Thought experiments can put us ahead of the media disruption curve

Let’s try some thought experiments, in the best tradition of Albert Einstein.

The hypothesis we’ll explore is this: That the large, lucrative revenue stream that newspaper companies have enjoyed from major/national advertisers will decline to something approaching zero.

Our thought experiments will examine what we should do about that.

First, though, what evidence do we have to support this hypothesis?

Well, there’s observation. Anyone who sees the sales numbers for any newspaper company has watched the revenue from big-box stores, national chains and department stores declining steadily — and often steeply — for a decade or more.

We’ve seen retailers shift dollars away from print by canceling orders, reducing preprint quantities and cutting ROP lineage. We’ve seen revenues shrink, too, because our circulations keep shrinking, and preprint volumes along with them.

And we’ve seen these same retailers plow more and more dollars into other channels — targeted digital advertising strategies, email campaigns, loyalty programs, social media campaigns, events and promotions, and a host of other alternative strategies.

We’ve also gotten calls from those companies and their agencies demanding rate reductions, which we often have had to grant despite our best bargaining efforts.

The truth is, we have no pricing leverage against these big companies, and no ability to influence their marketing strategies.

Meanwhile, anyone watching the health of those retailers has seen that they have severe problems of their own. We’ve seen them struggling — and more than a few failing — in the face of tough price competition and the rise of online shopping.

Hardly a month passes without bad news from one or another major retailer about lower sales, declining store traffic and challenged merchandizing strategies.

Will these trend lines continue?

Yes. A major U.S. retailer organization reported early last year that in-store traffic had fallen at least 5 percent a month for 30 months. The strong growth of online sales continues every year and there’s no sign of a plateau coming anytime soon. And digital marketing alternatives continue to multiply.

So we need to assume that major/national revenues at newspapers will continue to shrink.

What does that mean for newspaper companies?

It means big declines in revenues — and big declines in profits. That’s because major/national advertising — mostly in the form of preprints (or inserts, or circulars) — is one of our most profitable lines of business.

For these customers, we don’t have to make sales calls or design ads. We don’t have to print anything, create any content or make any special deliveries. We simply insert their prepared advertising pieces into our existing products and deliver them on our usual distribution routes.

So when we lose a dollar of preprint revenue, we lose much of that dollar in profits.

With that foundation, we’re ready to start our thought experiments.

Thought Experiment No. 1

Let’s imagine that we have reached the day when major/national revenue has fallen to zero. It’s gone.

Wait — you don’t think it will go to zero? You’re right; a few major retailers may keep using us, no matter how small our circulations get, and no matter how many digital marketing alternatives they have.

But this is a thought experiment, so we’ll keep it simple — we’ll say zero.

In that situation, is the newspaper company still profitable? Many would not be.

Take the profit, in dollars, generated by a typical newspaper company. Subtract the amount of its current major/national revenue. In many or most cases, you would get a negative number — a company that’s losing money.

That’s a big shock when you first realize it. It’s unexpected, because we know that we generate a lot of revenue from local businesses and from paid circulation. But for most newspaper companies, it wouldn’t be enough to be profitable without major/national revenues.

Realization No. 1

The first important realization from this thought experiment is that the amount of local business we do could, in fact, be enough to support a smaller local media company. But we’ve always had the rich revenues and profits of major/national advertising, so we haven’t had to cut ourselves to that size.

Realization No. 2

We will eventually reach that size, through year after year of painful cost cuts and staff reductions. We’ve been doing it for 10 years now. This will continue until we reach a point where revenues can be held flat or grow, and our costs by then will be scaled to that size.

For a decade, we have kept hoping our efforts to gain new revenues — selling digital advertising, digital marketing services, events, promotions and a host of other urgent initiatives — will be enough to offset the declines and get us to equilibrium. So far, it hasn’t happened. We are shrinking ourselves every year.

Realization No. 3

We should be rethinking our existing resources, putting far more energy and focus on growing our sales efforts and solution sets for the kinds of local businesses we can visit, talk to and influence. Our sales teams are too distracted by major/national accounts we can’t influence.

Thought Experiment No. 2

Since major/national will shrink to insignificance anyway, what if we decided to get ahead of the disruption curve? What if we set a goal to scale our organizations and costs down so we would profitable on local revenues alone — and did it soon?

In five years, major/national revenues will be a fraction of 2016’s dollars. What if we decided to act as if it would be gone in two years instead?

Realization No. 1

It would be painful, because we would have to make bigger cuts and make them sooner. But it would force us to think much more radically. Instead of trying to preserve the status quo, we would be forced to be far more creative in reshaping our structures and processes for long-term survival at a realistic size.

Realization No. 2

A huge and potentially life-saving additional benefit would occur: Because major/national revenues will not fall that fast, our cost reductions would generate actual gains in cash flow in the first few years.

Life-saving, that is, if we have the discipline to invest this additional cash to acquire new businesses and start new ventures.

We’ve proven for 10 years straight that incremental revenue efforts within our legacy business — digital or whatever — can’t offset the rapid fall in our legacy revenue. The smartest owners realize they can only do it by adding new ventures that make money in different ways.

One such owner is Jim Moroney, publisher and CEO of the Dallas Morning News. He talks about his approach here. And I’ve written often in this blog about some of the opportunities available to media companies in local markets — especially here, as well as herehere and here.

But investing in new revenue sources is almost impossible when your revenues and cash flows are declining. Investment takes cash, and shrinking companies don’t have it.

By acknowledging the inevitable loss of major/national revenues and taking courageous action to get ahead of it, we can create the cash we need.

I hope today’s thought experiments leave you thinking hard about what’s ahead and what we can do about it. The loss of major/national revenue is inevitable and inescapable — but if we have the courage to outrun it, we can remake our companies into local media businesses that can survive and thrive.

 

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Posted on June 8, 2016, in Advertising, Consumer revenue, Digital media sales, Disruption, innovation, investment, leadership, management, marketing agency, Media business model, media management, media ownership, Revenue, Sales. Bookmark the permalink. Leave a comment.

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