Who would you rather support journalism, advertisers or readers?

It’s a new question, one that made less sense to pose just three years ago. Now, though, with major shifts in the news market, it’s one to think about.

We’re about to move into a period in which reader revenue surpasses advertising revenue as the main support of many news(paper) companies. It’s yet another kind of profound crossover (“The newsonomics of crossover”), demonstrating again how quickly news business models are changing. With readers paying most of the freight comes a new series of profound questions, ones that we should start asking as we try to understand this change.

Unexpectedly, newspapers — of all things — are becoming the leaders in reader-supported media. As the public journalism movement (the enterprising start-ups led by the likes of The Texas Tribune, California Watch, and MinnPost) and public media (née public radio) pioneers move to increase their share of reader funding through voluntary membership (read subscription), newspapers are, almost accidentally, leading the way. The reason is obvious: There are millions of people used to paying for news — and now, courtesy of mobile news proliferation and All-Access plans — their expensive subscriptions are being ported over to the digital world.

How much money are we talking about? Worldwide, according to research I’ve done in my work with Outsell, circulation revenue — worldwide in 2011 — totaled about $30 billion. In the U.S., daily circulation revenue probably adds up to about $9.5 billion.

That’s a large sum, and it’s a key puzzle piece for the future.

Is it true digital revenue? Well, of course not. Does that matter? Where newspapers started bundling advertising — print, with a little digital — in combined buys in the ’90s, now they’re bundling print + digital subscriptions, even as they also sell “digital only” ones. All-access models make for a new indistinguishable blur — are people paying for print, for digital, or for news itself? — and that’s a head-turner.

It shouldn’t be a head-turner just for those of us watching the trade. If you run The Huffington Post, or Slate, or Examiner.com, you’re betting on one big revenue stream — digital advertising — going forward. Though there’s a huge amount of money in digital advertising, more than 70 percent is going to companies with the combinations of great audience reach and mind-boggling targeting ability. So, as Facebook shares tank this week, amid concern of it being able to compete well enough to justify its value in the hypercompetitive and cutthroat ad market, think of the smaller news players, like HuffPo, and their relative digital ad revenue prospects. If they’re competing in the 2015 marketplace with one revenue stream — digital ads — while whatever we call “newspaper companies” can harness two revenue streams, overall reader revenue and advertising, who has the advantage then? (Facile answer: It depends on how quickly legacy newspaper companies get rid of legacy newspaper costs. Witness Digital First Media and recent Newhouse/Postmedia day-cutting moves. In fact, the Postmedia moves with major Canadian properties — drop days, charge for digital access, centralize whatever can be centralized — are prototypical of how this new world fits together.)

That new twist to digital news competition is one I’ll return to soon.

For now, let’s understand this inexorable run toward majority reader revenue.

The trend has been slowly developing over the years, and now has picked up speed, because of two trends.

• One: Print advertising is in a never-ending tailspin, with the last positive quarter of U.S. ad growth coming back in 2006. U.S. companies have lost about half of their overall revenue, consequently, in last seven years. Globally, news companies have lost at least a third of all revenue, given the ad downturn across developed economies.
• Two: Digital circulation is now a reality. While it won’t bring back the same scale, or kind, of journalism, it now promises to be a second, major contributor to the evolving business model of news companies, at least print-based legacy ones. As news companies transition over their print readers — either providing print + digital “All-Access” for a single price or adding a small upsell for digital to print subscription — long-time print subscribers are learning they are paying for a news product, not a physical one delivered to their driveway. Yes, it’s still early, but the early evidence is that smartly executed, print subscribers can be brought along, with their paid subscriptions, into the mainly digital age. Getting younger, less habituated-to-print readers to pay remains a major question mark, but it’s not the big one on the minds of legacy newspaper companies right now.

For decades, the rule among newspapers in the U.S. was 80/20. Eighty percent of revenue came from advertising and 20 percent from circulation, with the circulation revenue — heavily home delivery subscriptions in most markets — paying for all those physical costs of getting the ad-heavy product printed and delivered. The great majority of the revenue — and significantly, the 20-35 percent margin profits — came from advertising.

In Europe and the U.K., the traditional model has been less ad-heavy. Figure that 25-40 percent of revenues have been derived from circulation, with great variation by region and market.

In Japan, thanks to both high pricing and enviable Amway-like network of paper deliverers and bill collectors, readers have long contributed the majority of revenues. Japan, though, stands out as the exception. Now the exception is building a new rule.

Take one good Midwestern example: Minnesota’s Star Tribune, fairly typical of once highly profitable, mid-sized metros. Like most of its peer group, it would have derived around one in five dollars from readers for many decades.

Now, according to publisher Mike Klingensmith, the total is up to 43.3 percent; a number that he knew instantaneously when asked. “We will definitely be at 50-percent-plus reader revenue in the next 18-36 months,” he tells me.

It’s not magic; it’s math. We go back to those two principles: fast-declining print ad revenue and new, all-access-inflected digital circulation. “We don’t want to hit the 50 percent too quickly,” Klingensmith adds with a chuckle. That would mean that print ads continue, or deepen, their downward trajectory. As those revenues tumble, of course, their percentage of the revenue contribution declines. That’s a no-brainer.

