REVENUE STREAMS AND POTENTIAL NEW REVENUE STREAMS

The two primary revenue streams for newspapers are circulation and advertising. During the second half of the 20th century papers became in- creasingly dependent upon advertising (see Fig. 5.2). In 2000 advertising provided 81% of the total income of daily newspapers.

PICARD

FIG. 5.2. Income shares for the U.S. newspaper industry 1950–2000.

Circulation grew from approximately 53 million copies daily in 1950 to

62.3 million in 1990, an 18.9% increase, but declined 3.2 million (about 5%) from 1990 to 2000, primarily due to the loss of evening editions of morning papers (Facts About Newspapers, 2001). These numbers are problematic because changes in circulation did not keep up with changes in population, and the circulation of newspapers declined from 353 per 1,000 population in 1950 to 202 per 1,000 in 2000.

Demand for newspaper advertising space has been more consistent than demand for advertising space and time in other media. Today newspapers receive about 20% of all dollars spent for advertising, the largest amount devoted to any one medium.

Three major categories of advertising are published in newspapers: na- tional advertising from large companies with business outlets or products distributed throughout the country; retail advertising (sometimes called display advertising) from local businesses making retail sales for goods and services; and classified advertising, small ads by businesses and indi- viduals that are divided into categories by the type of goods or services of- fered or sought.

Profitability

The newspaper industry is one of the most profitable industries in the nation, as well as one of the most profitable among communications industries. In 2001, for example, major public companies had operating profits averaging about 15% and net profits averaging about 12%.

The major newspaper companies are now among the larger corpora- tions in the nation. In 2001 the Tribune Co., for example, had assets totaling $14.5 billion, Gannett Co. surpassed $13 billion, Knight Ridder had assets of $4.2 billion, the New York Times Co. had assets of $3.5 billion, and Dow Jones & Co. had assets totaling $1.3 billion. Although not the size of firms such as General Motors, General Electric, IBM, and Exxon, the major newspaper companies rank in the top 150 in terms of assets, in the range of companies such as Colgate-Palmolive, General Mills, Kimberly- Clark, and Ralston-Purina.

Expense Picture

Newspaper costs can be broadly distinguished by the costs of gathering and preparing the product and the costs of printing and disseminating the paper. Newspapers have relatively high first-copy costs, that is, the cost for procuring and packaging the information and preparing it for printing. In this view, only one copy of a newspaper is really produced and the costs are relatively high for that copy. In the second part of the process, newspapers face costs for reproducing the product (printing) and distribution. These costs decline as economies of scale develop when the number of copies produced increases (Rosse & Dertouzous, 1979).

When considering newspaper budgets, it becomes clear that the largest contributors to newspapers’ expenses are production and reproduction costs associated with the printing aspects of the business (see Table 5.3). Even excluding overhead costs, expenses for “back shop” activities account for 30% to 35% of a newspaper’s operating expenses, and about one half of that cost is attributable to newsprint costs alone. Administration (absorb- ing overhead costs), circulation, and editorial costs contribute about 10% each to operating expenses.

Labor

Despite the increasing reliance on mechanical and electronic equipment, labor is still a primary cost in the newspaper industry, requiring about 40% of operating revenue to pay for labor costs. Nearly one half a million persons are employed in the newspaper industry nationwide and 48% of employees are now women (Fig. 5.3). About one half of the employees are involved in prepress labor. Production and maintenance activities account for about 48% of the nation’s newspaper workforce. Editorial and administration (including executives) activities each account for about 15% of the total, circulation activities for about 12%, and advertising and promotion for about 10%.

In many large newspapers and geographical areas in which organized labor has historically been strong, newspapers and employees engage in

5. ECONOMICS OF DAILY NEWSPAPER INDUSTRY

115

TABLE 5.3

Revenues and Expenses as Approximate Average Percentages of Operating Budgets

Operating Revenues Advertising

65%–80% Local/retail

Operating Expenses Editorial

8%–12% Building and land

Operating Margin Before taxes & interest

FIG. 5.3. Newspaper industry employment (in thousands).

