Memo to Newspapers: Incremental Change is Not Helping

Making the transition from being traditional print publishers to digital-first media outlets hasn’t been easy for newspapers — in fact, many have stubbornly resisted, and tried to dip their toes into digital waters gradually without investing any substantial effort or resources. As media analyst Frederic Filloux pointed out in a post yesterday at The Monday Note, this strategy (or lack of a strategy) is turning out to be a slow-motion train wreck. As author Clayton Christensen described in The Innovator’s Dilemma, it is almost impossible to cope with market disruption by making incremental changes, and newspapers are a perfect example.

Filloux uses financial results released last week by The Washington Post (s wpo) to make the point. In some ways, the newspaper company is a lot better off than many other other media entities, because it generates a lot of revenue from its educational arm — more than 60 percent of the company’s revenue comes from it, as well as 60 percent of its operating income — which creates a nice cushion for its newspaper business. And that business needs all the help that it can get, Filloux notes, because advertising revenue for the paper side of the business has continued to decline at a rapid rate, and even though online revenue has grown, it hasn’t even come close to making up the gap. This is the “digital pennies in exchange for print dollars” problem:

As Filloux points out, the math in this graph is not pleasant: over the last seven years, The Washington Post has lost five dollars in print revenue for every dollar that it has added in the form of online ad revenue — losing almost $90 million in print revenue while its online business has grown by less than $20 million. Other newspapers may have somewhat different numbers, but the trend is likely to be very similar. And Filloux correctly diagnoses the main reasons for this online-revenue problem:

  • Too much free content, which has diluted the value of editorial brands like the Washington Post.
  • The rise of competitors such as The Huffington Post, which have taken advantage of digital technology to build audiences at much lower cost.
  • The downward pressure on ad prices created by the explosion of content, as billions of pageviews depress the market for banner ads.

The dilemma for newspaper companies is that incremental change is not really helping them adapt, or as Filloux puts it: “mere adaptive tactics won’t save the traditional news industry in their multi-front war against disruptive technologies.” The Washington Post has done as good a job as any paper of trying to build a business online — online accounts for 43 percent of overall revenue, up from just 10 percent in 2004, according to the figures that Filloux quotes — but overall its business continues to decline because online ads are worth so much less than their print counterparts.

There are no signs that this is going to change any time soon — if anything, online advertising just keeps getting cheaper (newspaper companies are forming private ad networks, but this seems both too little and too late) and that means newspapers are fighting the law of diminishing returns.

So what is to be done? Many companies, including Rupert Murdoch’s News Corp. (s nws) and the New York Times (s nyt), are trying to fight a rear-guard action by putting up paywalls to protect some of their print revenue, or pinning their hopes on iPad apps and subscription revenue, despite Apple’s 30-percent fee for doing business on its platform. Filloux, however, argues that “radical re-engineering is needed,” and I think he is right — print may still be producing a large proportion of revenues for newspapers, but it is also the source of a large proportion of the costs at any traditional media company, and that spells doom if you are competing with digital-only publishing outlets such as AOL (s aol) and Yahoo (s yhoo).

The radical restructuring that Filloux describes, which involves a much smaller newsroom, lower costs and a digital-first approach to publishing, sounds very much like what Journal-Register CEO John Paton is trying to do with the company he took over last year after it emerged from bankruptcy. Above all, Paton says, media outlets need to become digital-first, because the print side is only dragging down their businesses and preventing them from being as competitive as they should be. So far, that’s a message too few traditional newspaper publishers have heard.

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Post and thumbnail courtesy of Flickr users Sandy Honig and Zarko Drincic