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| Newspapers learn from cellphone operators |
| Richard Beales / May 08, 2009, 00:13 IST |
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Newspapers are learning a thing or two from mobile phone operators. Along with Amazon's launch on Wednesday of a larger-format version of its Kindle electronic reader, the New York Times and Washington Post are borrowing a trick from the mobile phone industry: cheap hardware in return for signing long-term subscription contracts.
It's worth considering the economics of the paperless - and wireless - newspaper. Sure, revenue would initially fall; but that could be more than offset by avoided costs. Lock readers in for a couple of years the way mobile phone operators do, and a publisher could even justify giving the reader gadget away.
Take the New York Times Company. Its top two papers attracted almost 2m readers combined for their more popular weekend editions in 2008. The company's total revenue, with its other bits and pieces included, was $2.9bn, with $1.8bn - more than half - coming from advertising and $900m from circulation.
On the expenses side, its $2.8bn of 2008 operating costs included at least $1.1bn that can be attributed to producing, printing and distributing physical newspapers. That's divided between raw materials like newsprint, an estimate of non-newsroom wage costs and a (probably low) guesstimate of distribution costs.
Now consider an imaginary new incarnation of the same company - call it Changing Times. This company prints no newspapers. Everything is distributed daily to its readers’ Kindles - or rival electronic readers - over wireless networks. Of course it has a website, too; but unlike the Times, it charges for it, helping keep Kindle subscriptions down.
Given the choice, not all existing subscribers would want to read their newspapers this way. And although the new Kindle's larger screen is designed to accommodate a newspaper layout with advertisements, ad rates would probably be lower than for a printed paper.
STILL, suppose Changing Times managed 80% of the Grey Lady’s circulation revenue and 60% of its ad revenue. Overall it would then have about $2bn of revenue each year – some $900m less than the Times Co.
But its cost base would be lower than the Times Co’s by more than that – at least $1.1bn – because it wouldn’t have to print or distribute papers. That means that in operating profit terms, Changing Times would be better off by more than $200m a year - approaching $140 for each of its nearly 1.6m subscribers.
The new Kindle is priced at $489 retail. Suppose the wholesale price is 40% lower, at just under $300. Spread over a two year reader subscription, Changing Times could afford to give the gadget away and still make almost the same slim operating profit as Times Co made last year. Anything longer, and it would be in the money compared with its printed rival.
For now the Kindle may be just a nice extra for the Times Co, replacing some lost subscriptions and perhaps creating new markets in areas it can’t currently reach. If the company wanted to shift entirely to the Changing Times model, it wouldn’t be possible without wrenching and expensive change. But at least, with a little help from Amazon, it’s one version of a future in which newspapers survive.
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