The other part of the equation, smart reader revenue management, is more interesting.

At this point, publishers have figured out that there are two ways to wring out more reader revenue. Charge print subscribers a little extra for digital reading. Many of the Press+-powered papers, including the Baltimore Sun, charge print readers an increment — in the Sun’s case 99 cents a month extra. That adds a new increment to print circulation revenue and has helped at least stabilize circulation revenues at many of the papers that charge, or in some cases boosted it 1-3 percentage points. [Update, July 15, 2012: All new Baltimore Sun digital subscribers (print and non-print) start off with a 99-cent trial period for 4 weeks. After this trial period, the subscription then automatically rolls to $3.99 per week for non-print subscribers and 99 cents per week for print subscribers.]

Klingensmith takes a different approach. He increased pricing for all print subscribers by 9 percent in April 2011, at a time when digital access was still free. Then, last fall, he introduced a metered paywall, offering subscribers who take print at least two days a week (Sunday-only subscribers still must pay extra) included free digital access.

The result: a 7.5 percent increase in circulation revenue in the first quarter. That compares to a low-single-digit decrease in ad revenue. The lines on the graph are converging. If you do it right, he says, you can keep your revenues growing. “If you support a 10 percent higher price [overall], you can generate much much more income than selling 10 percent of your subscribers digital access,” says Klingensmith.

What does doing it right mean? On the reader revenue side, it means a bunch of things, including smart pricing (“The newsosnomics of pricing 101”; “The newsonomics of 99-cent pricing”), a state-of-the-art customer database, mobile products (HTML5, app, or both) that provide real value for higher pricing, and substantial enough journalism to make it all work. Of course, containing ad revenue decreases — hold on to as much of print, try to grow digital advertising faster — as much as you can is a vital piece of the puzzle.

The Star Tribune’s math is among the most aggressive, but it’s got plenty of company in the reader revenue march to majority.

Take A.H. Belo, owner of three major papers, The Dallas Morning News, Providence Journal, and Riverside (Calif.) Press-Enterprise. In the first quarter of 2011, circulation contributed 34 percent of combined ad/circulation revenues. (I’ve eliminated “other” revenue from this calculation here and elsewhere to focus in on the ad/circ change.) A year later, circulation now contributes 36.5 percent. That’s a combination of aggressive pricing, similar to the Star Tribune’s, and the ad decline.

Take The New York Times. The company as a whole hasn’t quite crossed over, but remarkably the New York Times Media Group has. A year ago, its first quarter showed 48 percent of revenues derived from readers; now that number is 52 percent. At the New England group, basically The Boston Globe and the Worcester Telegram & Gazette, this year’s split is 47 percent circulation revenue, up three points from a year ago.

By way of comparison, Time Inc., a good barometer of the consumer magazine industry, clocks in at 43 percent circulation revenue now, compared to 38 percent three years ago. Magazines, of course, take in far smaller annual payments from readers, but then again their costs are much lower. They are, though, subject to parallel print advertising downdrafts.

The inexorable trend of paywalls only underlines this trend and will speed the process to majority reader revenue. As we move into this age of majority reader revenue, we see a slew of new questions unearthed. For starters:

• Will majority reader revenue plus some significant level of advertising revenue be enough to sustain high-impact, high-capacity news operations? Here again, it’s that topline revenue number that’s most important.
• How long will robust reader revenue continue, as readers themselves and their reading products move digital? That’s a major unknown, but it seems like those who have “always” paid may transition nicely. At least, publishers are looking at relatively stable, if not growing, reader revenue, as a key part of the next three-to-five year plan.
• If this strategy works, where indeed does it leave the HuffPos? Where does it leave those companies like Digital First Media’s Journal Register and the Newhouse properties that have so far eschewed “paywalls”? Might they adopt metered payment for their highest use readers, and how would that play in their respective markets?
• Does it make any difference to the journalism, or to the journalist/reader relationship? As Dean Baquet, managing editor of The New York Times, suggested to a journalism audience in Berkeley in April, the Times digital circulation program had buoyed Times journalists. They felt a more direct validation of their work because some digital readers were now paying, he said. Is that more widely true? Will journalists feel more closely connected to their readers — and to their public service missions — if readers pay more of the cost of journalism? I suspect, so, especially as news organizations make more and more use of their direct reader interaction and feedback the digital world offers. For those of who grew up with an ad-heavy balance of revenue, though, I don’t think it confused us in whom we served; the diversity of advertisers provided a buffer against influence. Still, it’s fascinating to comtemplate new journalist/reader connections, facilitated by that old-fashioned love potion, money.
• Will reader revenue more blur the line between the nonprofits and the profit-seeking? Just last week, the Ford Foundation ponied up a million dollars to help The Los Angeles Times cover border and immigration issues, one of an increasing number of foundation grants to the formerly profitable daily press. With reader, and perhaps, foundation supplying a majority of funding, the distinction between for- and nonprofit narrows. How will the L.A. Times be different than KPCC? How will MinnPost and the Star Tribune be viewed?

Photo by Peter Dutton used under a Creative Commons license.