If it Costs $10 To Produce A Sunday Paper And Your Highest Subscription Charge is $4, How To Make up that Missing $6 Plus Profit In Today’s Economy?

Philip M. Stone February 4, 2009

Elementary economics taught us if you are selling something for less than its cost of production and delivery, then you lose money, so when the San Francisco Chronicle says it costs $10 to produce its Sunday paper and its highest subscription charge is $4 then something is missing – like profit!

Now in the good old days when the economy was growing and in the days before Craigslist decimated the Chronicle’s classified advertising the elementary economics probably said that missing profit would be made up by selling lots and lots of advertising – display and classified. But again, that was the economic model for the good old days. And we are no longer in the good old days. 

Seldom do we have as stark an example of current newspaper economics as this and the information comes from no other than Ward Bushee, the newspaper’s editor. He told readers as he trumpeted changes in the Sunday newspaper, “The Chronicle is losing large sums of money each week and has been for some time. The primary reason for this is a decline in advertising revenue, which once supplemented the cost of producing a newspaper. Few readers realize that it costs more than $10 to produce and deliver each copy of the Sunday Chronicle. In better times, advertising offset those costs, but that has changed. The tough economy has forced many advertisers to cut back and some have disappeared through mergers or closure. In recent weeks, as you know, Circuit City and Home Depot have announced they'll close some stores in the Bay Area.”

So, if it costs that much to produce the newspaper and the advertising isn’t there to make up the difference between subscription price and cost then how can this continue? Obviously owner Hearst has very deep pockets! In fact the pockets are so deep that the newspaper in June will be turning on what it calls “the most modern newspaper presses in the United States, readers can look forward to a high-definition version of The Chronicle.”

So will the new presses in June, and the new designs introduced this week – a “new fresh coat of paint” -- bring in more readers, attract new advertisers and make existing advertisers spend more? It’s easy to be a naysayer in these days, but let’s hope it all works.

But what the Chronicle can do is to take a look at its subscription charges. More and more newspapers these days have been increasing their price with relatively little fallout and that is something the Chronicle can look at to improve its bottom line. Go to its web site now and it offers a subscription for eight weeks to the Sunday paper alone for $32 -- $4 a week. Why not $4.99 (the old retail trick that a “4” is more enticing than a “5”.)

For someone wanting the newspaper  seven days a week that subscription  is $7.95 weekly (and you get back a $25 gift card good at Macy’s or similar for Safeway supermarkets or another for gasoline) --  and that weekly subscription price  is still  less than the cost just to produce the Sunday newspaper. That weekly cost needs to go up a couple of dollars.

Of course, there is always the fear that increased cost to the consumer will mean less consumers, but people are not stupid – if they know it costs $10 to produce a product then they really don’t expect to be paying much less to buy it. What was strange is that try as we might we could not find an opportunity on the web site to subscribe for more than eight weeks.

The Chronicle, of course, was the first US newspaper to get really hit by Craig Newmark and his online advertising. Craigslist alone has literally cost the Chronicle hundreds of millions of dollars in lost classified revenue. The newspaper has cut its newsroom way back – using far more AP copy than it once did – so you can’t say management hasn’t taken the knife to try and fix things.

But with newsprint where it is, plus all the other costs of producing a newspaper the advertising model even in print is broken and quite simply more and more of the cost has to rest on the shoulders of the consumers, which of course is dicey in San Francisco given that the newspaper’s web site is real popular and of course it gives its news away for free.

Auto sales are way down but that isn’t stopping Detroit from increasing prices this year. You just can’t keep selling for far less than it costs to make the product.

Whereas Hearst continues to invest in The Chronicle, take a look at what is happening in Denver (Scripps) and Seattle (Hearst) where newspapers are being  threatened with closure if they don’t get sold real soon. The problem in today’s economy, of course, is not only whether one can borrow the money to make the purchase, but since costs of running the business currently are more than revenues and then there could possibly be big debt payments to make those economics don’t work either.

In the case of the Seattle Post-Intelligencer the newspaper is said to be losing each month some $1.5 million – around $18 million annually.  The unknown here is how much would it cost to actually buy the newspaper? If it was this writer, the offer would be $1 or to be even more creative, to ask Hearst how much it would be willing to pay to have someone take the newspaper off its hands.

If you think that scenario is merely a dream, then remember back to 1985 when Reuters was close to a deal with Scripps to buy UPI. Scripps had already agreed to the principle that it would pay the British agency to take the money-losing American agency off its hands, but the deal fell through not because of the price but because Reuters eventually decided it didn’t want to get involved in what it called “parochial” US coverage.

So in Seattle it really boils down to how long the buyers can sustain losses of, say, $20 million a year in a climate where it is very uncertain how much advertising, if any, will return to print. There’s probably not that much more that can be done on the cost side so it’s really a matter of figuring how long the economy will take to get fixed, and how newspapers are expected to do in such an improvement.

Get it wrong and you could well have on your hands another Minneapolis (Chapter 11) or Philadelphia (looking for a government bailout).

Would you invest your money today in such an open-ended opportunity?