How to save The Boston Globe
The newspaper industry is in deep trouble. How so? It costs a lot to write, print, and deliver a newspaper, and with more people getting their news for free online and a plunge in advertising, costs are higher than revenues. The New York Times Co. (NYT) bought my local newspaper, The Boston Globe, in 1993 for $1.1 billion and is now threatening to shut it down unless its unions agree to $20 million in cost cuts. I don't think this is a viable plan -- instead The Boston Globe should stop producing its paper version and charge for access to its online content.
The Boston Globe is suffering from drops in circulation and advertising, and it has 13 unions boosting its costs. How bad is the pain? Its average weekday circulation fell 10 percent to 323,983 for the six months ending September 2008. Advertising revenues across the industry declined 16 percent in 2008. And the Boston Newspaper Guild -- whose members include 700 editorial, advertising, and business employees -- is being asked to take pay cuts and put an end to company pension contributions and lifetime job guarantees.
With advertising revenues down, the most likely way to get profitable is to cut costs -- but not just from union give-backs. The good news for the Boston Globe is that its online audience is up -- in 2008 the number of average unique visitors in the United States to its Boston.com site reached 5.2 million per month, up 21 percent from the 4.3 million per month in 2007.
The bad news is that operating costs for the New York Times Co. (The Boston Globe's financial statements are not broken out separately) account for 95 percent of revenues. By closing down the dead-tree version of the The Boston Globe, I estimate that operating costs could drop to 75 percent of revenues.
How so? Getting rid of the newsprint version would cut operating costs as a share of revenue by at least 20 percentage points -- eliminating raw materials, which would cut eight percent of revenues, and my rough guess is that an additional 12 percent of revenues (I welcome better estimates) would come from cutting the costs of people who would no longer be paid to print and deliver the dead-tree version of the paper.
For the New York Times's New England Media Group, which is mostly The Boston Globe, that would mean about $105 million in cost savings on its $524 million in 2008 revenue -- far more than the $20 million that the New York Times Co. is trying to get from union give-backs.
Of course, this estimate assumes that all print advertising will go to the online version and that the online version remains free. Although this is an overly optimistic assumption, internet advertising does have a big advantage over print -- which is that advertisers can track whether people who view their ads actually make a purchase.
As a result, in order to make up the lost revenue The Boston Globe will need to charge users for access to its online content as the Wall Street Journal does. This might not be as difficult as it would first appear. If it stopped producing a dead-tree version, The Boston Globe could roll the unfulfilled portion of its print subscriptions into online ones. Then it would face the challenge of getting others to pay for a previously-free online subscription.
Would cutting the costs of the dead-tree Boston Globe and paying for online subscriptions make it profitable? I don't know. But if the New York Times files for bankruptcy -- which it still could do since it owes $99 million from its long-term debt in 2009 and only generated $5 million in cash last year -- all its contracts will be subject to renegotiation.
It may be using its tough negotiation tactics with the Boston Globe as a way to experiment with an out-of-court rethinking of its business model -- as a long-time fan of the Boston Globe I hope some good ideas emerge from this effort.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.