, Hearst plans to employ the technology on a flexible screen almost as big as a tabloid paper. The e-paper can be updated by simply touching the screen. Hearst, owner of the Seattle Post-Intelligencer, is an investor in E Ink, along with Seattle Times minority owner McClatchy, Intel, and Motorola.
Essentially, both devices are new delivery systems for old content. What Amazon expects Kindle to do for book publishing – eliminate production and distribution costs – is the same goal Hearst has for its E Ink newspaper venture. The E Ink technology, says James McQuivey, a newspaper technology analyst for Forrester Research, "is probably the single largest display innovation of this decade."
Sounds cool, but what about that online revenue gap? How much would a newspaper need to cut expenses to switch from dead-tree print to an e-paper? Individual papers guard their finances jealously, so Crosscut asked two newspaper trade groups, the Inland Press Association and International Newspaper Financial Executives (INFE), for some help. Using averages from their annual National Cost and Revenue Study, a widely used industry benchmark, we created a hypothetical paper, which we'll call the Bugle-Interrogator. Our paper is a composite of data collected last year from a dozen real papers, each with about 100,000 circulation. (For comparison, the Seattle Post-Intelligencer's circulation is about 128,000.) Our B-I employs 530 full-time workers–about average, according to Inland/INFE – including 130 in the newsroom.
Here's a quick-and-dirty breakdown of the B-I's finances for 2006, using Inland/INFE's averages:
- Printing expenses: $6.7 million
- Circulation expense: $10.1 million
- Ink and newsprint: $10.4 million
- Newsroom expense: $9.9 million
- Advertising expense: $7.3 million
- Building, General and Administrative (G&A): $27.6 million
- Total annual expenses: $72.1 million
- Total annual newspaper revenue: $83.9 million (includes $15.8 million in paid-circulation revenue and $3.9 million in online ad revenue)
Two things jump out from these figures. First, our B-I turned a profit of nearly 10 percent last year. The trend is down, to be sure, but most businesses wouldn't sneeze at that profit margin.
More important, most of those expenses are what Philip Meyer, a specialist in newspaper economics and professor of journalism at the University of North Carolina, calls "variable costs." That is, they rise and fall with circulation. By contrast, Meyer says, an e-paper's costs are mostly "fixed" – that is, the size of the paper's circulation doesn't much matter.
By this accounting, if the B-I decided to kill its print edition and replace it with an e-paper it could immediately cut $27.2 million, or 38 percent, from its variable cost budget by eliminating outlays for production, circulation, and newsprint.
We'll leave news and advertising expenses at their current level, but the Building and G&A expense line would also shrink. Donald Kron, who oversees the National Cost and Revenue Study for Inland/INFE, says the catchall category covers the building housing the paper; equipment, utilities and maintenance; and support functions, including human resources, accounting, and finance. Health and other benefits are also in there, Kron says, along with executive salaries, payroll taxes, non-building depreciation, and bad debts.
Since an e-paper would be operating with just the newsroom, advertising, and marketing staffs, the support and executive staff would be smaller. Let's be generous and give the B-I a one-to-one support and executive staff ratio, including a few new, and costly, tech-support people. That would still leave the paper with about half as many employees than if it put out a print edition. The expense line would drop still further when the B-I sold its magisterial downtown headquarters and moved the smaller staff into cheaper, rented quarters – exactly what Hearst did when it yoked the P-I to a joint operating agreement (JOA) with The Seattle Times in 1982 and turned over all the non-news operations to the Times.
OK, let's say the Building and G&A line shrinks by about a quarter. That's another $6.9 million out of expenses. We're up to $34.1 million in total expense cuts – about 47 percent of the original $72.1 million expense budget. Take out another $3 million that Inland/INFE says newspapers of 100,000 circulation annually pay their independent delivery drivers, on average, in mileage and other fees, and we've cut $37 million – more than half the B-I's annual expenses.
But with just $3.9 million in online revenue for 2006 – average for papers with 100,000 circulation last year – the B-I is still a long way from covering those remaining expenses of $35.1 million.
Let's take another look at that revenue. According to the Project for Excellence in Journalism's industry projections, at a 33 percent annual growth rate, the B-I's e-paper would hit $38.3 million in ad revenue by 2014. But that assumes the print paper still exists during that time, and at a 4 percent growth rate is generating about $87.9 million in annual ad revenue.
How much of that print revenue would move over to the online B-I's revenue column with the print edition gone? Before we put our printing presses and delivery trucks on eBay, we better try to get a handle on that. And here is where Amazon's Kindle and Hearst's E Ink technology may play a role.
Let's say you've advertised your widgets for years in the print B-I and suddenly the ad salesperson calls to tell you an e-paper will be replacing the print paper. You hate those little box ads cluttering your laptop screen, especially the ones with the wriggling dancers offering low-cost home loans. "Cancel my ad," you snarl, and start to hang up.
Hold on, says the soothing voice of the ad salesperson. The new B-I e-paper won't have any dancing home loans. In fact, it will look pretty much like the old paper – same color, same page layout, and almost the same size. And your ad will pretty much look the same, too – except you can choose your audience, folks who might be interested in your widgets, and not waste your ad budget on readers who couldn't care less.
You think about that for a minute, then tell the ad salesperson you'll give it a try. For a while. Neither of you mentions that when the print B-I is gone, there won't be many other places to run your ad, anyway.
"A better technology, more like the regular process of reading a newspaper, conceivably could offer a better display for advertisers than the web is now," says Rick Edmonds, the Poynter Institute media business analyst who worked up those projections for the Project for Excellence in Journalism.
Still, Edmonds says, he would be surprised to see even half a print paper's advertisers move to an e-paper. A key element in making the transition from print to online, he says, will be not upsetting the "natural balance" that readers and advertisers expect between the ads and news stories that appear in their newspaper's format.
"The main competition" for an e-paper, adds the University of North Carolina's Meyer, "is non-consumption."
But a crossover of half the B-I's print revenue in 2014 would boost the e-paper's projected online ad revenue to $82.2 million, according to the Project for Excellence projections.
Or, to put it another way, using an extremely optimistic set of projections for revenue growth, and matching those projections against the fixed cost of running the B-I's e-paper – $35.1 million, remember? – in a half-dozen years our hypothetical paper would be very profitable.
Using more realistic projections – the latest 21 percent revenue gain for newspapers' online revenue versus a 9 percent drop in print advertising – the timeline to profitability gets considerably shorter for our B-I. In fact, by those projections, if Kindle is a winner and E Ink technology takes hold, it makes more financial sense for the B-I to stop the presses and go all-online right now.
There are other considerations, of course. For one, Amazon is asking $399 for Kindle. Hearst says it can get the cost of its e-paper wireless screen below the price of an annual P-I subscription – less than $185. Our B-I might do even more aggressive marketing, given the gloomy prospects for its print paper. How about offering the e-paper screen free for a two-year B-I subscription. Verizon does it, why not us?
Edmonds, who was skeptical at first, is starting to do the math now. "If you change the business model," he says, "that is something I would want to explore if I were a newspaper company."
New technology, of course, is a gamble. "There are lots of things that sound neat and have interesting benefits," Edmonds points out, "but for various reasons don't catch hold."
Still, he adds, "Are newspapers waiting for breakthrough technology to reconfigure the business model and re-invent circulation revenue gains?"
The answer, he says, is yes.
"If they do that," says Edmonds, "it's a new day."
