With Newspaper Fortunes So Battered What Are Vendors To Do?

Philip M. Stone July 17, 2008

It’s always a problem in the customer relationship when financially things start going sour – do you work with your customer to get over the hurdles in the hope that when the situation brightens that assistance is remembered and then price increases are acceptable, or do you just say “tough” and go for as much as you can no matter what?

With newspapers being hit so hard these days by declining revenues, declining margins, with advertisers spending some of their money elsewhere, print looks for every way possible to save costs – some of this can be done internally via cost cutting ranging from cutting out delivery to non-profitable locations to firing lots of staff -- but what about those services supplied by third parties?

Newsprint makes up around 20% of an American newspaper’s cost so what is the newsprint industry doing these days with its pricing? It’s soaring, that’s what. Newspapers are claiming prices are at or around 13-year high with 30lb paper now at  $697 a tonne – it was $567 at the beginning of the year  so that’s a 23% increase  already this year. If that wasn’t bad enough suppliers are looking to add another $60 by the end of Q3.

To combat that, publishers have cut back not just on the width of paper used, but also on the number of pages printed daily – it’s down around 10 – 15% this year. Other publishers have tried to outsmart the producers by switching to lighter-weight 27-pound paper, but the producers had that one in their sights – that’s priced higher at $744 a tonne, up 19% on the year.

So these price increases come at exactly the wrong time for the newspaper industry. But to be fair to the producers, they are breaking even at best on newsprint production and one has only to look at the financial statements of such companies as AbitiBowater and Norse Skog to see they, too, have serious financial problems.  The commercial relationship between newspapers and their newsprint vendors has always been one of “get what you can” and that’s likely to continue.

One of the biggest editorial financial bargains a newspaper has is the cost of news from news agencies such as the Associated Press and Reuters. There’s a simple formula for newspapers to figure out just how cost-effective their news agency fees are. Figure out the average cost of an editorial employee, divide that cost into the fees charged by the agency and you now have the agency cost in manpower terms. Next count up how much space in the newspaper is taken up by agency material – news and pictures – divide that figure by the agency cost in manpower terms, and compare that figure to the cost of filling the remaining space provided by editorial staff. For most newspapers the most cost-effective way to fill the news hole, particularly as newsrooms are continually being stripped, is a news agency.  And that, after all, is the primary reason why such agencies came into being.

But for US newspapers feeling the budget crunch that good deal wasn’t good enough; they “own” the AP co-operative, and they complained they are paying too much in these hard times.  That was probably best summed up back in April by Martin Baron, Boston Globe editor, who told the AP at a meeting, “You need to cut our rates 30%.”

So the AP dithered a bit, came up with a new pricing formula plan, effective in 2009,  that would save around  $14 million in membership fees and it then increased that to around $21 million in savings. The new pricing reduces pricing for about 80% of the members,  about 10% will see no change, and the other 10%, probably the wealthier biggies, will see increases; in all, income from its US newspaper members will decline about 10%.

 “Lean” Dean Singleton, publisher of the MediaNews Group that knows a thing or two about cutting a newspaper’s cost structure, also happens to be the AP chairman. He said, “When you’re faced with downsizing your news operation and making dramatic changes in the way you operate, you always look to someone to blame. And the AP has been a handy entity to complain about.” The AP Board is set to approve at a meeting July 23-24 the pricing changes that include financial incentives encouraging member newspapers to tag their content for easier online use.

The AP has changed face over the years, late getting into the video and digital game because its members objected to the co-op feeding such competition. But Singleton, at an AP lunch in April noted, “You may be surprised to know that AP now receives only 28% of its revenues from member newspapers. In 2009 it will receive less than 25% from members. Broadcasters, Internet companies, and international subscribers provide the lion’s share of AP revenue.”

What the AP is missing in the US to really keep pricing down is competition. Nobody covers the US like the AP, right down to the high school football game level, the state legislature, and the like. There used to be real competition in the form of UPI (no, not the UPI around today, but the real UPI when it was owned by the E.W. Scripps Company). The competition between the two agencies was legendary and the big winner was the world’s media, and particularly US newspapers and broadcasters. The agencies provided some of the best journalism going, and the cut throat competition was not just in journalistic terms, but on the sales side, too, and that kept prices down for everyone. Clients would sometimes make decisions on which agency to subscribe to on the basis of just a few dollars difference in contract terms.

But during another economic downturn – this one in the mid-1980s – the “real” UPI went bankrupt as newspaper after newspaper decided to drop one news agency and it was usually UPI. Since then AP has had carte blanche to raise its membership fees, raises necessary since it was restricted for so long from branching out in other areas to gain new revenues, but at the end of the day the AP members have no one but themselves to blame if they believe AP charges too much, for it is those same members that got rid of the competition.

Today there are international news agencies on the American scene such as Reuters and Agence France Presse, but their US coverage is very limited by comparison. As a Reuters executive said back in the 1980s when looking at whether the agency should buy UPI, “We don’t get involved in parochial coverage.”  Even so, those agencies have to adapt to current conditions.

Christoph Pleitgen, global head of News Agency for Reuters Media, explained, “There’s no question that the U.S. newspaper business is challenging to everyone at the moment. We aim to keep a balance between supporting newspaper clients during the difficult transition they are going through and making sure the value of our services is recognized. Our approach has been to improve the quality of our content, to show more flexibility on rights, particularly online, and to leverage our video and data assets to help our customers differentiate and seize opportunities in the growing online space. We offer a variety of business models ranging from traditional licensing to pay-as-you-go, depending on the type of service. We are also starting to offer more channelization options and keep exploring additional business models.”

In other words, try to keep the line on pricing, but maybe offer more for that pricing. As Pleitgen pointed out, “Given the fact that Reuters is not the lead agency for US publications, our pricing structure is really not comparable to that of the AP.”

Doing business with American newspapers these days is really tough. “Nice-to-have” doesn’t exist anymore and each “must-have” is seriously questioned. Unless there’s a near monopoly supply situation such as the North American newsprint suppliers who can force through their price increases, then serving American newspapers these days seems to be via rock-bottom deals only.