The Seattle PI hits the 10101010; CAN A LOCAL ONLINE NEWSPAPER BE PROFITABLE?

As the whole world knows by now, the Seattle Post Intelligencer bit the digital dust this week. It replaced its print edition with an online only version. See The New York Times and Wall Street Journal coverage.

Michelle Nicolosi, its "executive producer" (revealing title) explains the experiment this way: The creation of seattlepi.com as a standalone digital news and information business is a great opportunity for us to try out many of the theories journalism professionals and academics have been throwing around for the past few years.

SO WILL IT WORK. CAN AN ONLINE LOCAL NEWS ENTERPRISE, STAFFED WITH REAL JOURNALISTS, WORK....THAT IS, BE PROFITABLE.

The topic is certainly the rage. I've gotten several emails in the last few days urging me to help start such ventures. And there is no doubt that the local news/local information category is still a wild frontier on the internet, with no one yet proving out a business model that is sustainable and can make long term sense.

Last week, Rick Wartzman, a former Los Angeles Times reporter and now director of the Drucker Institute at Claremont Graduate University, argued in a Business Week piece that renowned business scholar Peter Drucker would "have called for something that has, by and large, been missing from the scene: a genuine boldness and decisiveness of action by top management. To stop the red ink, newspapers need to get rid of the ink altogether. It's high time for online-only operations."

He goes on to say: The Web needs to be embraced much more fully than most papers have done. This means no more tentative, halfway initiatives. Dead-tree editions must immediately yield to all-Internet operations. The presses need to stop forever, with the delivery trucks shunted off to the scrapyard.

I generally agree with the thought, but I'm still worried about whether the numbers work.

Wartzman talked LA Times editor Russ Stanton into running the numbers for what a web only operation would look like at his newspaper. Stanton said that they'd need only about 275 total employees (and only 150 from the newsroom--I imagine that made a few of the 600 people left in the newsroom there a tad nervous) to run a profitable online operation. With 275 employees, total compensation costs including about 20% for taxes and benefits, would total around $23 million. If salary costs total half of total costs, and that's probably conservative for a web only operation, the online operation would only need $46 million in revenue to break even. And if the actual revenues for online operations at the newspaper are about $80 million, as some people have suggested, then you've got a nice profit margin, and $34 million of cash in your pocket. A good solid business, but nothing like what it was; it's a lot less than the $100 million in cash flow The Times probably made last year, and far less than the $250 million plus it had been making in years past.

But the real question is not whether a heavily trafficked site like latimes.com, or usatoday.com could make money on their own--I have no doubt they can--the more challenging issue is whether the transition can work for a community newspaper. Many such newspapers--but not the Seattle PI which was losing money--routinely operated with a 30% profit margin.

I tried to recreate the Seatle PI's financial pro forma with the aid of a calculator and the back of an envelope. What I really needed was my old company CFO Stu Coppens (Stu where are you when I need you?)but the picture I came up with is pretty grim, if they just take the old fashioned approach of cpm (cost per thousand) based online banner advertising. Here are the numbers (and who knows if I am even close or even in the ballpark...)

The Seattle PI has said they will have 40 employees, 20 in the newsroom, and 20 selling ads. (They still need some management, and someone to do accounting, so I've added another 5 people). I estimate that total salary costs for those folks, including an 18% factor for taxes and benefits (less rich benefits than at the LA Times), will be around $3.5 million. (The ad sales folks get paid substantially more than the reporters, reflecting the real world.) So let's double that and say the total costs for the enterprise are $7 million ( and you could probably run it for less). Then in order to make any money, the new online web site has to generate at least $7 million.

That may be the hard part, unless the site changes and attracts a lot more page views, or there is a lot of creativity on the revenue generating side.

According to compete.com, total visits to the SeatlePI. com have been running about 140,000 visits a month with only 30,000 unique visitors. Average visit time is less than 30 seconds, and less than 1.5 pages are viewed. Not Good. At a $20 cpm, with three ads running on a page, and selling all the inventory, total revenues for the year will be less than $1.5 million, by my rough estimates. If my estimates are wrong, somebody tell me (especially old friend Roger Ogelsby who is the publisher), but if not it suggests that they've got to drive up the cpm to rates advertisers generally pay for targeted, niche communities (say over $60 a thousand), get real creative with sponsorship packages for microsites, promotional contests with advertisers who might be willing to pay for reader engagement, and the like. (Note: Roger did get in touch and my traffic stats were wrong. See correction in blog entry above.)

Remember, however,in this particular case, the Seattle's number two newspaper was already apparently losing $14 million a year for Hearst, so at least they may have reduced the losses, and given local news on the web a chance.

As all TV journalists love to say, "only time will tell" whether this experiment works. In the meantime, I'm very interested in any and all comments (especially from Roger and Stu)!