Hiking the prices: as advertising declines, some papers see charging readers more as a promising strategy.

Morton, John

Our nation's earliest newspapers--well, even before there was an actual nation--printed advertising for free, figuring that displaying prices for various goods qualified as news. They made all of their money from sales.

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That didn't last long, as publishers concluded that they could make a lot more money by charging merchants for access to newspaper readers. By the mid-1800s, slightly more than half of newspaper revenue came from advertisers, a proportion that gradually increased to two-thirds by the early 20th century and a bit more by the 1950s.

Thus did newspapers fall into the grasp of commerce, with all the attendant benefits and disadvantages: Higher profit to fund more and better journalism. Pursuit of profit to the near exclusion of all else. Sacred cows. Fatter newspapers to accommodate increased advertising, bringing greater demands on capital for bigger and faster presses. Prosperity, or the lack of it, tied to the ups and downs of the economy.

The better newspapers resisted the negative effects, but many others did not. Most of all, the reliance on advertising as the source of profit made newspapers especially vulnerable to changes in the way advertisers reach customers. And that's the problem newspapers are struggling with today.

I've written in this space before about how the rapid rise of high-speed Internet broadband household coverage since 2004 is almost a perfect reciprocal of the rapid decline in newspaper advertising. As one goes up, the other goes down. And we are far from the end of this process, as more and more households hook up to broadband. The conventional wisdom was that newspapers' lost advertising--in the last two years they got less than half as much as they did in 2005, the peak year in terms of dollars--had shifted to the Internet, and that is doubtless true for a lot of it.

But another part of the loss has not been discussed much, and I will illustrate it with personal experience. I can get on my computer, log on to Target, Wal-Mart, Home Depot or any other big-box outlet, and buy anything they've got to sell. And I can have it delivered, often for free, in a day or two.

What's missing from this scenario? Advertising.

Now it's possible I might have been motivated to access one of these sites because I was exposed to an advertising insert in my newspaper or saw an ad on television. But that wasn't the case. I never look at inserts, and I don't watch commercial television. I logged on because I know these stores exist, and I suspect I'm not alone. Indeed, these stores will alert me by e-mail every day about what's on sale.

This doesn't mean that these retailers no longer advertise in newspapers and elsewhere. But I suspect they do so less frequently because they are not stupid--they know how many customers come to them via the Internet unbidden. Compounding newspapers' plight is the explosive growth of dollar stores, which hardly ever advertise.

Which brings us to ponder the newspaper industry's two principal streams of revenue, circulation and advertising. From the 1950s through most of the 1970s, advertising accounted for 68 to 71 percent of the total of the two. The percentage began to increase in the 1970s, gradually rising to as high as 82 percent in some years, most recently from 2005 through 2007.

During those years, most newspapers refrained from boosting subscriber and street sale prices to make sure circulation, already declining, didn't plummet further. And the Internet really didn't start to take away newspaper advertising in a big way until 2006.

So what can newspapers do? Advertising revenue continues to drop 5 to 8 percent a year at most newspapers, to the point that last year its share of the advertising-circulation total had declined from 82 percent in 2005 to 69 percent (preliminary estimates of 2012's advertising total is 46 percent of 2005's). The industry has pinned most of its hope for the future on increasing digital ad revenue, charging for digital content and bundling print and digital content into one-price packages, but so far gains from these efforts have failed to match what has been lost.

Thus in the short term a more promising source of increased revenue is from circulation, and some newspapers, notably the New York Times, have aggressively raised subscription and newsstand prices in addition to requiring digital subscriptions for more than minimum access to a paper's Web site. Indeed, the New York Times last year for the first time in its history received more revenue from circulation (53 percent) than from advertising.

The Times has a unique hold on its audience, and there's hardly a guarantee that other newspapers, with a less firm grip on readers, can be as aggressive as the Times in raising circulation prices. Certainly the cost-cutting and diminishment of journalism--things the Times has largely eschewed--at a vast majority of the nation's dailies don't help.

John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.