Newspaper Economics 101
Indiana Writers Group column for March 22 and thereafter
by Cecil Bohanon and John Horowitz
In 1970, English language newspaper circulation in the United States was 62.1 million subscriptions. By 2004, this had fallen to 54.6 million subscriptions. This is a 12 percent decline, during a period when population has increased by 45 percent from 203.2 million to 293.7 million.
One of the reasons for the decline has been the emergence of substitutes for newspapers. In the last century, radio and television offered new ways of disseminating news much to the chagrin of many newspaper owners and publishers.
Two decades ago, growth of multi-channel cable television providers spawned the growth of additional television news networks. In the last decade, a whole new medium of news delivery has emerged via Internet blogs and websites. The Internet has opened new ways to target consumers that directly compete with traditional print journalism. Young people are especially likely to use those substitutes. This accelerates expectations about future declines in newspaper circulation.
With a few notable exceptions, the responsibility for news-gathering and dissemination has fallen squarely on privately owned for-profit businesses. Some newspapers are privately owned and closely held, which means the ownership rights are held by a private family or an independent investor group. Other newspapers are privately owned and publicly traded, which means ownership shares are exchanged in a market on a daily basis and the price of those shares vary, often widely.
There is considerable evidence that for-profit enterprises act in a way consistent with maximizing profits. Profit maximization implies that managers are always looking for new ways to increase revenue and reduce costs. Profits increase when managers find ways of enhancing a product’s value to consumers, thereby allowing it to charge a higher price for the product. Profits are also augmented when managers find ways of maintaining product quality while reducing the costs of the resources necessary to produce the product. This holds for the newspaper business as much as for a software company or a automobile producer.
However, the newspaper model of profit maximization is somewhat different from that of an automobile producer. News is of interest to readers who will pay for the information provided. But more important, readers are of interest to advertisers who want to sell to a mass audience and are willing to pay dearly for the privilege. This model has provided information to the public and profits for advertisers and publishers for at least two centuries in the United States, although the quality of the information (and the profits for that matter) has been a continual source of conflict and controversy.
Most of the newspaper revenue comes from advertising and advertising rates charged by newspapers depend on circulation. As the old saying goes "circulation is the lifeblood of a newspaper" — in economic terms most of the costs of newspaper production are fixed costs. The marginal or incremental cost of additional subscribers is low compared to the marginal benefit of an additional subscriber, making circulation growth the holy grail of the business, and circulation decline its death knell.
Given these facts, it is hardly surprising that the market value of publicly traded newspapers has gone down. And as disconcerting as these changes no doubt are to those who work in the newspaper industry, it is not surprising to an economists that many newspapers are up for sale and that newspapers get shuffled around like board pieces in a Monopoly game.