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Publishers Must Learn To Innovate Their Business Models

2014 October 15
by Greg Satell

Like many millennials today, Yale classmates Henry Luce and Briton Hadden left their jobs to create a startup.  They found newspapers dry, longwinded and boring and thought they could do better by presenting stories in a faster paced, more personality centered format.

In 1923 they launched Time magazine and it became a runaway success.  Hadden died of a freak infection in 1928, but Luce went on to create Fortune and Life in the 30’s and eventually build the greatest publishing empire the world has ever seen.

Many believe that publishing is dead, but the truth is that there is more opportunity now than ever before.  It took Luce decades to build his empire, but Bleacher Report and Huffington Post took just a few short years to create hundreds of millions of dollars in.  The real problems old-line publishers face today are not ones of talent or even technology, but culture.

How The Publishing Business Model Got Broken

Every media market is different, but some principles are universal.  Perhaps the most significant of these has been the press-TV tradeoff, which is the starting point for understanding the media economics of any given place.  The stronger the TV ad market is, the weaker the press market will be and vice versa.

The US has been unique in this regard.  Because its TV ad market is fragmented into 210 DMA’s, strong national broadcast advertising opportunities were historically rare.  Magazines, however, offered large, targeted national audiences and newspapers dominated localized content.  That made publishing in the US a truly great business for a long time.

Yet digital technology changed the game entirely.  At first, because the Web was primarily used for direct response marketing, only newspapers were affected.  But with the arrival of more visually impactful tablets, magazines’ display advertising business has come under attack as well.  Profit margins, once in the mid-to-high 20’s, are now in the low teens.

The situation of the publishing business is by no means unique, eventually all business models fail.  Unfortunately, publishing executives who built their careers on selling ad pages and pushing rates are often unwilling to accept that the economics of digital are fundamentally different than print.  That has to change.

The Paywall Trap

The greatest challenge for publishers today is to create new business models.  Unfortunately, most haven’t even begun the process due to misplaced nostalgia for distribution revenue.  In that sense, paywalls represent the greatest threat to old-line publishers.

To see why, let’s look at what is considered a paywall success story, The New York Times.  According to its most recent annual report, circulation revenues increased by 3.7%, from $795 million to $824 million, but its advertising revenues fell by 6.3% from $712 million to $667 million, for a net loss of $15 million. That’s no way to grow a business.

A quick examination of the digital business alone shows what an enormous failure this is.  In 2012, digital made up about a quarter of the NY Times ad revenues or $170 million.  In 2013 US digital ad growth was 17%.  If the NY times achieved that growth, it would have earned about $200 million, but instead its digital ad revenues fell by 4.3%!

So what should have been a $30 million increase turned into a $5 million decline.  In a sense, this shouldn’t have been surprising. Publishers have historically lost money on production and distribution, so it is unreasonable to expect to it to be profitable in the digital age now that it is essentially free.

The golden rule of media is that marketers will pay more for consumers than consumers will pay for content.  That doesn’t mean that digital subscription businesses can’t work, some can, but it does mean that paywalls are mostly a waste of time and effort that could be spent more productively elsewhere.

It’s Not The Technology, It’s The Culture

Most people assume that the problem with old-line publishers is that they don’t understand the new technology.  That may be true in some cases, but it’s mostly a red herring.  Many publishers have excellent technology teams and successful new players like Bleacher Report and Huffington Post rarely have particularly sophisticated platforms.

The real barrier to success lies in publishers’ organizational culture, which has for far too long been dominated by the “Chinese wall” that was originally instituted to separate the business and journalistic sides of the enterprise.  While the “separation of church and state” certainly played an important role in preserving integrity, it also had costs.

As I noted in an earlier post on innovation failure at the NY Times, the Chinese wall has made it almost impossible to move forward.  To see what I mean, look at these two quotes from the NY Times innovation report.

 

We heard from editors who said the fear of impropriety meant that they actively avoided communicating with business colleagues altogether.

The fear that a single stray word can derail a conversation is keenly felt, particularly on the business side.

 

No business can function that way and expect to compete in the rabidly competitive digital environment.  Business model innovation is a highly collaborative process.  It requires people to work very closely together and establish trustful relationships.  That can’t happen if people with different skill sets don’t talk to each other.

So that, in a nutshell, is the state of old line publishers today.  On the one hand, you have business side people with little real understanding of the product and on the other you have journalists who want to ply their craft as if the business never existed.  No wonder there are problems!

