One of my biggest criticisms of Journal Register Company and Digital First Media has been how it has cherry-picked financial figures to show its transformation is succeeding, and how the press covered those incomplete numbers.

Journal Register, as a closely held company owned by a secretive hedge fund, doesn’t have to report its results. So it’s been near impossible for business journalists to put the pronouncements of CEO John Paton in context like they typically would with any corporate financial spin.

But when you file for bankruptcy protection, you do have to publicly release some numbers, and so, between those now in the public record (see the bottom of this post), along with Paton’s public statements, I backed into some rough estimates of how JRC’s digital transformation has gone and ran them by Paton, thinking he wouldn’t be able to comment. Surprisingly—and to his credit—he did and gave me precise numbers that give us the clearest picture yet of JRC’s Digital First-era finances.

Of JRC’s $295 million in revenue last year, $167.1 million of it was print ads, $86 million was print circulation, and $30.1 million was digital ads. That means digital ads were 10.2 percent of JRC’s total revenue, up sharply from the pre-Paton era when it was a miserable 2.8 percent.

The question for Paton and JRC is how fast that digital revenue can continue growing. We’ve noted a few times that it’s far easier to post big growth percentages when you’re growing off a small base. When Paton took over, JRC had one of the lowest rates of digital revenues in the business. A good chunk of the 235 percent growth in digital revenue since was low-hanging fruit. You can see this from the trendline of growth, which, according to the bankruptcy filing, was 108 percent in 2010, 61 percent in 2009, and 33 percent so far this year.

It’s worth noting that McClatchy’s digital revenue was at least 17 percent of total revenue last year. The New York Times’s was at least 17 percent, including my rough estimates of its digital-subscription revenue (that number was 13 percent excluding About.com, which it has since sold). Gannett’s digital revenue last year was 21 percent of total revenue, which is something. Gannett!

(One thing to point out here: A percentage is calculated with a nominator and a denominator, obviously. So when the denominator (total revenue) declines, as it has been, the digital revenue percentage will grow even if digital revenue declines, so long as it declines more slowly than other revenue streams. In other words, JRC’s digital revenue, 10 percent of the total today, would be just 5 percent if it still had 2005-size total revenue, and everyone else’s would fall similarly. Sharp print declines actually make digital look better than it really is).

Beyond the relative ease of posting big numbers off a low base, it’s easier to raise revenues if you’re pouring a bunch of money into a business, which, to its credit, JRC has done with digital. The ultimate question, though, is what kind of return on investment you can get. To tell that, we need to look at digital costs.

Paton tells me digital investment was $8.5 million for 2009 and a projected $21.7 million for this year. He didn’t have 2011 handy, but adding numbers in the filing to Paton’s 2009 figure gives us $21.3 million.

That’s a net gain of $20.1 million on a net increase of $12.8 million in expenses. The net return on investment is $7.3 million a year, which is pretty good, though our low-hanging-fruit premise would imply that every new dollar from here on out will be harder and more expensive to get.

The problem is, in the meantime, print-ad revenues fell from $206.6 million in 2009 to $167.1 last year, while circulation edged down from $89 million to $86 million. That’s a $43 million annual loss of print revenue (19 percent), and it’s only partially balanced out by print operating cost cuts, which will total roughly $40 million a year by the end of this year, according to JRC’s filing. By the end of this year, JRC’s print loss from 2009 levels will be roughly $62 million, if 2009-2011 trendlines continue.

So the digital gains and print cost cuts clearly weren’t enough to offset the loss of print revenue and the increase in other costs like pension shortfalls, and the result was bankruptcy.

That said, JRC’s digital revenue is still growing fast at 33 percent during the first half of this year. The question for its long-term survival is how long can it continue to keep up this kind of pace? As it surpasses the digital revenue percentage of companies like Lee and approaches others like the NYT, McClatchy, and Gannett, those digital gains are likely to moderate. JRC almost surely won’t end the year up 33 percent, as it will be harder to grow the second half off a bigger base.

Paton says it won’t be quite so daunting, “People like Lee are in the mid-20s. Gatehouse is in high 20% growth,” he says. “It’s just a bigger pie. There’s more money in digital right now than there is in print. With the right products in the marketplace we can keep growth in the 20- or 30-percent range. And from the cost-cutting perspective that has to continue. That’s not going to change anytime soon. The trick is if you can do that cost cutting and not go after (news) and sales.”

We’ll see, but I seriously doubt that level of growth can continue for long. Growing 30 percent a year through next year alone would entail nearly doubling last year’s digital revenues. (It’s also worth pointing out that much of that $30.1 million in digital revenue isn’t really digital. Paton told David Carr late last year that 60 percent of it was digital-only. The rest is bundled as upsells with print ads. That “digital” revenue has typically been declining across the industry as print advertisers exit.)

In the meantime, Paton tells me he hopes to cut tens of millions of dollars in costs (debt and pension and the like, not operating costs like the newsrooms, he says) via the reorganization. If JRC is able to get out from under a good chunk of the debt its owner Alden Global Capital also controls, it will have some breathing room.

At some point in the newspaper industry, print will have fallen so far that print-ad declines will get smaller on an absolute basis and digital revenue gains will be able to offset them. But that’s several years away.

I’ve long argued that digital subscriptions would help slow the fall of print and increase digital revenue. Paton is famously anti-paywall. But ironically, he also controls more newspaper paywalls than just about any other executive, inheriting 23 newly installed ones when Alden took over MediaNews and installed Paton as CEO of Dean Singleton’s former company. “Everybody thought I would kill them,” Paton says. “The first test that they did was abysmal. We’re talking about de minimis revenue over a 12-month period.”

But those were relatively crude paywalls. Paton, though he doesn’t seem too optimistic about it, says he is moving MediaNews’s paper to “paywall 2.0, using the all-access strategy test similar to what The New York Times is doing. We’ve redone them now with all the best practices that Journalism Online and Press+ say they have.”

“I’m not hoping for this not to work,” he says. “It’s real money. A paid print product is probably not going to be a great idea for the future. I do think, however, that when you create and spend tons of money creating apps for smartphones and for tablets that there’s a real possibility to have an all-access strategy. You take a look at the Denver Post’s iPad 2.0 app. It cost a fortune to build. Trying to reimagine how content is created and consumed is not trying to imagine how to get newspaper stuff on the iPad. I think people will pay for that down the road.
They will pay, I believe, for something that uses the medium for its strength. But then you’re going to have to spend that kind of dough to start having more resources. It’s a high-wire act.”

JRC2

(Further reading: Bill Grueskin’s open letter to John Paton.)

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.