#42 - The New York Times: A Sleeper Tech Company

Winning in a World of Aggregators

The transition from the physical to digital economy is difficult to navigate. The New York Times is one of the rare companies who successfully crossed the physical to digital chasm. In doing so it offers a template for how to succeed in a world dominated by aggregators. It also exemplifies the rich-get-richer dynamic that’s so prevalent in online businesses. 

Crossing the Digital Chasm

In the second quarter of 2020, the Times’ digital revenue exceeded print revenue for the first time. The company also reported 5.7 million digital subscribers, up from 1.0 million in October 2015, a roughly 40% compound annual growth rate (CAGR).

Over the past decade subscription and revenue mix have steadily moved from physical to digital, a trend that should continue as the Times targets 10 million subscriptions by 2025: 

The Rise of Digital Subscriptions

Success in digital subscriptions was not guaranteed for the Times. In 2012 the company had four revenue streams: print subscriptions, print advertising, digital advertising, and digital subscriptions. Digital subscription growth was plateauing and the other revenue streams were stagnant or declining. Mark Thompson, the Times’ outgoing president and CEO, notes in this fascinating interview with McKinsey & Company that:

The psychology inside the Times and other newspapers was that all you had to do was get a bigger audience and transfer the wonderful economics of print advertising to digital. I didn’t buy that. I think digital can be useful. I think it’s an important adjunct source of revenue. But I never thought it would save the Times. It had to be subscriptions. 

The key insight here is that digital is an inherently different business from physical. For the Times’, this meant replacing the advertising-based business model that was in place for over a century. Many companies try slapping a website on top of their existing business model and calling it a day. This doesn’t work. Ask Macy’s. Nailing digital requires a different cost base, different leadership, and a different way of thinking. It requires playing by internet assumptions:

The focus shift from advertising to subscriptions also reflects a sober evaluation of the online advertising landscape. Google and Facebook are a duopoly, gobbling up most online ad dollars and leaving everyone else to fight for table scraps. That’s a tough environment to build a business in. Instead of competing with Google and Facebook for ad dollars, the Times decided to try using its unique content to build and monetize a direct relationship with readers. This bet is now paying off. 

Like Netflix, but for News

As Netflix and Spotify show, a direct customer relationship paired with world-class content is a winning combination. The Times is using the same playbook as it transitions to digital. 

A direct relationship with your users and the ability to drive direct traffic are keys to winning in an age of aggregators. The Times leverages its unique content to drive this relationship with readers.

Over its 170 year history, the company has won 130 Pulitzer Prizes and a boatload of other awards. This content drives traffic and subscribers. The company’s revenue mix is tilting towards readers and away from advertisers, suggesting that its strategy is working. Today roughly 60% of the Times’ revenue comes from readers, compared to a historical 70/30 split between advertisers and readers.

As Netflix shows, the flywheel between subscribers and content is where the magic happens. To attract subscribers, Netflix invested billions of dollars into content. As the company acquired more subscribers, it could spend more money on content which in turn would help it acquire more subscribers. A virtuous cycle. The Times benefits from a similar (though far less expensive) flywheel. The more content it produces, the more subscribers it acquires. The more subscribers it has, the more it can invest in content and product. 

For context, the Times added 587,000 new subscribers in the first quarter of 2020. According to the Columbia Journalism Review:

That’s almost three times the number of total subscribers to the Los Angeles Times. It’s more than 70 percent of the total cumulative subscribers to Gannett’s 260 media properties. The New York Times has more digital subscribers in Dallas–Fort Worth than the Dallas Morning News, more digital subscribers in Seattle than the Seattle Times, more digital subscribers in California than the LA Times or the San Francisco Chronicle.

In the second quarter of 2020 the Times added an additional 669,000 new digital subscribers. The Times’ flywheel keeps spinning, driving the winner-take-all dynamic that’s so prevalent in online businesses. 

Long Runway, Big Moat

Since 2008, US newspapers have shed over half of their newsroom employees, according to research by the Pew Research Center. Media startups haven’t fared any better, particularly as Covid-19 shrinks ad budgets:

While many newsrooms are being gutted, the Times has grown its newsroom headcount to 1,750 in 2020 from 1,550 in 2013, according to Nieman Lab. Returning to the McKinsey interview, Thompson notes: 

So what’s interesting to me is the competitive context for the Times weirdly feels remarkably thin. We’ve got 1,750 journalists working their hearts out, trying to produce the best journalism in the world. Not many other people are doing that...The barriers to entry are very high for this kind of high-quality journalism.

This is a massive moat. The Times has newsrooms in New York, London, and Hong Kong and 31 international bureaus including Baghdad, Beijing, and Caracas. To compete, you’d need boots on the ground in Afghanistan, Venezuela, and dozens more. If you’re the United States Marine Corp that might not be a daunting footprint, but good luck if you’re a media startup. As Thompson puts it:

I would say the list of competitors is not very big and the trends in the business are going to make it harder to launch or to grow, rather than easier, in the coming years.

That’s the kind of sentence that would make Warren Buffett gush. 

The Opportunity

People pay for one news subscription on average, according to a study from the University of Oxford’s Reuters Institute for the Study of Journalism:

The internet removes the constraint of geography, meaning that the Times could add more global subscribers over time. Indeed, their 2025 target of 10 million subscribers anticipates 2 million from abroad. Here’s how Thompson frames it:

The opportunity now is to become one of the tiny handful of trusted independent sources of news in the world: of immense appeal in the United States but also throughout the entire world of college-educated people who’ve got a good command of English; who’ve got an interest in what’s happening at a global level, what’s happening in the United States, and what’s happening in Western culture; and who really want reporting that touches every part of the world.

A durable brand, growing moat, diminishing competition, and growing subscriber base are an attractive combination. The opportunity for the Times is to be the one news subscription for ten of millions of people globally. 

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