One local TV station, interviewed for this report on the condition it not be identified, illustrates this paradox well. The station is a successful local broadcaster operating in one of the top four U.S. television markets. It has a 150-person news staff and is a leading source of local news in its market. For several years it has also operated a website, run by three dedicated producers who do original reporting as well as post stories and video drawn from newscasts.
On paper, the site has the assets to be a top online outlet for news about its city. It can draw on its sizable reporting resources and the promotional power of the station’s broadcast operation. And it has free access to a large supply of valuable “rich media” assets in the video and audio segments produced by its parent.
The station has built a large online audience over the last several years, growing from a monthly average of 550,000 unique visitors in 2008 to about 2.5 million at the end of 2010. Still, the station’s general manager has struggled to make the site break even. He shaved expenses substantially by outsourcing software and site maintenance and by cutting back on reporting from the field; not counting salaries, the site now costs roughly $500,000 per year to run. He has also tried a number of different sales strategies, including revenue-sharing partnerships and small, dedicated sites—“microsites”—custom-built for particular advertisers. Still, the site accounts for just 1 percent of the station’s overall revenue. “Forget local being the holy grail,” he says. “National sites are making money, but we don’t have the scale locally to do so.”
The cost pressure can be even more severe for local newspapers following their audiences to the Internet. A newspaper has enviable assets for putting news on the Internet—because it produces so much news text every day—and in theory it can also achieve enormous savings as it makes the switch to digital distribution, which does not require ink, paper, and delivery trucks.
John Paton, chief executive officer of the Journal-Register Company, based in Yardley, Pa., has made reducing legacy costs the centerpiece of what he calls a “Digital First” strategy. The company, which came out of bankruptcy in 2009, owns eighteen local dailies and scores of other “multi-platform products” across the Northeast and upper Midwest. Since becoming CEO in 2010, Paton has reduced expenses by consolidating printing facilities and outsourcing a wide range of noneditorial functions, from delivery to advertising design. He promises to have reduced infrastructure costs by 50 percent in three years.
Another prong of “Digital First” is to wean the publisher from its dependence on print advertising revenue, which Paton calls the “crack cocaine” of the business. He predicts that by the end of 2011, more than 15 percent of ad revenue will come from the digital side and that most of that will be purely online revenue—not ads sold in print-online package deals.
Paton has been a popular figure on the future-of-journalism circuit, appearing frequently at industry conferences to extol his company’s digital gains. He frequently cites growth percentages for the Journal-Register site—for instance, he says the company’s “digital audience” grew 75 percent in 2010, reaching 8.8 million unique visitors in March 2011. He also recently announced bonuses for employees and declared the company had made a $41 million annual profit. It isn’t clear, however, how that profit figure is calculated, because the company does not provide data on revenue, costs, or other metrics as a publicly traded firm would. Paton says his investors don’t want to disclose too much.
But Paton does acknowledge that moving revenue online amounts to “trading dollars for dimes”—or perhaps, if he’s successful, quarters. The gamble is that the Journal-Register Co. will be able to cut costs and increase its online audience quickly enough to compensate for the lower revenue that online advertising brings.
The notion of “trading dollars for dimes” captures the impact of digital distribution on the economics of the business. Newspapers, magazines, and broadcasting are all characterized by high fixed and low variable costs; it’s quite expensive to produce the first copy of a newspaper, but it’s far cheaper to produce the second copy—or the millionth. A local broadcaster faces much the same set of costs whether it reaches 100 viewers or 100,000. Hence the traditional media’s profound economies of scale. News outlets that could not build a large enough base of readers or viewers to cover their steep fixed costs have tended to collapse in a few years, mired in debt. But those that surpassed that break-even point and went on to establish a mass audience could become immensely profitable—and those steep fixed costs created a natural barrier to competition.