A New World Of Digital Opportunity

The publishing industry has clearly failed to adapt.  Samir Husni, Director of the Magazine Innovation Center, estimates that magazine publishers today earn less than 3% of their revenue from digital.  While the NY Times earnings report suggests that newspapers fare somewhat better, they still earn the majority of revenues from print.

You would think that with such a paltry digital effort the old-line publishers would be going out of business, but they continue to profit and grow, albeit moderately.  As Husni points out, they are even launching successful new print titles like All Recipes, HGTV and Food Network. Magazine giant Hearst recently reported its best month ever.

That old-line publishers continue to survive is testament to how good they are at plying their basic craft.  Editors know what their readers want and journalists are skilled at delivering it powerfully.   Combining the publishing expertise of industry incumbents with the digital savvy of the new upstarts has the potential to be a great business.

There is no clear path to prosperity, but here are some suggestions:

Tear Down The Chinese Walls:  I noted this above but it is important enough to mention it again.  There are well established techniques for innovating business models, but all of them require intense integration and collaboration.  While concerns about preserving integrity are real and important, there are other ways of addressing them.

Take TV Money:  For decades, publishers have been whining about how much money goes to TV.  Now, with online video booming, they have an opportunity to compete with broadcasters on an equal playing field.  It is unconscionable that so few are seizing it.

Spin Out Brands:  New brands are much cheaper to launch on the Internet than in print and easier to get to profitability.  Some publishers, like Atlantic Media have been aggressively pushing out satellite digital brands.  Most however have not.

It’s worth mentioning here that some publishers have ample assets to create new digital brands at negligible cost.  Surely, The New York Times, with its abundant archive of book and movie reviews, could launch competitors to Goodreads and IMDb.  Again, so many opportunities available, but so few taken.

E-Books: Another way that digital publishers are creating incremental revenues is by repackaging existing assets to create short e-books.  Politico, for example, published and sold a 2012 election guide.  Others sell pregnancy and vacation guides.

Create a business model innovation process:  The ideas I outlined above merely scratch the surface.  In truth, there are unlimited opportunities in publishing today, but business models need to adapt and evolve.

There is no mystery about innovating business models.  People like Steve Blank, Eric Ries and Alex Osterwalder have laid out clear principles that work.  I’ve also written a basic guide for innovating business models as well as one that applies to the media industry specifically.

In the final analysis, the challenges of the publishing industry are not so much economic or technological as they are cultural.  It’s not technology that publishers need to conquer, but their own organizations.

– Greg

3 Responses leave one →
  1. Ken Faris permalink
    October 15, 2014

    Especially interesting is the cultural roadblocks to business innovation. Can see how this would stifle development and also see the deep desire and need to retain journalistic integrity. Could it be as simple as common frame of reference through a set of mutually agreed upon ground rules for any innovation that protects integrity of the journalists and integrate that into governance?

    [Reply]

    Greg Reply:

    In my experience the only way to promote integrity is to make integrity a priority. There’s no way to institutionalize ground rules, it has to be continually promoted as part of the culture.

    I think it’s notable that, even with a very strict (and I would say overly strict) Chinese wall in place, The New York Times has had some pretty big integrity scandals over the years. So separating the business in terms of “Church and State” is clearly not a cure all. In fact, in some ways it encourages the business side of publishing operations to distance themselves with the integrity of the organization.

    – Greg

    [Reply]

  2. Mats permalink
    October 18, 2014

    In my former consulting role to media companies I suggested three mantras for publishers when it comes to sustaining and building their ad revenue:
    1) Think “advertiser” rather than “advertisement” (packaging integrated solutions rather than individual exposures)
    2) Think “brand” rather than “channel” (use the strength of your media brand in more ways than just as a distribution vehicle)
    3) Separate “high volume low CPT” sales operations from “high value integrated solutions” (different techniques, different messages)

    I would now like to add another opportunity for publishers: additional distribution routes, like my current emplyer Readly (readly.com). The “all-you-can-eat” model has helped sustain the music industry, and can certainly create new opportunities for publishers (as long as publishers realize that consumers don’t necessarily want a plethora of individual apps for every magazine they might want to engage with). And in addition publishers finally get current and detailed data of how their magazines are read – analytics for print has finally arrived.

    [Reply]

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