Blimey O'Reilly: The web revenue threat is no myth

Some delegates at the recent World Newspapers Conference in Cape Town thought they’d witnessed a magnate smiting the prophets of doom. Others reckoned it was a newspaper publisher talking out of his backside.

The speaker was Gavin O’Reilly, chief operating officer of Independent News & Media. O’Reilly told conference delegates it was a ‘myth’that the web is damaging newspapers. Print and online, he insisted, are ‘complementary’media platforms.

Here in Britain, journalists recently made redundant, or soon to be axed, at the Telegraph Media Group, News International, The Guardian and The Independent could be forgiven for finding O’Reilly’s optimism hard to swallow.

Many readers and some journalists would have no difficulty accepting the argument that print and online really are complementary. But the real difficulty exists in the financial realm, where the economics of print and online are about as compatible as Evian and crude oil.

This is because of the web’s great secret – what economists like to describe as a marginal cost of production and distribution that tends to fall to zero.

In the online world, once media owners have written the necessary software code, added some content, and purchased some cheap web hosting, their potential to attract audiences is theoretically limitless.

The financial DNA of newspapers – and most forms of traditional media – is very different. As Pat McGovern, the American who runs both magazines and web sites at computer industry publisher IDG, says: ‘Without print, paper and postage, profit margins online are about 40 per cent.’Print magazines, McGovern suggests, make margins of up to 15 per cent.

Of course, there’s a catch. The problem with digital media is its tendency to radically shrink a publisher’s revenue base.

In the US, digital media consultant Vin Crosbie has calculated that each printed newspaper reader is worth between $500 and $1,200 a year in terms of reader revenues and advertising cash.

By contrast, Crosbie suggests that the average online newspaper reader is worth perhaps $8 a year.

If you transpose these figures on to the circulation performance of The Guardian, the dilemma comes into sharp focus. From the annual report of the Guardian Media Group, we know the company’s entire national newspaper operation – websites and all – produced revenues of £237m in the year to April 2006.

But using Crosbie’s rule of thumb, we can hazard a guess that the 300,000 full-rate readers of The Guardian’s print edition might be worth around £180m in revenues each year. By contrast, Guardian Unlimited, with around 15m unique users every month, attracts significantly less revenue.

Of course, these calculations are speculative. But they do illustrate the reality of what management consultants from McKinsey describe as online price destruction.

Some of the benefits of this destruction flow to readers, who are besieged by vast quantities of free online content. But the majority of the benefits flow to advertisers.

According to McKinsey, for example, US newspapers lost $1.9bn in classified ad revenues to the web between 1996 and 2004. But after factoring in the low cost of online classified advertising, the newspaper industry’s online rivals probably only gained a few hundred million dollars in additional revenue.

Running a pure-play digital media business has its challenges. But running print and online operations in parallel is much harder.

Publishers want the high margins of web publishing. But they are also terrified by the collapse in revenues required before they can enter the promised land.

This dilemma lies at the heart of the political wrangling that divides advocates of online and print on the business side of most newspapers’ operations.

In this debate, the key questions are these: how much of print’s revenue base will be vapourised by the web? And how quickly will this happen? The newspaper industry’s traditional answers to these questions are (a) Nobody knows, and (b) Relatively slowly.

In their support, traditionalists such as O’Reilly point out that expenditure on print ads in national newspapers isn’t falling. In 2006, for example, the nationals managed to increase their print advertising revenues by 0.2 per cent.

Of course, not everyone buys this logic. Among the more extreme pessimists is Jeff Jarvis, an associate professor at City University of New York’s Graduate School of Journalism and author of the blog Buzz Machine.

Jarvis, who also works as a consultant at the Guardian Media Group, believes that newspapers cannot maintain their traditional mix of big revenues and big costs indefinitely.

Here’s his recipe for editors and publishers: ‘I think that you have to boil down to your assets. Put your resources behind what makes you special and more valuable.”

Rather politely, Jarvis is advocating mass redundancies. One piece of evidence in particular supports his argument. Five years ago, the web accounted for just 1.4 per cent of advertising spend in the UK. From this low base, the sector was doubling in size on an annualised basis.

This year, web advertising will probably account for 14 per cent of UK advertising spend – the highest proportion anywhere in the world.

This is also a good deal more than the £1.9bn that advertisers will probably spend on national newspapers this year. But web advertising is still growing at 40 per cent annually.

Five years ago, the newspaper industry was being attacked by a frisky Labrador puppy. Now it’s being mauled by a pack of fully grown St Bernards. The implication is that web advertising could push both the markets for print and TV advertising into rapid decline during the next few years.

The publishers of Britain’s nationals need to start wringing a lot more revenue from their web operations – and soon. If they can’t, the inevitable results will include even more redundancies, and perhaps even a few closures and mergers.

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