Of Fly Eyes And Newspaper Revenues

You know how the compound eyes of a fly are designed to spot motion and not stationary objects? Well, to a lesser degree ours are as well (which is why we don't see our nose). We're evolutionarily trained to focus on change, even at the cost of sometimes missing what's right in front of us.

The chart below (from Gawker) brings this to mind. It shows US newspaper advertising revenue from 1982 to last year, with the dark brown print revenues and the light brown online. It was headlined "Over the precipice", and the same news (of a 9.4% fall in print ad revenue and a 7.9% fall overall, including online) elsewhere got similarly apocalyptic coverage about the largest fall in fifty years.

But when you see this chart, what's the first thing that you notice? Surprisingly, the industry is just ten percent off its historic highs (much like the stock market) and is still twice as big as it was twenty years ago.

[continued below chart]

If you'd ask me to describe the state of the newspaper industry based on the scary coverage about it alone, I would have guessed that it had fallen by half and that we were back to 1970s levels. Instead, it's a $45 billion business, which is twice as big as Google and Yahoo combined.

The reason we get this wrong is that we give too much weight to the first derivative (growth) or even the second derivative (change in rate of growth) and not enough to the absolutes numbers. In the past, I've called that "endism" and its symptoms include equating negative growth (or even, more sinfully, slowing growth) with death.

Here's the example I gave in the earlier post [updated to reflect comments], using the hypothetical example of Consumer Reports:

• "Absolute people" think: "4 million subscribers is a lot. Consumer Reports must be doing something right."
• "First derivative people" think: "It was 4.5 million two years ago. Consumer Reports is dying."
• "Second derivative people" think:  "They lost more readers last year than the year before! Consumer Reports is dead."

The truth is that the newspaper business is still a huge industry and will be around in one form or another for the rest of my life. That is not to dismiss the declines, but only to note that there's still a lot of money there and what is required is strategic change, not giving up the ghost.

Growth industries are different from sunset industries, but in many cases the second category is larger (one example: the Yellow Pages is still a $16 billion business).  Managing companies on the way up takes a different set of skills than milking them for cash on the way down (and often different people, witness the buyout guys), but fortunes are just as often made the second way.

What people forget is that industries peak at the top. Which is to say, at the very time that the first and second derivative people are writing off a business, those who can stand back and see the value still left in it can make a mint. Laugh at newspapers if you will, but I'll bet some private equity firm out there is looking at the chart above and licking their chops.

Comments

[albert]

"They lost 200,000 readers in three years! Consumer Reports is dead."

How is that a second derivative? A second derivative would be "They lost 40,000 more readers than they lost last year!"

No?

[Chris Anderson]

Albert,

Yes, indeed. Typing too fast. Now fixed...

Thanks!

[Hugo E. Martin]

If you measure the impressive growth of the advertising shown in your picture from Gawker with the development of advertising spend, GDP per Capital and (or) price development since 1985, it would look - on best account - flat.

Btw., why so fatal Chris? "Milking the newspaper industry for cash on the way down ..." I think we need 'publisher' to service their existing and potential users better and make a living out of it ... and find their place.

[Frederik Marain]

Chris,

The really interesting (alarming, telling, ...) graph is of course the one about declining readership (%), from, say, 1965 (> 80%) to today (around 50%?).
Eric Alterman has a very good, open-ended article ('The death and life of the American newspaper') on newspapers and/vs news-blogs.

[Josh Bernoff]

This is far more thoughtful than the doom and gloom piece in the New Yorker this week. As albert points out, it's the decline in readership that's the story, and that's been pretty steady.

Part of the "milking" of the newspapers is the laying off of newsroom staff. The New York Times and Wall Street Journal are still impressive, but other local newspapers aren't nearly what they once were in terms of reporting, and it shows in the product.

As an industry there may still be life in the old girl yet, but as a medium it's struggling. And this chart shows revenues, not profits. Profitability is a challenging question that magnifies changes at the margin.

Accelerating declines (of CD sales or classified ad revenue for example) may get exaggerated coverage but they are indeed signs of crisis if you believe they represent the beginning of a real and inexorable trend and not some momentary fluctuation.

'Course that's a third-derivative statement (!). Still . . .

[Terry Heaton]

I appreciate the optimism, Chris, but...

The problem for all publicly held companies is growth and stock value. What you don't see here is the cost of maintaining all that brown, and it's difficult to support the idea that you can manage your way to growth through expense reduction in the trenches of America's newspapers.

Moreover, the southward turn of the brown glob isn't going away, so regardless of how much money is in the space, there is little to be optimistic about.

It's a bit like being married to a nymphomaniac. Just when you've satisfied the craving, she demands more.

[YLlama]

Just out of curiosity, are those numbers inflation adjusted?

[Francis Hwang]

Since the Y-axis is in dollars, it couldn't be sensibly inflation-adjusted, I don't think.

And, regardless of what a growth-obsessed stock market might say, there's no shame in holding a company that doesn't get revenue growth but still returns 10%, 12% on equity for 10 years. As Chris implies, this could spell a great opportunity for private equity, although most private equity firms are usually looking for bigger upside and bigger risk.

Makes me wonder if Berkshire Hathaway still owns any of the Washington Post ...

[Tim Windsor]

To answer a previous commenter, a quick-and-dirty normalizing for 2007 dollars...

http://www.flickr.com/photos/timwindsor/2375095856/

...shows 2007 nearly at 1982 levels in constant dollars ($40 million in 1982, $42 million in 2007).

No one of these charts tells the whole story, but it's always a good idea to keep constant dollars in mind when discussing growth or loss of business.

