I wrote the other day about why the Kindle—at least in its current incarnation—isn’t going to save the newspaper industry. But I saw some new data that leads me to believe it won’t even make a ripple.
Bloomberg dropped some very interesting information in a story about how Knight Ridder spent three years working on a sort of paleo-Kindle fifteen years ago—that newspapers only get about 30 percent of the revenue from Kindle subscriptions.
Thirty percent.
So of the $14 a month a reader pays for a The New York Times, say, the Times itself actually gets about $4.20. The rest goes to Amazon and to the wireless carrier that transmits the data.
Ouch.
And that $4.20 is all there is folks. There aren’t any ads on the Kindle.
So let’s revisit that crude math I did the other day:
Let’s go to the chalkboard—or the back of the napkin, more like. If every one of The New York Times’s 1.04 million subscribers suddenly switched over to the Kindle at $14 a month, the “paper” would get $175 million in annual revenue (actually less, Amazon takes a cut, though I’m not sure how much). That’s nothing to sneeze at, but that’s probably about what the newsroom alone costs every year—the last figure I saw was $200 million, but that was before some recent cuts.
That $175 million number if all Times print subscribers suddenly switched to Kindle would now be $52 million. Basically, a Kindle subscription only covers about one-quarter of its weight in newsroom costs alone. Forget about marketing, sales, and other overhead.
That means that those subscribers are extremely unprofitable, especially as compared to newspaper subscribers (online-only readers at non-charging sites anyway are the biggest money losers there are). And even in a real-world scenario where Kindle subscribers make up only a couple of percentage points of the subscriber base, their impact will be minimal—negative if they are converts from the newspaper.
So, again, Rupert Murdoch is entirely right to be sounding off about not giving his content to Amazon. Here’s what he said:
I can assure you we will not be feeding our content rights to the fine people who created the Kindle. We will control the prices for our content and we will control the relationship with our customers. Any device maker or website which doesn’t meet these basic criteria on content will not be doing business long-term with News Corporation.
Especially if they’re taking 70 percent of your revenue.
So the gap between what the Kindle as is and what it needs to become to be viable for newspapers is even larger than I thought the other day. It would take even more ads at high rates, even higher subscription prices and a big shift in the revenue pie toward the content provider to make it even approach viability.
Until then (and that’s unlikely), the Kindle just looks like another way for newspapers to turn profitable customers into unprofitable ones.
But what happens if or (more likely) when newspapers go digital only? No paper, presses, no pressmen, no carriers, trucks, etc., and associated costs. Does the 30 percent look better then?
#1 Posted by cbj, CJR on Thu 14 May 2009 at 08:52 AM
I'm not entirely sure what you mean when you say "there are no ads on the Kindle." It seems to me that you're conflating XML versions of the newspaper text, ala the (NY) Times Reader, with screen facsimile or redesigned versions of the newspaper, which the Kindle and other e-book readers are able to display. The Times Reader dynamic display wasn't able to work around static advertising particularly well; however, a Kindle or other e-reader PDF version of the paper could easily include ads. The two aren't mutually exclusive.
Second, you're making a significant logic leap by assuming that electronic editions are meant to "save" newspapers. As someone who was involved in creating an electronic edition of the Columbia Missourian at the Missouri School of Journalism, I can assure you that the goal is substantially different. We found that there was an audience of people who didn't care to read the newspaper on the Web but also didn't like the print edition. An e-edition is a nice compromise between the two, especially if you can capture some ad revenue out of it.
There's also a logical fallacy that I see here that many people make -- namely, you're assuming that subscription revenue is significant to newspapers. Although it's a big chunk of the "revenue" department, it's also a huge chunk of the "expense" column. Most newspapers I've worked at are happy to break even on subscriptions. And every new subscription is one more paper to print, one more stop along the route, one more fee to pay a carrier.
By contrast, the subscription revenue you'd get from a Kindle subscription are pretty much pure profit -- the costs of publishing the edition are static regardless of how many you deliver.
Put simply, the market for readers of e-editions is certainly not one that's going to save newspapers. But the calculus for newspaper owners is whether the revenue you can capture by offering readers the edition is worth whatever amount of subscription revenue you might lose.
#2 Posted by Rob Weir, CJR on Thu 14 May 2009 at 09:07 AM
Yikes. -- But the Kindle does still represent many cost savings: No need to actually produce and distribute an increasingly expensive print product, and no need to pay for a sales staff to sell ads.
