Musings (and occasional urgent warnings) of a veteran media executive, who fears our news-gathering companies are stumbling to extinction
Wednesday, August 29, 2012
Twin threats peril preprint newspaper ads
Preprint advertising, a long-reliable source of business that represents a quarter of the remaining revenue for the struggling newspaper industry, is at greater risk than ever before, owing to a perfect storm of challenges.
Representing some $5.2 billion a year in sales in 2011, advertising inserts from companies like Best Buy, Target, Kohl’s, Home Depot and Kmart represent the second largest revenue stream left to an industry that has lost half of its sales since revenues peaked at $49.4 billion in 2005. The only bigger revenue source for publishers are the local retail ads carried in the pages of their print editions.
The growing importance of the preprint business to newspapers in the last five years is illustrated in the pie charts below, which show that preprints represented 26% of the industry’s $4.4 billion in sales in the first quarter of this year vs. 17% of the industry’s $9.8 billion in revenues in the first three months of 2007.
Preprint advertising has a significant impact on the industry’s profitability. “Preprint advertising accounts for 70% of the Sunday revenues at the average newspaper,” said one industry leader who declined to be named because he is not authorized to speak for his organization. With the Sunday paper producing “most of the profitability” for many publishers, he added, the health of the preprint business has a direct bearing on the bottom line of almost every publisher.
A major drop in preprint revenue would be “draconian” for the industry, agreed Caroline Little, the chief executive of the Newspaper Association of America, in a telephone interview.
Unfortunately for publishers, preprints are threatened by two circumstances that are well beyond their control. They are:
∷ The digital revolution, which is (a) unraveling the business models of many of the big-box retailers who historically have been the biggest buyers of preprint advertising and (b) encouraging even healthy bricks-and-mortar retailers to shift from high-priced print advertising to targeted and inexpensive digital formats.
∷ A favorable rate cut granted last week by the U.S. Postal Service to Valassis Communications, which will enable the direct-marketing company to mail certain types of national retail preprints for 42% less than newspapers are required to pay for the same product. The NAA says the Valassis deal could divert no less than $1 billion in advertising revenues from newspapers to the direct-mail company, which generated more than $2 billion in sales in the last 12 months by mailing its Red Plum ad circulars to consumers.
The above developments put publishers are in a classic squeeze, where they are being forced to battle declining customer demand at the same time they are being undercut by a newly empowered, low-price competitor.
Exhibit A in the “declining demand” side of the equation is BestBuy, the last-standing, national big-box retailer of computers, consumer electronics and appliances in a field once crowded with the likes of such faithful preprint purchasers as Circuit City, CompUSA and the Good Guys.
Best Buy, which reported a 90% drop in profits in the second quarter of this year and told investors it could not offer any earnings guidance for the balance of 2012, is being decimated by Amazon and other online merchants, who can afford to charge less than Best Buy for laptops, TVs and dishwashers because they don’t bear the expense of operating bricks-and-mortar stores.
In the interests of maximizing its marketing efficiency and efficiently connecting with consumers through digital media, Best Buy cut its purchase of newspaper preprints to $257,000 in 2011 from more than $1 million in the prior year, according to Advertising Age. At the same time Best Buy trimmed its preprint spending by 75%, the company boosted Internet advertising by 40% to a bit less than $23 million.
Beyond Best Buy, some of the other long-time preprint buyers suffering from challenged business models include Radio Shack, J.C. Penney, Sears and Kmart. A recent study by Group M Next, a market researcher, found that 45% of consumers say they would abort a transaction in a physical store if they could find a discount as low as 2.5% from an online retailer.
Even thriving bricks-and-mortar retailers today are trying to improve the efficiency of their marketing by seeking low-cost and highly targeted advertising options. Major retailers like Target and Safeway are not only putting more of their ad budgets into digital media but also are seeking to establish direct relationships with consumers through their own websites and the social media (as discussed previously here).
The local and national retailers still relying on preprint advertising in newspapers are demanding that their circulars go only into papers delivered to specified Zip Codes. With insert quantities limited, publishers often run out of highly prized Sunday ads for single-copy papers, angering incidental readers they would like to convert into regular subscribers. At the same time advertisers cut preprint allocations, they are demanding ever-greater discounts in the delivery fees that publishers charge.
Discount-hungry advertisers will have fresh ammunition in dealing with newspapers as a result of the decision last week by the Postal Regulatory Commission, the body overseeing the postal service, to grant Valassis a significant discount in mailing rates for circulars it delivers for durable and semi-durable products sold by national brands.
The discount will let Valassis mail a nine-ounce bundle of inserts for 17.2 cents apiece, or nearly 42% less than the 25.4 cents per unit that a newspaper would pay for an identical package sent to a non-subscribing household in its delivery area. Prior to the adoption of the new discount, Valassis and other saturation-mail services already were being charged 3 cents per piece less than newspapers.
The Valassis discount, which does not apply to ads it already mails on behalf of local retailers, requires the company to boost its volume by 1 million pieces within 12 months. If the company hits the goal, the discount will apply for three years and the financially challenged postal service estimates it will reap up to $15 million in fresh profits for itself. If Valassis misses the minimum, it will owe the Postal Service a one-time penalty of $100,000.
