Online Revenue Business Model Has Changed Little Since 1996

Newspaper Research Journal, Spring 2007 by Mensing, Donica

This study finds that despite aggressive competition for advertising revenue, newspapers as a whole have not altered their online strategies significantly from 1996 to 2005.

After several centuries of economic success, the American newspaper industry "is facing its greatest crisis in its 400-year history."1 The market conditions that allowed newspaper companies to prosper-including high barriers to entry, effective use of economies of scale, monopoly power in individual markets and centralized production and distribution-no longer describe the news business.2 Instead, new publishing markets are characterized by low barriers to entry, intense competition, lower fixed costs and decentralized production and distribution, fundamentally changing the economic environment.3 The supply of news is multiplying across media channels in formats more attractive and engaging than newspapers to many people.4

In response, the newspaper industry is aggressively cutting costs, seeking new markets to increase demand and differentiating their products from those of the competition.5 However, the challenges faced by newspaper companies in making the transition from current business models to models that accommodate new economic factors are significant in scale and scope.6 This study focuses on one key challenge facing the newspaper industry: how to generate sufficient revenue from online newspaper sites to continue covering the sizeable costs of operating a general interest news business. Based on two surveys of U.S. online newspaper managers, one conducted in 1996 and the other in 2005, this study answers basic questions about how online newspaper sites are generating revenue and how profit strategies have evolved since the early days of Web publishing.

Developing successful business models for online news is of urgent interest, not just to owners of newspaper companies, but to all interested in the long term sustainability of in-depth news gathering, editing and publishing capabilities, which newspapers, more than any other existing product, represent. Developing sustainable economic models to support independent, public-oriented journalism is a vital task for those interested in the future of news in our society.

Print Newspaper Revenue Sources

Print newspapers in the U.S. have relied primarily on advertising to support the costs of doing business, and this reliance has grown during the past two decades.7 Approximately 70 to 80 percent of total newspaper revenue is generated by three sources of advertising: national and local display advertising and classified advertising.8 National advertising has become less important and classified advertising has become a more important revenue source over the past 20 years,9 increasing from 27.4 percent of total newspaper revenues in 1965 to 40.7 percent in 1998.10 While competition for advertising dollars has increased significantly and the share of overall advertising dollars spent on newspapers has declined, advertising expenditures for newspapers have grown in real terms during the past five decades, allowing for continued profitability of newspapers.11

The second most important source of print newspaper revenue is generated by subscriptions, approximately 18 percent of total newspaper revenue.12 Circulation growth, however, has declined since the mid-1980s.13 This has led newspaper companies to work to decrease circulation costs, often by deliberately shrinking geographical markets and reducing home delivery.14 Syndication, single-copy sales and a variety of miscellaneous sources provide relatively small contributions to overall revenue for most newspapers.

Online Newspaper Revenue Sources

Four basic economic models for online profitability were identified in the early days of Web publishing:

* subscriptions

* advertising

* transactional

* the bundled model.15

Experiments with each of these models have been tried during the past 10 years, with varying levels of success. As Chyi and Sylvie16 point out, the economics of online newspapers are "particularly complex." In their in-depth interviews with 14 online news managers in the U.S., they found a great deal of uncertainty regarding the definition of markets, competition, products and the relationship between print and online newspapers. News managers classified revenue strategies as "locally" driven, meaning each site was finding its own path to profitability or failure.17

The primary revenue strategy for nearly all online newspapers is clear: Advertising has proven to be the most successful source of revenue.18 Online advertising has shown steady and impressive growth, with advertising revenues projected to have grown 30 percent in 2004 to a total of $10 billion in 2005; however, this amount is still a fraction of the total advertising market.19 Although demand for advertising in online newspapers has been steadily increasing and is projected to continue growing, the competitiveness of the online advertising market makes some question heavy reliance on this revenue source. One estimate is that online advertising in mid-size and larger papers will not "equal or surpass print revenues at such papers until 2018."20