The New York Times leads a digital yield hunt

The New York Times Company is one that is closely watched by investors looking for a read on the future of the content business. This week it reported its calendar first-quarter earnings. The result – not bad, not great. Circulation revenue was up 6.5 per cent for the quarter to $241 million. Advertising took a hit – down 11.2 per cent to $191 million. Operating costs were down 4.3 per cent. Combined, operating profit increased 81.2 per cent to 22.8 million.

Taking a closer look at the numbers, the majority of the operating cost savings were related to depreciation and amortisation, with the larger cost areas of production and sales and administrative down 2.5 per cent. Advertising revenues were hit uniformly across the board – retail advertising was down 15 per cent, classifieds down 10.9 per cent. Circulation revenue was helped in a large part through the growth of digital subscriptions – paid digital subscriptions to the NY Times totaled more than 700,000 by the end of the quarter, marking a 45 per cent increase on the same period in 2012.

The company faces the same challenges that are interrupting newspaper publishers the world over – a reduction in print advertising and print circulation revenue, increasing digital audiences but decreasing yield, solving the paywall dilemma and trying to work out other ways to leverage value out of the masthead brand.

The results clearly demonstrates a few key things. For one, digital advertising alone isn’t going to save content creators. Sure, the digital ad market as a whole is growing but look closer and you will see that a handful of very large players are growing and the rest of the market is standing still or going backwards.  The notion that digital advertising revenues will plug the hole created by falling print ad revenues has well and truly been found to be incorrect. Secondly, the rate at which media companies such as the New York Times, or other long running media businesses with print roots, are cutting operating costs is not rapid enough. Many have operational cost bases established decades ago in markets unrecognizable by today’s standards. The need for rapid operational cost overhaul still seems to be lost on many. Lastly, despite it being an unpopular reality, the need to find ways to get users to pay to access your content is absolutely vital for survival.

The Times is clearly enthused by the gains it’s seeing in its digital subscription revenue. A 45 per cent year on year increase is nothing to be frowned at.  Given the take-up, you can be sure many inside The New York Times have wondered what their relative position would be today if they hadn’t decided to abandon their first attempt at a paywall back in 2007. Then publisher, Vivian L. Scihiller, declared the move to abandon the Times Select paid product was due to the significant upside the company was poised to achieve from online advertising, saying “our projections for growth on that paid subscriber base were low, compared to the growth of online advertising.”

Since that day the share price of the New York Times Company has dropped from $26 to just over $9, and the company hasn’t paid a dividend since 2008 after paying regular dividends to shareholders for the preceding 22 years. Since 2011 when the paywall was re-established, the financial health of the New York Times Company has increased, and more importantly it has been generating more revenue from end users rather than advertisers.

Whilst it’s still early, the achievement of generating a larger share of revenue from users rather than advertisers is extremely positive and places the Times ahead of a large chunk of the web content industry who are solely, or at least highly, reliant on advertisers funding their efforts. Times chief executive Mark Thompson announced a new strategy for the company, one that seems to favour end user revenue over advertising and a focus on the end consumer product rather than the advertising one.

The company aims to continue its experimentation around subscriptions, announcing new subscription products and lower price points for specialist content around politics, the arts and technology; as well as a lower priced paid product that would offer users  “access to The Times’s most important and interesting stories in a convenient, media-rich package for consumers looking for an efficient way to stay informed.”

As announced earlier in the year, the company’s International Herald Tribune brand will be now known as the International New York Times as the company aims to increase the volume of international subscriptions. To date this hasn’t been an area of focus for the company, with only 10 per cent of subscriptions coming from outside the United States.

Video is another strategic pillar for Thompson and his team. He has made the decision to allow full, unlimited free access to the Times video section in order to increase its presence and traffic. Video advertising is currently considered a significant growth area within the world of digital advertising. Much of this is due to a much more favourable relationship between advertising demand and advertising supply – unlike banner advertising, which is plagued by infinite supply and flat demand, video advertising has the opposite problem of too much demand and not enough supply. Plus it is currently a high yield product. Thompson will want The Times to convert a percentage of its readers to its video product to ideally generate a video product that can play a role in the video market and make up for the losses it is seeing in display revenue. It would not be unexpected to see more assertive use of video across the site, especially in articles.

The last area is brand extensions – paid ones at that. Generally when it comes to digital publishing, historically a brand extension basically means creating more content given away for free and subsidised by the same advertising pool. This strategy (if you could call it that) hasn’t worked too well, increasing costs generally faster than revenue. The Times wants to look at games and e-commerce as a way of increasing user revenue extraction. It is also going to more aggressively try and build its branded event and conference business.

In addressing analysts today, Thompson outlined that the initiatives announced “should be seen as a significant first step in efforts to put The New York Times Company on a path to sustainable growth”, somewhat of an indirect acceptance that the groups initial reliance on digital advertising was far from sustainable or strategic.

Whatever the outcome, the new direction is another indication that content creators such as The New York Times are no longer happy to give away their product and rely as heavily on advertising revenue as they have in the past; and are much more confident in their abilities to market directly to consumers and persuade them to pay for access, rather than rely on an increasingly fickle ad market to pick up the bill.