This article first appeared in The Edge Malaysia Weekly on December 4, 2017 - December 10, 2017

This is the second instalment of my views about the newspaper industry. How it was decimated by digitalisation, how it reacted and what the outcomes are. More importantly, what are the lessons we can draw from it, with every business facing similar disruptions from the onslaught of digital innovations, new technologies and changing behaviours in a new ecosystem.

Last week, in my article entitled “Go digital or die. Is print media really dying?”, I wrote about the loss of circulation, readership and advertisement revenue of newspapers to the technology giants. I explained how the business models and competitive advantages of the newspapers were being quickly annihilated by the internet.

This week, I am writing about how the newspapers responded, fighting back by putting their content online, often for free, with the aim of expanding their readership. This was in the hope that, as their digital readership grew, they would secure a fair share of the fast exploding digital advertisement revenue to make up for the loss of their print advertisements.

It appears to be a totally logical decision. The fact was that the total print advertisement revenue of all newspapers in the world in 2016 was only US$58 billion, and falling. At its height, it was some US$100 billion. Meanwhile, total global digital advertisements were already at close to US$190 billion by 2016, far exceeding print and growing at a tremendous pace. In 2016 alone, digital advertisement revenue for Google grew by 17.8% and Facebook by 57.4%, to US$79.4 billion and US$26.9 billion respectively.

I call this the Media 2.0 strategy. And when it is put elegantly like this — “Newspapers are not selling paper but news, and with the internet, where paper is replaced by pixels, which offer better experience and engagement, a bigger and global reach, yet have the ability to customise and personalise to each customer and at literally no cost” — how could it possibly be wrong?

The argument above is similar for most businesses and industries. Retailing is about consumers buying what they want. Physical stores and shopping malls, with their high capital and operating costs, are struggling to compete with online services.

As for banks, they are cutting costs and collaborating with fintechs to adapt to the challenges of digitalisation. But revenue growth continues to weaken with an accelerating decline in profit margins. Traditional profit centres such as remittances have been devastated, and e-payments and online lending by digital platforms will further erode the role of banks.

Let’s review the outcome after many newspapers adopted the strategy of going online.

Chart 1 shows the total revenue sources for newspapers from 2012 to 2016. Overall, they declined from US$167.3 billion in 2012 to US$154.2 billion in 2016.

Total print circulation revenue actually rose by US$2.7 billion. But this was due to the huge gains in China and India. Elsewhere, it fell. In North America, it declined by almost 12% over the five-year period from 2011 to 2016. These figures were quoted in last week’s article. Taking out the China and India anomaly, circulation revenue for newspapers generally declined.

What was destroying the newspaper business was that print advertisement revenue collapsed from US$79 billion in 2012 to US$58 billion by 2016, or 26.7%. Even more alarming is the fact that print advertisement revenue is falling at a faster and faster rate even as it shrinks (see Chart 2). From 2012 to 2013, it fell by 6.4% and the rate of decline accelerated each year, falling year on year by 8.8% in 2016.

To make up for this loss in print advertisement revenue, newspapers went online with their content with the hope of capturing digital revenue. Did they succeed?

Chart 3 shows global news publishers’ (I have switched the description from “newspapers” to “news publishers” as they moved online) digital revenue. It increased from US$8.2 billion in 2012 to US$12.9 billion in 2016, or a compound annual growth rate (CAGR) of 12%.

Going digital did generate additional revenue, although not sufficient to offset the decline in print revenue. This is because as a percentage of the total news publisher’s revenue, digital revenue made up only 8.4% by 2016, up from 4.9% in 2012.

Everything starts small. So, even the relatively small digital revenue contribution is good news for news publishers. But would it be able to grow rapidly and sustainably to replace the lost income from the print advertisement revenue?

Global digital advertisement revenue for news publishers grew from US$7.3 billion in 2012 to US$9.6 billion in 2016, or a CAGR of 7.2%.

What is shocking and alarming is that the annual growth rate of global digital advertisement revenue for news publishers is falling rapidly (see Chart 4) — from more than 11% annual growth in 2013 to just 5% annual growth by 2016. And even then, this growth rate is overestimated. Why? Because there were more news publishers that went online each year during this period. In other words, digital advertising revenue for each news publisher on average quickly stagnated.  

The hope and “promise” of gaining digital advertising revenue through the elegantly articulated strategy of putting their content online (pixels better than paper) quickly vanished.

Contrasting this with the growth in the digital advertising revenue of Google and Facebook over the same 2012 to 2016 period makes the analysis even more interesting (see Charts 5 and 6).

Google’s advertisement revenue went from US$43.7 billion in 2012 to US$79.4 billion in 2016. For Facebook, it shot up from US$4.3 billion to US$26.9 billion in the same period.

Despite a high base of over US$40 billion in 2012, Google was able to grow its digital advertisement revenue by 13% to 18% annually. And that rate of growth is not declining. Facebook is growing its digital advertisement revenue by 48% to 65% annually. And again, there is no sign of a let-up.

Let me summarise the two major facts I have presented above.

Newspapers went online with their content (either free or paid) out of necessity as their print circulation and advertisement revenues crumbled. This Media 2.0 strategy achieved some digital advertising revenue, but despite starting from a very low base, its growth quickly stagnated, growing at a slower and slower rate each year, from an annual growth rate of 11% in 2013 to 5% in 2016.

Meanwhile, their print advertising revenue is falling at a faster and faster rate.

In 2016, as an industry globally, media publishers gained US$478 million in additional digital advertisement revenue during the year. But they lost US$5.6 billion in print advertisement revenue, or a net loss of US$5.1 billion. In comparison, the net loss in 2013 was less at US$4.3 billion. This is because the loss from print advertisement revenue was less at US$5.1 billion while the gains from digital advertisement revenue were more at US$808 million.

The second point is the fact that digital advertisement growth for the technology giants, which eats away at the advertisement revenue of the newspapers, is growing at a faster pace each year, even as their revenue has already far exceeded those of the newspapers. Google, with US$70 billion of annual digital advertisement revenue, is still registering an annual growth rate of 18%. Facebook, with US$20 billion in annual digital advertisement revenue, is growing at 57% annually.

If the above developments do not kill off the newspapers quickly enough, newer digital technologies will. Take ad blocking software. Basically, it stops digital advertisements online to overcome loading time, data consumption and experiential frustrations. Already, 11% of the global internet population is blocking ads on the internet. It is even higher for smartphones at 22%. Ad block usage grew 30% in 2016 (see Chart 7).

Newspapers can use ad block walls to overcome the ad blocking software in theory. In practice, 74% of the audience that use ad blocking software will leave the website when faced with ad block walls.

Just as news publishers were adapting to a digital strategy (Media 2.0) of going online with their content, newer digital technologies are proliferating at an even faster pace to negate the very strategy of these news publishers.

Simply putting content online is clearly not a viable strategy.

The first newspaper in the world started in 1690. The first banner advertisement appeared online in 1993. Three hundred years apart. Yet, it took less than 20 years for these technology giants to put down a once-proud and powerful industry.

As interesting as the facts are, what lessons can we learn? This really is the objective for my writing this series because it has implications for every business facing the digital onslaught. Simply listening to the consultants in adapting to today’s digital technologies and using the platforms of the technology giants may result in an earlier demise of your business.

I will continue with this next week.

Total portfolio return now stands at 70.8% since inception. This portfolio continues to outperform the benchmark index, FBM KLCI, which was down 6.1% over the same period, by a long way.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.