[Tim Windsor]

Sorry, badly formed HTML in the URL above. This is better:

http://www.flickr.com/photos/timwindsor/2375095856/

[Hans Suter]

stock price of NYT reflects that well: split adjusted in 1987 21 $, today little more than 18 $.

[Jim Johnson]

Of course, when you only look at the revenue side of the equation, you are missing something.

You also need to put up a chart showing newspaper expenses and see how the correlate.

It will be a slow, painful death... until the journalism industry makes the dramatic change.

[david cushman]

How long are you planning on living Chris? Newspapers will be all but dead in 20 years. Magazines will live on and on. If 'newspapers' transform themselves into a lean back activity then yes, they'll live on. But their role will have fundamentally changed. Magazines on newsprint if you want. As long as they don't think they can get away with doing news.

[phil jones]

It's the stock-market which makes people obsessed with second-order derivitives. Share price is based on future expectations ... so having a market in shares for a company makes that future (and trends towards it) significant for people *now*.

As so much money is made from the movement of shares, that's what people care about most.

[Kylie]

Is not Yahoo! itself a 45 billion dollar business?

[Gale]

Why did you use the term "designed" instead of evolved in your description of fly eyes? Dr. Freud may have an explanation.

[JamesH]

Are we sure those numbers are in real terms? Given inflation those trends might appear much flatter...

[Malcolm Kass]

Gotta agree with Jim Johnson on this one; it takes two to tango, revenues and costs. Also, there are other dimensions is all of this. First, is the revenue from price increases (probably) or selling more ads (circulation numbers are down, so doubtful). If it is from price increases, then is print really offering anything of more value to its customers or is the print industry simply siphoning off what's left of the difference between value provided and price. If yes, zoinks!

To evaluate performance, methinks to need to take into the context the greater ad industry, and newsprint, well, not so hot right now. This isn't to say that there aren’t products that are perfect for print, but that pool is decreasing.

Regarding the personification of calculus, I am more of a integral kinda of a guy. Exponent up, baby!

[Malcolm Kass]

yes, I am a nerd.

[blooflame]

The first derivative and second derivative people are a direct consequence on our unique form of capitalism (lately), where people expect to make money from stock price changes rather than sharing in the actual profits of the company.

I'm betting if stock sales or profit from stock sales were taxed at a higher rate than earnings from dividends, we would see a lot of people happy to have their company making a profit, and the companies would employ the right people to produce quality stuff, rather than hiring making things the cheapest way they can.

[Thomas]

Der lang anhaltende Machtkampf um das Gebiet Tibet, wobei es meiner Ansicht nach um die einseitige Macht Chinas geht und auf der anderen Seite ein repressionsfreies und anerkanntes Nebenherleben (lt. dem Dalai Lama), spitzt sich angesichts der bevorstehenden Olympischen Spiele weiter zu.

[Alex Tolley]

Firstly, is the chart using constant $s or nominal? If inflation was just 2.8% over he last 25 years, this would mean that real revenues were flat - and we know inflation averaged more than that over this period.
Secondly, readership has been in long term decline, with that decline steepening of late.

Put those facts together and you realize that if the chart was using nominal dollars and was corrected to real dollars, it would look relatively flat, possibly declining, with a sharp decline in the present.

That would indicate real problems.

Other evidence is the spate of mergers that have reduced the number of independent papers. If the industry was doing well, this probably would not be happening.

[Podkłady muzyczne]

Good info! Thanks.

[vittoriozambardino]

A question for Chris Anderson.

It would be great if you could go a bit more into detail about your notion of "strategic change".

And about that "form or antoher" of yours. It's where you wrote: "...The truth is that the newspaper business is still a huge industry and will be around in one form or another for the rest of my life".

In the (European) newspapers industry, where I work, this means more of the journalists working on the web, more content on many platform/channels. The paradox is... there isn't enough money down that way for the newspapers to survive.

I hope you have something more on this.

Vittorio Zambardino
Italy

[mikerapp]

The newspaper business cannot be evaluated solely on the above growth curve, any more than the music business can be evaluated only on a retail sales curve.

The costs of maintaining the infrastructure needed to support the newspaper business climbs with every canceled subscription, because to print a paper you need a massive number of bodies to manage the process. Even with digital workflow, printing a newspaper requires huge overhead.

We are experiencing what researchers call a Death Spiral in many atom-driven industries that are moving to bits/bytes. The best example of this is the postal service: As people increasingly move to email rather than snail mail, stamp income decreases. The postal service, to cover costs, raises the price of stamps, leading to an inevitable further decrease in usage. Eventually, there simply isn't enough money to pay for the infrastructure, and the entire model collapses. We see this every day in the stock market, when "successful" companies go under simply because they don't have cash flow.

How do you project the decline in newspaper revenues a year from now? Because the folks I know in that business feel as though there is no one left to cut from the payroll. At some point, you are not cutting fat, or muscle, but limbs and even organs. I see this happening VERY SOON in the newspaper business.

I am coming to believe that the Internet may not have an historical parallel. America's move from an agricultural to an industrial society happened over many decades; There are still tens of thousands of farmers operating in mostly the same manner they always have. With more people on the planet there is more need for food, even if the manufacturing process is increasingly leaning to corporate production.

But the Internet is making things not cheaper, but FREE. It is forcing an economy to adapt by completely reorienting the entire manner in which EVERYONE uses a service in a matter of months and maybe years. Many people don't realize that most of these dot-com success stories are still in the red, and the ones that aren't have staffs of under 50 people -- serving hundreds of thousands of customers (37 Signals is a good example).

All I suggest is, while I don't want to be alarmist, I think the true impact of the Internet -- where everything eventually becomes free -- has no parallel.