How Will the News Media Make Money in 2013?

Money Piggy BankTo be clear, if trends hold true, this is more of a story about resisting decline than it is about accelerating growth. The idea up for grabs is not that news media companies have identified reliable avenues of revenue growth, but that they face an industry-wide problem (a crisis, if we want to be dramatic) that has been growing for a number of years.

The debate over how the Internet would change news media began pretty much moment the Weekend City Review uploaded its first summary of the week’s news in 1991, one of the earliest incidences of a hard-copy subscription-based news service making the leap. Before that, in the late 1980s, pure-play online newspapers did exist, but primarily in localized networks.

Your 1 Feature Stock Pick for February is hot off the press. Click here to discover it now!

The dot-com era has now come and gone (today could probably be dubbed the social-media era), and the digitization of news media is old-hat. The Internet did such a good job democratizing the creation of and access to content that the exclusivity of a breaking story pretty much vanished overnight. Anybody anywhere could publish and read news content for free. The previous printing, distribution, and human capital infrastructure vanished and, as a result, many news outlets, both small and large, collapsed. The conversation about the breakdown of the traditional 80/20 advertising/circulation revenue model seems quaint in its antiquity at this point.

Producers and consumers of news media have pretty much adapted to the new norm, which is: if you don’t swim as hard and as smart as you can, you will drown in the oversupply of information and the tyranny of stupid popular things

Man Measuring MoneyAs it stands, display ad revenue is the bread and butter of the news media industry. The operating model is: get page views, get paid. Advertisers want to put their products in front of as many eyes as possible. The problem for both parties is that the obvious issue of oversupply. The ability to publish anything essentially for free means a battle royal for page views. The value of a website that gets a certain amount of traffic goes down the more of those there are.

Web traffic has increased something like 40 percent in just three years, and as the audience grows, news media has tried to access more and more of it. Five million people who read a news website is fine and dandy for an advertiser, but a website of the top 10 silliest cats on the Internet that attracts hundreds of millions of page views is even better.

From here, it’s clear to see why companies that relied on ad revenue began collapsing. Ad revenue per impression is falling faster than the growth in traffic. The economics of ad-driven news media is falling apart, and the next chapter is already here. If it’s not display-ad revenue that will grow a news media company, it’s something else. If the portion of Internet users who want to consume news media instead of cat media is small, then companies will have to derive more revenue per user.

Money ManOn Thursday, the New York Times Company (NYSE:NYT) reported fourth-quarter and full-year 2012 results that pretty much gave the finger to the malaise cast over the industry by the breakdown of the ad-revenue model. Shares climbed over 14 percent as the company revealed that it had beaten away the bears with a baseball bat and reversed the traditional ad-dominated revenue split. For the first time, circulation revenues, which grew by 10.4 percent to $952.9 million, surpassed advertising revenue, which declined 5.9 percent to $898.1 million.

There are a number of reasons why this happened, and only some of them are because the New York Times Company has smart management and good writers. Those two facets resulted in the smashing success of its paid-content initiative, which many thought would fail in the face of excessively abundant free material.

The New York Times and publications like the Wall Street Journal can successfully charge readers for online content because they offer a best-in-class experience. That is, people will pay, but only if its worth it. The trick, like in any industry, is to create a compelling product. At the end of the day, consumers decided it was worth a few bucks for the insight provided by the New York Times on the same news events that everyone with a laptop and a blog is covering.

So the New York Times Company has become increasingly successful at monetizing subscription/circulation. The other part of the equation is declining ad revenue. Again, this has less to do with traffic volume than it has to do with competition and the online advertising ecosystem at large.

There is a science to advertising that Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) are getting really good at. They are leveraging information to create unique niche-advertising opportunities for clients that traditional news media websites have a hard time replicating or competing with. Why pay as much for a website that will put your ad in front of 1 million people, 5 percent of whom may have interest in your product, when you can put your ad in front of 100,000 people who are highly likely to care about what you’re selling?

Their success at creating the best information-based targeted ad products is putting dollars in their pockets, but not translating into a feasible level of revenue for many news media companies. The earnings, even populated by other revenue streams, speak to this. Here’s a look at how the New York Times Company, Thomson Reuters (NYSE:TRI), Gannett (NYSE:GCI), and McClatchy (NYSE:MNI) have done over the past few years. Revenue values in millions.

2007 2008 2009 2010 2011 2012
New York Times $3,195 $2,949 $2,440 $2,393 $2,323 $1,990
Thomson Reuters $13,355 $12,493 $14,823 $13,462 $13,660 $12,890*
Gannett $7,439 $6,768 $5,613 $5,439 $5,240 $5,350
McClatchy $2,260 $1,900 $1,472 $1,375 $1,270 $1,231

*Estimate

At the end of the day, led by the strong example set by the New York Times Company, it looks like news media would be smart to rely more on its readers and less on its advertisers to make money.

Don’t Miss: Here’s Why News Corp Is Spinning Off Its Publishing Division.