After surveying more than 300 publishers, the NAA calculated that the Valassis discount will put $2.5 billion in existing newspaper ad revenues at risk. Of that sum, the organization predicts that up to $1 billion in business would switch away from publishers, leading the NAA to not only denounce the discount but also to mount a legal challenge against it. While the NAA is asking both the Postal Commission and a federal court to block the immediate implementation of the discount, Valassis will be free to pursue newspaper advertisers unless a stay is issued.
It is not unprecedented for the postal commission to grant favorable discounts to major bulk mailers, said Paul J. Boyle, the senior vice president for public policy at the NAA. Credit card marketers got lower rates by promising to increase the number of solicitations they dropped in the mail.
But the Valasiss discount, he said, represents the first time that the postal service acted to help one bulk mailer to try to switch business from another. “Newspapers don’t have the ability to go after Valassis advertising, because the postal commission won’t let you cannibalize existing mail,” said Boyle. “This only works [for Valassis] because it goes after ads that are currently in newspapers.”
As big a challenge as the Valassis deal poses to newspapers, it may not be the only competitive threat facing publishers from bulk mailers. The Smart Source service operated by a division of News Corp. mailed twice as many coupons last year as Valassis, according to Kantar Media, an independent market research company.
The threats to the preprint business come at a time that the advertising category has become second in importance only to the ads that local merchants buy in the pages of printed editions. Run-of-paper retail advertising generated $6.6 billion of the industry’s aggregate $24 billion in sales in 2011, according to the NAA. In generating $5.2 billion in advertising in 2011, preprint volume surpassed classified, national and digital advertising sales.
Penultimate sobering note: Notwithstanding the stated intention of most publishers to migrate vigorously to digital publishing, printed papers remain the primary revenue source for the industry. Print advertising accounts for about two-thirds of sales, print circulation produces about a quarter of revenues and digital advertising generates only about 10% of revenues.
Final sobering note: Although the nation’s publishers collectively sold a bit less that $24 billion in advertising in 2011, they are unlikely to do as well this year. The NAA reported that industry revenues fell nearly 6.9% in the first three months of 2012 and reports from individual companies indicate that the decline continued at about the same level in the second quarter, too.
Just when you thought you had a handle on digital publishing, here comes a paradigm shift that will be more counterintuitive and more disconcerting for newspapers than all the technological innovations that have come before.
The disruptor du décade is called Big Data and it involves the collection, slicing and dicing of fragments of information that can be rapidly assembled to identify subtle macro trends or create actionable profiles that precisely target unique individuals.
The vastness of the opportunity is characterized in this quick paragraph from IBM:
“Every day, we create 2.5 quintillion bytes of data — so much that 90% of the data in the world today has been created in the last two years alone. This data comes from everywhere: sensors used to gather climate information, posts to social media sites, digital pictures and videos, purchase-transaction records, and cell phone GPS signals, to name a few.”
Throw in who individuals are, what they read, when they are in a particular place, where they shop, why they buy and how they feel about public policy and you have a wealth of valuable data.
The commercial potential for Big Data is the reason Facebook achieved a record high valuation of $104 billion when it began selling its shares on the stock market. Even though Facebook’s shares tumbled in the aftermath of its clumsily managed IPO, the company continues to gather more personal information about people and their friends than any platform yet devised.
Don’t be misled by the critics who pounced on recent articles questioning Facebook’s potency as an ad medium. While General Motors famously acknowledged immediately before the IPO that it was scrapping its $10 million Facebook ad budget and a Reuters poll found that only 1 in 5 users admit to responding to Facebook ads, the skeptics are missing the point.
Facebook’s success, or lack thereof, will not depend on selling banner advertising, whose pricing and efficacy will necessarily degrade as the supply of page views expands exponentially. Facebook will make its bones, if there are bones to be made, by innovating ways to commercialize the torrents of data it continues to accumulate.
Can’t imagine what the winning Big Data app will be? Don’t feel bad. Facebook might not know, either. But the $4 billion in cash collected at the IPO window equips the company to fund any number of science fair projects and business pilots. Eventually, Facebook – or perhaps someone tinkering in an IBM lab or a dorm room littered with empty Red Bull cans – will come up with the way to turn the growing nuggets of data into gold.
There is precedent in Silicon Valley for retroactively lashing a revenue model to a company already in progress. When Google was launched in 1996, the founders had no idea how they were going to make money with the speedy and accurate search engine they had devised. It wasn’t until late 2000 that Google began selling the ads that now accompany its search results.
Google’s AdSense system creates an audience of one when a user types a few key words into the search box, instantly triggering up to a dozen links to merchants who bid for the right to post ads related to the targeted expression. Although merchants pay only for the limited number of times someone clicks on an ad, the system worked well enough to deliver the preponderance of the $36 billion in revenues that Google reaped in 2011 (a sum equal, btw, to 1.5 times the combined print and digital ad sales of all the newspapers in the land).
