Henry Blodget, the CEO and Editor-n-Chief of Silicon Alley Insider, has conducted a hypothetical analysis of the economics of newspapers gone solely digital, called Running the Numbers: Why Newspapers Are Screwed.
Blodget leads in with a obvious caution about the distinction between the online and off-line economies in advertising:
Newspaper content generates way more revenue in the physical world than it does online, because offline it can be packaged with classifieds and display ads and actually sold. In the online world, meanwhile, it has to be given away, and because classified ads are now run by classified sites and newspaper sites are only one of dozens of places where people get news, the advertising opportunity is comparatively tiny.
So warned, he sets up the scenario:
[L]et’s pretend that, tomorrow morning, every print reader stops buying the paper, and, instead, reads it online. To be safe, let’s further assume that each offline “subscription” actually encompasses two or three readers. In other words, let’s pretend that, tomorrow, print circulation goes to zero, and online readership jumps by 2.5 million. What would happen to the business?
1. The company would eliminate paper, distribution, printing, and all other physical production costs.
2. Online inventory (and, therefore, revenue) would increase by about 33% (7.5mm to 10mm users)
3. Content creation costs would stay the same. (The site would have to pay the freight for all the content it now gets for free).
4. All print revenue–ads and circulation–would vaporize.
Mr. Blodget then itemizes the necessary assumptions, or variable settings, for costs and revenues, all of which are fairly conservative, and most-likely over-generous towards newspapers. The results?
Revenue drops by more than half, 40%-50% of employees get fired, and the company still loses money. Using the NYT’s Q2 numbers and these assumptions, for example, revenue would have dropped from $789 million to $285 million. More importantly, EBITDA (earnings before interest, taxes, depreciation, and amortization) would have dropped from $118 million to -$64 million. Which means that management would just be getting ready to fire a few hundred more people.
While perhaps an extreme portrait, this is not necessarily an unrealistic extension of the prevailing expectations for news delivery in the near term. Perhaps it takes a mogul to raise a newspaper.