An Old Revenue Model Returns

At this year’s WAN-IFRA World Congress in Washington D.C., it was announced that audience revenue exceeded advertising revenue for publishers worldwide for the first time in many decades. At the same event, Arthur Sulzberger said that during his tenure at The New York Times, advertising revenue has gone from 95 percent of total revenue for the company to less than half. The transition to audience revenue from advertising revenue is a reflection of the changes in the industry brought about by the internet and mobile delivery platforms, and the revenue shift is accelerating despite the growth in advertising technology and programmatic exchanges. A positive outcome of this trend is that products, both print and digital, will better serve the needs and preferences of readers instead of advertisers. Publishers that have invested in product development and added-value services are leading the industry in financial performance and audience growth. We believe this trend is valid for both national publications as well as regional and local publications.

The internet has changed two fundamental characteristics of the market for news media and content: the competitive landscape and the addressable market. Prior to digital distribution channels, the addressable market of a publisher was the footprint of their print distribution network. Only a few publishers have nationwide print delivery capability, and most publishers, particularly news media, are limited to their metropolitan areas or regions. When advertising revenue was high, it subsidised the cost of delivery, which caused the footprints of most publishers to grow beyond the area it would have been if determined by audience revenue alone. The economics of print distribution networks and print advertising, where a disproportionate share of revenue goes to the publisher with the largest audience, create an incentive for consolidation among print news media. That market dynamic has enabled most newspapers to achieve near-monopoly status in their markets. The mindset of these organisations was that all circulation was good regardless of the price, since that had been the winning formula in print. As digital distribution platforms emerged, they provided an opportunity for publishers to extend their addressable market beyond their print delivery networks, and most provided their content to the digital audience for free.

Digital advertising revenue will likely not flow to publishers to the extent it did during the print era due to the audience commanded by a few large technology firms. This is despite the emergence of new advertising technology and digital exchanges that reduce the friction of transactions and provide publishers access to nationwide advertising markets. Publishers will be able to earn premium advertising rates on inventory that they can define using their own audience data, but much of their traffic is from individuals they do not have a recurring relationship with and thus not much data.

These trends suggest publishers will be the next industry to transform their business through the use of customer analytics and yield management, following in the footsteps of airlines, hotels and others that segment their audience and price each according to their preferences and price elasticity. Those industries have desensitised the market to differences in price across customers by business-to-consumer companies, so individual customers will likely accept that publishers identify their high-value customers and treat them differently with an associated premium price. Similarly, publishers will identify customers with very high price sensitivity, whether it be from a lower valuation of the product and diminished willingness to pay or an income constraint that limits their disposable income, and target them with a lower priced and less-exclusive product.

The analytics publishers will need to achieve audience revenue growth will be focused on individuals and their behaviour as customers. Publishers will need to collect in one place the data on an individual or household wherever it exists in their organisation. They will need to form a holistic understanding of that customer’s experience, both from the content and advertising side, and from print and digital content consumption. Publishers will need to predict how individual customers respond to subscription offers and renewal price changes and adjust accordingly. Advertising revenue should not be written off altogether, and much of the analytics around audience will yield incremental revenue on the advertising side too through targeting of premium segments and the addition of offline customer information to the digital information they are collecting.

We believe that print and digital publishers can survive with most of their revenue coming from their audience. Leading publishers already have this business model, and in European markets where publishers never had the monopoly status most U.S. print publishers have enjoyed, publishers have long existed with 80 percent of their revenue from their paying print customers. We believe this model is more efficient and productive, with the audience and publishers benefitting from their direct financial relationship, than what has happened to the products and services provided by publishers focusing on advertising revenue. Ironically, the emergence of digital platforms may result in better print products.

–Matt Lindsay, Ph.D.
president – Mather Economics