September 8, 2020

Local News Works When Cost Structure Isn’t Screwed Up

Thirty years ago, local newspapers had incredible power. It was before the internet, so there was little competition for subscribers or advertisers. If you lived in one town, you likely could only get one paper. And if you wanted to target your customers, there was only one place to advertise.

The monopolies were incredible.

Naturally, with the rise of platforms and the removal of geographic boundaries, news and advertising became far more diverse. You could read stories from any publication in the world and advertisers could find their customers on any website they frequented.

As you can imagine, the local newspapers have struggled. There are a variety of reasons for this. Hedge funds have milked these companies for all their worth. Overpaid senior managers have fired their lowest paid employees (journalists), resulting in an inferior product. Facebook and Google have claimed a far larger chunk of the advertising pie.

But despite all of that, the fundamental reason that local news has struggled is because the businesses are just bad. They have screwed up cost structures that make it incredibly difficult to be profitable.

Let’s set the stage with this slide from a report by Benedict Evans, formally of A16Z.


In 1994, The New York Times generated approximately $2.4 billion in revenue; however, it only earned roughly $200 million in profit. That means it cost the company nearly $2.2 billion to earn $200 million in profit. I round up and we come to a 9% margin.

That’s insane.

It also isn’t all that surprising. The companies were bloated with enormous costs. They had to produce a physical product and then ship that product to people that wanted it. That’s not cheap.

Salaries, hardware, raw materials, real estate; those costs continued to exist irrespective of how much money the business brought in. The fixed costs are completely fixed.

Take, for example, A.H. Corporation, which owns the Dallas Morning News. In July, it reported Q2 financials and they were as disappointing as you can imagine:

A. H. Belo’s revenue slid to $35.4 million for the three-month period ending June 30, down from $47.1 million in the same quarter a year ago. Most of the decline was from a 38.4% drop in advertising and marketing. Circulation revenue fell 7.6% from both lower home delivery and single copy sales, which was partially offset by a digital-subscription revenue increase of $300,000.

The company ended the quarter with 769 employees, a 12.5% decrease from a year ago. Starting Aug. 10, employees making $60,000 a year or less will be returned to their pre-pandemic salaries.

I dug into the financial statement and they’re as bad as you might expect them to be.


It had operating costs and expenses of nearly $40 million in three months. It costs $120 million a year for this business to operate.

For those of you non-financial media people, let me break down what this is saying.

  • Net Operating Revenue: All the ways that it brings money in. That’s the $35,415 (multiply that by 1,000) to get $35.4 million
  • Operating Costs and Expenses: All the costs of bringing that money in. That’s the $39,793 (again, multiply that by 1,000) to get $39.8 million.

Now… Some might say that I am cherry picking data because this was the three months ended June 30 and that was smack in the middle of Covid-19 truly wrecking the advertising business. So, let’s look at the same quarter in 2019.

The statement says net income was $16.5 million. Except it really wasn’t when factoring in the actual media business. See the line item of “Gain on sale/disposal of assets, net” line item? The company sold Dallas Morning News’ headquarters to a developer. That effectively cut in half the operating expenses from that quarter, making it possible

If we don’t count that, it cost $50.2 million to run the business in Q2 2019. Its net operating revenue was $47.1 million. Do the math. It would have lost roughly $3 million without that real estate sale.

I hate to say it, but our newspaper industry as we know it today is not going to survive. The businesses are bad. They can’t work. The cost of business is too high.

Remove the fixed costs and suddenly it works

Imagine a world where you didn’t have all of that fixed costs. As Benedict Evans says, these newspapers are “a specialised (sp) light manufacturing industry, that aggregated attention to sell advertising.”

Manufacturing in America has been dying for decades because it’s just too expensive to do business here. The same should be said about the newspaper business.

You know who doesn’t have fixed cost? The digital-first upstarts that are trying to prove that local news can work.

Let’s go through a few examples…

Capital Daily

I really started thinking about writing this essay when I saw this tweet by Andrew Wilkinson last week:

They started a local newsletter that gave high level reporting on what was happening in the community. For about a quarter million dollars—$200,000 in advertising and $60,000 on salary—they were able to build a newsletter to 40,000 people. That’s 10% of their city’s population.