Still, I doubt that amounts to 70% of The Times' operating cost.
#3 Posted by Ken Hawkins, CJR on Thu 14 May 2009 at 10:13 AM
Hmmm, I get the WSJ on my Kindle every day, they were one of the launch day content providers.
#4 Posted by Russell Stewart, CJR on Thu 14 May 2009 at 11:57 AM
Hi, Rob,
There are no ads on the Kindle newspapers now. There may be in the future--there should be--which I noted would be one of the only ways to make this work. But there aren't now. That's all we can go by then.
As for "saving newspapers," I'm not making that leap. Much of the press and blogs did that. That's why I took a look at this in the first place. But that's okay--newspapers do need a savior right now, and any quasi-revolution that comes along justifiably raises hopes. And you make it sound like people just start reading E-editions out of nowhere. They may not like reading the print paper or the Web, but they do. And these things are tailored to look more like print, which is meant to appeal to their profitable print subscribers.
I most definitely do not make that logical fallacy re subscriptions. Please read the original post, which I linked to in this post. I make it very clear that papers lose money on print circulation and that they don't with digital readership. And nothing in this post says that print circulation is profitable. I said digital "subscribers are extremely unprofitable, especially as compared to newspaper subscribers." They are. Newspaper subscribers bring in tons of ad revenue to make up for the loss leader of the physical product and its delivery.
You, however, fall into the all-too-common logical fallacy of assuming that the cost of a reader on a Kindle is only what it costs to deliver the product to them. That presumes the print circulation will continue paying for the newsroom and overhead and that digital readers are just gravy. That's so wrong. The cost of the newsroom and overhead (especially in an era of declining print circulation) should be apportioned to each subscriber, regardless of platform. So the subscription revenue from Kindle (or the pennies on the dollar you get from Web readers) is in no way pure profit. In fact, as I said, it's a huge money loser because the revenues don't come close to covering the cost of producing the journalism.
And this is also wrong:
"But the calculus for newspaper owners is whether the revenue you can capture by offering readers the edition is worth whatever amount of subscription revenue you might lose."
The calculus is whether the revenue you get from subscriptions to the Kindle will supplant the amount of advertising revenue you are losing from print circulation. If Kindle readers switch from utterly unprofitable, non-paying Web readers, then you gain. If they switch from the newspaper, then you lose--bigtime.
It's not even close.
#5 Posted by Ryan Chittum, CJR on Thu 14 May 2009 at 01:12 PM
When making business decisions you need to consider MARGINAL cost and benefit. They are already spending on the newsroom, which is a FIXED cost. So every paper they sell has a marginal cost only of print and distribution (and marketing). The fact that these don't pay for the news room doesn't mean you should turn away customers who are willing to pay more than the cost of getting the paper to you.
The Kindle's distribution cost is basically nil. But it might have a cost of taking subscribers way from the print edition. That plus marketing is the true marginal cost. Marginal Revenue - Marginal Cost = Marginal Profit. Any business decision that produces positive marginal profit should be taken.
#6 Posted by Chris Corliss, CJR on Thu 14 May 2009 at 01:23 PM
Right, but the point is we're searching for sources to pay for the newsroom, and I understand the biz terminology of fixed costs, but newsroom costs haven't exactly been fixed for years. Those costs have been plummeting in as papers slash staffs because of collapsing revenue.
Of course, any true marginal revenue newspapers get from Kindle should be snatched up, especially if it converts them from Web-only readers. But to the extent that the Kindle lures newspaper readers from their print subscriptions, then it's a massive money loser. That's net negative revenue.
Also, even the truly marginal revenue from the of Kindle is something of a pittance. At $4.20 a month, the Times would make about $50 a year off a reader. Adding 100,000 "marginal" readers—a huge number— would be $5 million a year, or enough to cover about 2 percent of newsroom costs alone.
And I wouldn't say the Kindle's distribution cost isn't nil. Readers pay $14/month for a Times subscription, but 70 percent of that revenue goes to distribution costs to Amazon and the wireless carrier.
Papers have to find new sources of revenue to shore up their newsrooms, and I'm betting Kindle would have a net negative effect when you account for all the print subscribers that switch.
#7 Posted by Ryan Chittum, CJR on Thu 14 May 2009 at 03:03 PM