• by Erik Sass  @eriksass1, May 11, 2009

Amid the longest sustained drop in newspaper advertising revenue in American history, technology gurus and media watchers are making hopeful noises that Amazon's new Kindle DX reader, and similar portable electronic reading devices, can "save" newspapers. Unfortunately, a quick look at potential business reveals that, barring a complete reinvention of digital advertising, Kindle and the other mobile devices will do little more than partially offset the continuing overall loss.

Newspapers have traditionally drawn on two main sources of revenue: advertising, which accounted for about 80% of total revenues, and circulation -- including newsstand sales and subscriptions -- which made up the remaining 20%. So far, most of the proposals have focused on generating revenue from electronic newspaper subscriptions delivered via Kindle or other mobile devices.

However, leaving aside the issue of revenue-sharing with Amazon or mobile service providers, electronic subscriptions cannot produce anywhere near the amount of revenue being lost on traditional subscriptions.

For example, in the first quarter of 2009, the New York Times Co. took in circulation revenues of $228 million, generated by about 1 million full-week subscriptions and half a million Sunday-only subscriptions, according to the Audit Bureau of Circulations. The bulk of this -- about $150 million -- comes from the full-week subscriptions, which for many legacy subscribers, cost about $600 per year.

Conversely, The New York Times' Kindle edition for sale on Amazon costs $13.99 per month. In retrospect, if all 1.5 million weekly and Sunday subscriptions were converted to full-price Kindle subscriptions, total circulation revenue in the first quarter would actually drop more than half -- from $228 million to just $63 million, because the Kindle subscriptions cost substantially less than home delivery.

On one hand, the Times would save millions on the costs of printing and delivery, which could make Kindle subscriptions more profitable than a comparable print distribution base. On the other hand, most of the current subscribers to the paper edition probably will not make the switch to Kindle. (Their intransigence has prevented them from transitioning to online readership over the past decade.)

Kindle may, however, succeed in recruiting readers who visit newspaper Web sites but deserted print newspapers, or just never read them in the first place.

The Times' total print audience in September 2008 was reckoned at 11.5 million by Scarborough, while Nielsen Online pegged its total Web audience in March of this year at 20.1 million unique visitors in the U.S., most of whom are not duplicated. The online audience continues to grow -- up 7% in March 2009 compared to the same month last year. This audience is the best chance for locating new circulation revenues.

Of course, new subscription sales are limited by the total number of Kindle units sold. In 2007-2008, based on analysts' guesses, Amazon is believed to have sold 500,000 units of Kindle 1 and Kindle 2. (The company won't release stats.) The newer Kindle 3 and Kindle DX are said to be selling well, with 300,000 units shipped since February of this year.

Taking an optimistic view, Amazon could end up selling a total 1.6 million Kindle units of various models from 2007-2009, and another 2.5-3.0 million units in 2010. That means there would be around 5 million Kindles available for Times subscription sales by the end of 2010.

In the first year of Kindle sales, the Times sold 10,000 subscriptions -- or just about one subscription for every 50 units sold. But even if Amazon and the Times managed to sell subscriptions to one of every five new Kindle owners, adding 1 million new subscriptions, this would represent new revenues of "only" about $168 million a year -- a welcome contribution to the Times' bottom line, whose significance dwindles next to NYTCO's larger revenue declines.

In the first quarter of 2009, the company's total revenues fell almost $140 million compared to the same period in 2008. This followed an annual decline of $245 million in 2008 compared to 2007, made up of accelerating quarterly declines of $38 million, $47 million, $67 million, and $93 million over the four quarters of 2008.

At this rate, the company will need far more than Kindle subscription revenues to stabilize -- which means advertising. But that raises the issue of its long-term inability to monetize digital ads at anything close to the rate of the old print product.

Although the online audiences of major metro dailies are typically larger than their print readership, online ad revenues still constitute less than 10% of the bottom line at these publications -- 7% for the industry overall in 2008, according to the Newspaper Association of America. In fact, online revenues have been falling -- with an industry-wide decline of 1.8% in 2008, mostly due to their reliance on "up-sells" from print classifieds, which have fallen away rapidly.

The most promising category for online revenue growth in the near future -- display -- is much less remunerative than print, with CPMs for most big branded content sites hovering around $20-$40 in 2008, versus, for example, an average national print CPM of about $144 for some of the Times' premium print content last year.

To date, cost-per-click and cost-per-action pricing approaches have served only to undermine the value of newspapers' display business, especially as average online click-through rates appear to be falling below 0.1%, perhaps to stay. Equivalent CPMs for display advertising on mobile devices are about $10 for a banner ad, with $30 CPMs for premium vehicles like the iPhone. (Some outliers claim CPMs of up to $60, but this is unlikely to last.) As on the Internet, mobile CPMs and click-through rates are forecast to fall, even as the medium scales up.

In presenting their new mobile audience, the Times will naturally try to charge more than the average online or mobile rates, touting the desirable demographic attributes of its Kindle readers. Even allowing for an inflated digital display advertising CPM of $30, however, total revenue numbers are still small compared to newspapers' old business: 1 million Kindle users with Times subscriptions reading the newspaper three times a day and seeing three different ads in each session would generate "just" $100 million a year in ad revenue.

Thus, together with the $168 million in new circulation revenue, very successful online/mobile advertising could generate a grand total of about $268 million per year. Once again, this sum -- while considerable -- does not offset the $385 million of revenue lost over the last year and a quarter at NYTCO, to say nothing of the losses to come (NYTCO's losses to date are typical of the industry in general: 2008 saw McClatchy Co.'s total revenue decline $360 million compared to 2007, followed by a drop of $123 million in the first quarter of 2009. Gannett saw total revenues tumble $700 million last year and $300 million in the first quarter of 2009).

There are also ominous problems on the hardware front: Some Kindle users complain of new fees for data downloads that were not part of the original service. Amazon faces competition from other manufacturers with e-readers ready for the market. PDA and mobile handset manufacturers will probably introduce new products to compete with Kindle, too. The Times can negotiate new content deals with all these competing reader services, but each will doubtless demand their own share of subscription and ad revenues, again diminishing the digital bottom line.

Again, the main reason for doubting Kindle's value to newspaper publishers is their earlier failure to build significant online revenues on a substantial, regular, oft-measured online audience during almost a decade of Internet operations. The new generation of newspaper e-reader deals will probably extend this legacy -- finding innovative, convenient ways to distribute content, but neglecting to effectively monetize them.