Impressive as Google’s do-it-yourself system is in terms of performance, productivity and profitability, we someday will look back on it as a quaint, if not to say crude, form of targeted advertising. Because the keyword system responds only to the estimated location of and the keywords chosen by the user, it cannot leverage all the variables, context and nuance that a robust Big Data profile could provide.
If Google’s currently dominant digital advertising engine could be surpassed by faster, better and cheaper ways of connecting buyers and sellers, where does that leave newspapers?
To date, publishers have applied the same business model to everything from print and the web to the latest mobile and social platforms: Build the biggest possible audience.
This approach, unfortunately, is exactly at odds with the point of Big Data, whose goal is to connect individuals with information specifically tailored to them. The quicker Big Data applications develop, the faster the large but un-targetable audiences traditionally delivered by newspapers will become an anachronism, thus limiting their utility to consumers and value for advertisers.
While most publishers aren't equipped to be first movers in Big Data, they should be paying attention – and ready to jump into partnerships that prevent them from being left behind.
“How are we going to get investigative reporting to work for the digital media?” a frustrated editor asked me in a recent conversation.
“Our newspaper got a tremendous number of page views on the first day of an ambitious eight-part series and a decent number of hits on the second day,” he lamented. “But traffic just died after that.”
The answer, of course, is to leverage the power of the digital media to tell complex stories in a more compelling and less-wordy way than newspapers historically have done.
A great example of how to do this debuted last week in an instructive and important video that combines hard-hitting facts and audible cow farts to reveal the toll taken on our environment – and our health – by the estimated 48 billion hamburgers consumed annually in the United States.
Called “The Hidden Costs of Hamburgers,” the video (embedded below) is among the initial offerings of a new YouTube channel created by the ever-innovative Center for Investigative Reporting to provide one-stop access to the best investigative journalism videos on the web.
The I Files Channel, which launched last week, will feature contributions from such media partners as ABC News, BBC, the New York Times, Al-Jazeera and the Investigative News Network, which consists of 60 nonprofit news organizations including the Pulitzer Center on Crisis Reporting, the Investigative Reporting Workshop and the Center for Public Integrity.
CIR, which will curate the channel, promises to include videos from freelance journalists and independent filmmakers from around the globe. All the videos will be freely sharable on multiple digital platforms via the usual YouTube linking and embedding functions.
The most journalistically inspirational – and ecologically terrifying – video among the first projects posted on the channel is the burger investigation, a lively synthesis of politics, economics, science and animal husbandry that reports, among other things, that every Quarter Pounder adds another 6.5 pounds of greenhouse gasses to our overheating atmosphere.
Work on the project, which was undertaken by CIR to coincide with the launch of the new channel, began in the fall, with senior multimedia producer Carrie Ching teaming up with reporter Sarah Terry-Cobo and illustrator Arthur Jones to research and script the piece. In a disarmingly charming voice that complements Jones’ whimsical infographics, Terry-Cobo covers the many dimensions of a complex story in slightly less than eight minutes.
But don’t be fooled by the entertainment value of the video. It represents serious journalism, as demonstrated here in the closely annotated script, which identifies the source for every assertion. (One suggestion: The video would have more authority if there were a more prominent link to the annotated script.)
With each of the three contributors to the burger project working remotely from different locations around the country, CIR brought in the video for approximately $25,000, said Robert Rosenthal, the executive director of CIR, who previously ran the newsrooms of the Philadelphia Inquirer and the San Francisco Chronicle.
The time and talent expended on the hamburger video represents 20% to 25% of the resources that would have been devoted to a big investigative project at a newspaper, said Rosenthal in an email. While CIR will continue to pursue big projects in the future that appear in print, on air and on the digital media, Rosenthal also sees a clear opportunity to tell important stories in videos like the burger project.
Despite being steeped as anyone can be in the old-school traditions, Rosenthal knows that investigative journalists, like all journalists, have to work ever harder in the future to build audiences for their important work.
Often, the best solution won’t be 25,000-words packed into an eight-part series but an eight-minute video punctuated by cow farts. Next time you have an important story to tell, consider adding some hamburger-style helper.
Alan D. Mutter is perhaps the only CEO in Silicon Valley who knows how to set type one letter at a time.
Mutter began his career as a newspaper columnist and editor at the Chicago Daily News and later rose to City Editor of the Chicago Sun-Times. In 1984, he became No. 2 editor of the San Francisco Chronicle.
He left the newspaper business in 1988 to join InterMedia Partners, a start-up that became one of the largest cable-TV companies in the U.S.
Mutter was the COO of InterMedia when he moved to Silicon Valley in 1996 to join the first of the three start-up companies he led as CEO.
The companies he headed were a pioneering Internet service provider and two enterprise-software companies.
Mutter now is a consultant specializing in corporate initiatives and new media ventures involving journalism and technology. He ordinarily does not write about clients or subjects that will affect their interests. In the rare event he does, this will be fully disclosed.
Mutter also is on the adjunct faculty of the Graduate School of Journalism at the University of California at Berkeley.