The Wedge Strategy

It’s painfully apparent that digital revenue cannot yet support substantive professional journalism for smaller daily newspapers. I don’t know that it ever will, either. Fortunately, it does not necessarily follow that community newspapers are doomed.

If the goal is to find a near-term replacement for all the revenue necessary to support a newsroom and newspaper operation something like the papers we know today, the logical response is either to proceed on blind faith or give up in despair. But that’s the wrong goal. Think instead in terms of what I call the Wedge Strategy.

In simplistic terms, the Wedge Strategy frames the goal more modestly (and achievably) than trying to replace all the print dollars. With a Wedge Strategy, the goal is to fill the profit gap created by declining core revenue and increasing expenses.

You can expect long-term deterioration of core newspaper revenue. The rate and shape of that decline is anyone’s guess, but the fact of digital transformation cannot be denied. Meanwhile, there is inexorable upward pressure on expenses. The two lines move in opposite directions, and simple extrapolation quickly produces losses.

A Wedge Strategy assumes the key to survival is not necessarily to toss out the entire print newspaper business model in a desperate grab for digital dimes. Rather, the key is to work hard on bending both of those core newspaper trend lines, for revenue and expenses, while at the same time developing new revenue sources, especially online revenue, that fill the wedge.

Implicit in the Wedge Strategy is a belief that the physical daily newspaper is a unique, valuable and durable medium. It offers a level of engagement that’s hard to replicate online, it’s convenient and efficient for many uses, it’s cheap, it’s an old-school push technology that rewards curiosity and leverages hundreds of years of information design evolution to serve readers.

A print paper may not be everyone’s preference, and it is not likely to dominate even smaller markets in the future, but my assumption is that it will continue to adapt and will retain a valuable niche, perhaps serving educated, affluent, engaged members of the community. It may publish fewer days, it may shrink and change focus, but it will remain a significant factor.

As an illustration of what a Wedge Strategy might look like, I modeled a typical small daily newspaper with a nice, even $10 million in current revenue from its core operations. That might correspond to a paper with 20,000 circulation.

With $10 million in core operations, I assumed circulation revenue of $3 million, display revenue at $3.5 million (50 percent of ad revenue), classified revenue at $2.1 million or 30 percent of ad revenue and preprints at $1.4 million. Your mileage may vary, but those are within the bounds of industry experience.

I assumed this paper has not been terribly aggressive or successful at getting online revenue, so I put that at $250,000, with another $250,000 in “other publications.” Those I call the growth revenue opportunities.

I put expenses at $9 million, which gives this paper an operating margin of a bit under 15 percent. That’s pretty low by historical standards, but it’s certainly not crazy for this stage of the recession.

Now come the real critical assumptions. The value of a simple model like this is not that it might actually predict the future. I don’t know anyone that smart. Rather, it can help you identify what you need to do to succeed over time given certain reasonable assumptions. Then you have a goal, and you can begin to evaluate how likely you are to make that goal. And then you can start playing with better or worse scenarios.

My approach with this model is basically to solve for the wedge — to figure out what you need to raise is growth revenue to maintain a reasonable rate of return from operations.

My starting assumptions are the following:

  • Display revenue will increase modestly over the next few years with recovery, then it will flat-line for a few years, then it will start to decline at 5 percent annually. After 10 years, it will have dropped about 6 percent.
  • Classified advertising will just keep going down at 5 percent a year, dropping 40 percent over 10 years. (A straight-line is unlikely, but it makes modeling simpler, and, really, who knows?)
  • Preprint revenue will drop by 1.5 percent over the next four years and by 5 percent thereafter, leading to a 31 percent drop over 10 years.
  • Circulation revenue will drop a steady 1.5 percent, the assumption being that some online subscription revenue will offset slightly larger print declines.
  • One the expense side, I grossed everything up and assumed increases of 0.75 percent every year. That’s pretty tight cost control, but that’s our new reality.

Here’s what it looks like graphically:

With no growth, the paper dips below 10 percent operating margin in Year 5, and by Year 10 it’s losing more than $1 million a year.

So what’s the wedge?

To hit a 10 percent margin in Year 10, you need to maintain an average growth rate in online revenue and other publications of 18.2 percent. To hold a 15 percent margin, you need to grow at 20.8 percent.

In practical terms, a steady growth rate of 20.8 percent over 10 years is, of course, highly unlikely. But in absolute dollar terms, the numbers are somewhat less daunting, in part because this mythical paper is starting from a low base. That kind of growth rate gets this paper to online and other publication revenue of $1.65 million (each) after 10 years. That’s a bit less than 15 percent of total revenue.

That’s a stretch, to be sure. But it’s a tangible challenge that presents at least a possibility of success, a possibility that becomes more and more attainable the more you can do to hold those other numbers in line. Sure beats despair.

Here’s that future:

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