Part 1: The Chasm

(First of three parts. Get a copy of the Crossing the Chasm white paper.)

These are not happy times in the newspaper business, and they're not about to get better soon. In fact, the industry is just entering a period of great upheaval and pain as it transitions between the current primary reliance on print advertising as a revenue source and the magical point, somewhere in the future, when online ad revenue begins to truly support the business.

How best to describe this period of transition, with its scarifying depths before reaching the other side? Call it the chasm.

How wide is the chasm? I hope you're sitting down. The optimistic consensus seems to be that it's going to take five to eight years before online revenue is sufficient enough to equally support the industry. Five years is probably extremely optimistic; eight years may even be on the low side.

And how deep is it? So deep that we will see unspeakable changes in the industry over the next few years. In the struggle to transition to a business model primarily funded by online advertising, countless more jobs will be lost in the newspaper industry because of cost-cutting, mergers and acquisitions among newspaper chains will continue, highly leveraged newspaper companies will be gravely threatened and, yes, some newspapers will close. It's a bleak picture as the industry enters this chasm.

You can see one way of looking at this transition period in this table and chart: They show print ad revenue, currently at about $45 billion a year for the entire newspaper industry, declining by 5 percent a year, which is about the current rate of decline. At the same time, they show online ad revenue, currently at $3.5 billion, rising at a 20 percent annual rate, similar to the past couple of years. (Not included in this analysis: circulation revenue, which is another $11 billion a year but not as immediately threatened as advertising.)

Those percentage changes may be optimistic, but at the moment they're the best guesstimates we've got. Put them to work on this simple chart and you see total industry revenue bottoming out at about $44 billion in 2012, remaining at that level for four years as the two sources reach a sort of equilibrium and the two revenue lines cross, and then finally rising again, eight years out, as online revenue begins to really heat up. By 2018, good news: Online revenue begins to exceed print. By then, the transition is complete.

There are a few things that may affect those two trendlines. One is the possibility that the erosion of print will accelerate--and indeed, there have been some indications in the recent newspaper company results that the decline in advertising revenue is worsening. On the other hand, desperation will (hopefully) force more aggressive attempts to wring dollars out of the online business, including more sophisticated advertising types and new sources of revenue, while advertisers become more savvy about the potential for online ads. That would increase the growth of online revenue.

Nonetheless, it's a wide, ugly chasm. We can see the online-supported headlands on the other side, but there are a few years of deep pain until we get there. That's not good news for newspapers that already are cutting costs to the bone to try to weather what we can now see as merely the early stages of this transition. And as I said, this may be optimistic: a recession, for instance, would widen the gap and exacerbate the pain. Ask publishers in real estate-sensitive states like Florida and California what that's like—they're already suffering heavily from the fallout from the mortgage-loan fiasco. And it's not just ad revenue that's falling, either—as the latest circulation numbers show, print readers continue to desert newspapers as well.

In the chart, we see that newspaper print advertising revenue drops to half of its current level by 2020--while online revenue skyrockets to 10 times its current amount in the same period. Long-term, that's a sign of hope for the news business and the businesses that can survive this transition. Unfortunately, there's also a case to be made that newspapers are actually widening and deepening the revenue chasm by failing to adequately innovate online and falling behind their smarter, more aggressive competitors. I'll look at that in my next post.

Part 2: Digging a Deeper Hole
Part 3: Building a Bridge to the Future

Comments

[Jon Garfunkel]

Mark-- looking forward to the full report. One thing is a mystery to me as well-- I've read about the 20% annual growth rate, but that rate is not going to come from eyeballs alone. Even Yahoo News has not been hitting 20% unique visitor growth rate annual. So it comes from "more sophisticated advertising types"-- either more intrusive visually, or better targetted.

Regarding "new sources of revenue" I hope you consider the Paper Trust model I've devised-- http://civilities.net/PaperTrust