Ken Doctor: Save Newspaper Biz, Shrink Margins

Newspapers need to prepare for the next generation by right-sizing their operations, diversifying their holdings, and finally grasping, from top to bottom, that there has been an online, pay-for-performance advertising revolution that is at least as significant as the online reading revolution, says Ken Doctor, an analyst with Outsell, an information industry consulting firm.

Doctor, previously a Knight Ridder Digital executive (and former client), talked to us about his newly published 47-page report, titled "Deadline with Destiny: Newspaper Industry Faces $20 Billion Gap."

"A perfect storm of print circulation decline, accompanying pressures on print advertising and the rapid growth of lower revenue producing online news media is now hitting the industry," says Doctor in his report. "The onrushing dynamics of time and money mean the newspaper industry has less than half a decade to remake its future. At best, (it is a) mature industry, with only modest growth — even if things improve substantially from the last couple of years."

Doctor adds: "The industry needs to grow beyond its 'mass' success and acknowledge the new world of niches and extending the brand. The days of one-size-fits-all, mass medium products aren't easily supported in a long-tail world of hyper-specific niche marketing."

Nevertheless, newspapers aren't over yet. "It is a silly question whether they will 'go away,' " Doctor said during our conversation. "Newspaper brands have historic credibility and power in their communities." Moreover, he adds, their news content remains primary material for aggregators like Google News and Topix.

But revenue trends will force them to become smaller companies, maximize existing revenue streams and develop some new ones. If they just keep the status quo, at some point, "they will be 40 percent of what they have been; they will be a shadow of themselves," says Doctor.

Online is the Change Agent

The biggest change agent for newspapers, of course, is the march of online services. As print declines, online has assumed its position as the fastest growing business in newspaper portfolios, with annual growth rates typically more than 30 percent. Still, online started from zero and only represents 5.5 percent of their overall gross.

Going forward, as online becomes more dominant, the challenge is for newspapers to use online to make up for their inevitable print losses. That's easier said than done. Today, online is a cheaper medium, and online revenues are at least three times less impactful per reader than print revenues, notes Doctor (Borrell Associates estimates they are 10 times less impactful). Still, Doctor is reassured that recent, upward trends in pricing for recruitment print and online packages will become more the norm, across the board.

Beyond pricing, Doctor says newspapers have to be able give themselves some room to change. The focus on quarterly earnings and maintaining 21 percent profit margins by relentlessly cutting costs is killing them, he says. Profit margins should be readjusted for today's reality. And Wall Street should accept it for what it is.

The worst that can happen is that a bubble hits the industry, says Doctor. When prices can't be sustained, or alternatives develop, the market just deflates. It has happened before when newspapers are challenged. This is essentially what happened in Knight Ridder's Venture Unit, he says. "They made a lot of money, and then they just pulled back. Now, of course, newspapers have a lot less money to invest."

The key to avoiding bubbles is to move on to new models, while keeping sane margins in an acceptable zone that is lower than today’s unsustainable 21 percent. This can be partly achieved by cutting costs where it is acceptable, such as on printing plants, which are less necessary in an age where online takes command.

Ten percent may be the low end of the appropriate threshold, argues Doctor. The Outsell Index of Top 100 Information Industry firms, for instance, maintains an average of 12.8 percent margins — and most of those firms don't have editorial costs as a mainstay of their operations.

Ownership changes will also go a long way. For public companies that can't go private, the best way to buy room is to become part of a more diversified organization. Diversified ownership takes some of the pressure off quarterly newspaper results and provides potential synergies, says Doctor.

Doctor notes that companies like Scripps have given themselves more options by purchasing companies like Shopzilla and developing cable TV networks. Today, just 28 percent of Scripps' revenues come from newspapers. Industry-wide, newspaper revenues account for 54 percent of their owners' revenues, down from 58 percent in 2003.

Other short-term solutions abound. McClatchy CEO Gary Pruitt, for instance, has pulled off an impressive sleight-of-hand by selling off Knight Ridder's large, no growth markets and focusing on its high growth markets. But unless McClatchy is successful in making structural changes to the newspaper business, the high growth market strategy will only buy "a few years," says Doctor.

Longtime readers know that my own favorite solution for local newspapers is to reposition them as local advertising centers, encompassing classifieds, directories, social networks and local search.