5. ECONOMICS OF DAILY NEWSPAPER INDUSTRY

collective bargaining. Primary labor unions involved in the newspaper industry include the Communication Workers of America (which includes the former International Typographical Union and the Newspaper Guild), the Graphic Communication Union, and the Brotherhood of Teamsters. In the smaller papers and in regions of the country in which right-to-work laws prevail or antiunion sentiments are strong—such as the southeastern states—unions represent employees in few newspapers. Unions represent- ing composing and printing employees and vehicle drivers have had the most success in gaining members and agreements because of their special- ized knowledge and historic strength nationwide. Nevertheless, unions play only a small role in the newspaper industry as a whole, but are an im- portant economic factor in the largest newspapers.

Although unions have had a minor effect on the newspaper industry as a whole, the increasing power of large newspaper companies created by public ownership has led unions to establish cooperative efforts to increase their representation of newspaper employees, particularly those working for newspaper groups, in the 1990s. As a result, large newspaper corpora- tions are becoming more active in establishing and pursuing antiunion activities. These actions precipitated lengthy labor disputes at the New York Daily News in 1990 and 1991 and the Detroit Free Press and Detroit News in 1995 and 1996.

Sales

Income produced through sales of newspaper circulation and advertising is continuing to grow despite the fact that the newspaper industry is mature and many newer media and communication devices are challenging newspapers’ positions as information and advertising providers.

Income from newspaper circulation rose from $1.3 billion in 1956 to $10.7 billion in 2000 (Fig. 5.4). When adjusted for inflation, however, it is clear that income has been stable in real terms for about a decade, after de- clining from a height in 1987.

Advertising expenditures in newspapers grew from $2.1 billion in 1950 to approximately $48.7 billion in 2000 (Fig. 5.5). When adjusted for inflation, the figures indicate that in real terms newspapers get 2.5 times more advertising revenue today than they did at mid-century.

Products

Many newspapers offer a portfolio of print products, including total market coverage papers and real estate and auto guides. Efforts to develop revenue from developing online editorial and advertising sites are being made and today about 90% of U.S. papers have online operations, but very few papers

PICARD

FIG. 5.4. Circulation revenue of U.S. newspapers, 1956–2000 ($ billion, constant dollars at 2000 index).

FIG. 5.5. Newspaper advertising expenditures (daily and Sunday), 1950–2000 (current and constant prices, $ billion).

have found ways to make these operations profitable. Despite the financial difficulties online newspaper sites tend to be the most visited local sites and are used more often than online sites operated by television stations.

The growth of mobile telephony is leading some newspapers to develop headline and notification services using short messaging systems (SMS) and to develop mobile Internet products.

With the growth of these additional operations, newspaper managers are seeking ways to effectively integrate and coordinate cross-media activi-

5. ECONOMICS OF DAILY NEWSPAPER INDUSTRY

ties, including operations with radio and television stations that may be owned by the same firm or through joint ventures with those owned by other companies.

Distribution

The costs of getting printed copies of newspapers to readers now accounts for about 10% of most newspapers’ expenses (see Table 5.3). Although the costs of transportation and labor are high, newspapers rarely meet these costs directly but enter into subcontracts with distributors bearing the ma- jority of the costs.

The most common delivery system is that of independent distributors, which is used by more than three fourths of all daily newspapers. Inde- pendent distributors purchase papers at wholesale prices and sell at retail prices. Their distribution territories are typically small, and the average newspaper has one carrier for each 100 subscribers. Adult independent distributors typically serve routes ranging from 200 to 600 customers, and youth carriers usually have routes ranging from 20 to 100 customers (Thorn, 1987). About 15% of all papers use contract distributors, that is, agents paid a set fee for delivering papers, and about 10% use employees who receive hourly wages or salaries

The costs of distribution are particularly problematic for newspapers because costs rise as the distances to customers increase and distribution den- sities decrease. Distance and density issues can combine to create situations in which newspapers may have potential customers who want to receive the paper but the papers cannot serve them without incurring a loss (Picard, 2002).

This occurs because it takes more time and effort to reach customers, and the costs for transportation vehicles, operating costs, personnel, etc. rise as distance from the production to the delivery point increases.

REVENUE STREAMS AND POTENTIAL NEW REVENUE STREAMS