Now… There is a big difference between a newsletter, which does a lot of curation, and an original reporting newspaper. One is dependent on the other.

If you look at the business now, it has started adding additional staff and are now doing longer-form reporting. It’s still not where I’d want to see a local publication, but it’s on its way.

This is a repeatable model across other cities. One thing Wilkinson says that shouldn’t be surprising, but likely is:

I expected to burn money, but now advertisers are lining up and we’ve realizing it can not only break even, but be profitable…

Advertisers are not just looking to rush to Facebook and Google to advertise. They’re willing to work with local publications if their target audience actually exists there. When you have 10% of the city’s population, you’ve got a decent start.


I wrote about Don Day’s business back in July, but it’s another example of a media business serving a local community that is also growing.

When I first wrote, I said:

Local is hard. It’s impossibly hard. But what Day has figured out is crystal clear. If you cover your market and provide information that matters, which means no national news or “mugshot galleries, crime, car crashes… even a weather report,” then you can build an audience. Some of that audience will pay. And in this attention economy that we’re working with, if you have the local audience, advertisers will also sponsor.

Don and I started tweeting each other and a few additional points came out of it.

First, with revenue across ads, members, licensing, grants, events and other sources, it’s not “insubstantial.” That has allowed the company to add more people, which should help it continue to push forward on its mission.

Second, there is clearly some demand for subscriptions in Boise, Idaho. As Don said, “the McClatchy paper just announced 10k digital subs, or about 12x my volume. But, they have ~22 journalist to (until last month) just one for BoiseDev.”

This is an important point… McClatchy was 12 times his size from a subscription perspective, but that required 22 times the number of journalists to achieve. By focusing on what his community really needs, BoiseDev has been able to grow much faster than it might otherwise.

Lookout Santa Cruz

Ken Doctor’s upcoming news organization based out of Santa Cruz is an important test for how these digital first, local publications will do.


It’s one of the boldest experiments yet. Unlike many of these companies that start with tiny reporting teams, Lookout Santa Cruz will have a staff of 8 to 10 journalists. Doctor told Digiday that “at less than $2 million a year, we can map a full service news company that has two to three times the reporting strength in quantity of a daily newspaper.”

It’s unsurprising that Doctor is taking this approach with the company. For a long time now, he’s been saying that media companies need to move away from an era of cutting and start growing.

In this 2020 epiphanies essay published on Nieman, he wrote:

Only an orientation toward growth — with strategies that grab the future optimistically and are funded appropriately — can awaken us from this nightmare. Replace “replacement” strategies with growth strategies and these businesses look different.

Happily, we do have growth models to look at. Take, most essentially to the current republic, our two leading “newspapers.”

Today, The New York Times pays 1,700 journalists. That’s almost twice as many as a decade ago. The Washington Post pays 850, up from 580 when Jeff Bezos bought it in 2013.

His general point? Because both of those publications have invested in growing, they are now seeing better-than-ever success.

Now, you’ll notice where that investment is being made: journalists.

As I have said dozens of times, for a publication, the product is the content. Therefore, the journalists are the primary engine of generating demand for readers and, thus, the subscription and advertising revenue.

By going with eight to 10 journalists, Lookout Santa Cruz believes it will be able to build a very profitable media company that is built entirely to do one thing really well: report on local news.

Let me sum this all up for you…

The reason newspapers are dying is because they’re stuck with massive fixed costs when the businesses no longer require them. It is expensive running a printing operation. Additionally, the infrastructure that gets built up to support hundreds of employees is also very expensive.

But in all three cases, digital-first local media companies are looking to serve their communities without needing those fixed costs. It means that profitability can come much quicker than it ever will for newspapers.

People like to talk about how media needs new business models. The business models are perfectly fine. People will either pay for the content themselves or their attention will be monetized with advertising. Those are fundamentally good business models.

What needs to change is all that fixed cost. Publishers need to spend less time thinking about the “next pivot” and more time fixing that. Until they do, they have no shot.