After coming close to death earlier this year, the New York Times Company (NYT) finally hit the panic button. Since then, it has done exactly what it should be doing:
- Raising the price of the paper for subscribers and on newsstands
- Sharply cutting costs
- Explore charging for online access.
The NYT began taking these steps in earnest earlier this year, and they are buying the company time to figure out a long-term strategy.
But let’s be clear about two things:
- First, the company doesn’t have a long-term strategy yet.
- Second, the current moves cannot go on forever.
On the subscription side, for example, NYTCo pulled off a near miracle this quarter, as subscription revenue rose 7% year over year. This was NOT the result of subscriber increases: In fact, subscribers at the flagship NYT dropped a gut-wrenching 7% in Q3 alone. The growth was the result of price increases. The New York Times has realised that some of its readers will pay almost anything for the paper, and it is wisely asking them to pay considerably more. (The newsstand price, according to Peter Kafka, jumped 33%, from $1.50 to $2.00).
Will people who buy the paper pay even more for it? Yes, some of them will. And the NYT will likely continue to increase the price of the paper each year for the next several years.
As the company raises the price, however, it will also drive more of its subscribers to cancel–especially if it continues to give the same content away for free online. Buying the paper on the newsstand every day costs more than $1000 a year. Having it delivered costs more than $300 a year. No matter how much subscribers love the paper, some of them will opt to get it for free.
It seems safe to assume moreover, that the more NYTCo raises the prices, the more subscribers will cancel. The circulation base just dropped 7% in a quarter, to 928,000–its lowest level since the 1980s. If the circulation keeps dropping at that rate, the paper will have to raise the price about 10% a year to stay in place. It will be able to do that for a while, but not forever.
Meanwhile, NYTCo has not yet announced its plans for an online subscription business. We continue to believe that the factor that is often overlooked here is the dichotomy between a print paper costing $300-$1000 a year and an online paper that is FREE. Charging to access the site online would certainly reduce the overall web readership (though not as much as people think, if done intelligently). But it would remove the incentive to drop the paper subscription because the choice is hundreds of dollars versus FREE. For this reason alone, an online subscription fee is more attractive than it would be if the web business were the only consideration.
On the cost-cutting side, NYTCo is reducing the cost base by 20%+ per year. The company should probably be even more aggressive here–30%-40% a year–so as to build a bigger cash cushion. But 20% is significant.
It goes without saying that you can’t cut 20% of your costs each year forever, though, without ultimately driving yourself out of business. So that’s not a long-term strategy, either.
What is a long-term strategy?
Moving the company quickly toward a cost structure that can be supported by the online business.
We believe the online business does about $175 million of revenue per year (ex About.com). Let’s assume that grows a bit as the economy picks up, and let’s assume the company adds a subscription fee. So let’s assume NYTCo eventually has an online revenue base of $300 million.
What cost structure would a $300 million business support?
You would want an operating profit margin of at least 20%–to pay interest and taxes and have something left over for shareholders. An operating profit of 20% on a $300 million business would leave you a cost base of $240 million.
$240 million might break down as follows:
- 50% newsroom ($120 million)
- 50% everything else ($120 million)
That compares to a current cost base of about $2 billion.
So there’s some cutting left to do.
The good news is, the New York Times has bought itself several years to figure all this out. The bad news is, the problem isn’t going to go away.
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