The Dead Tree Digital Replacement Index

My desk is awash with quarterly financial reports from newspaper companies. Almost all try to emphasize anything positive that could distract from the larger negatives. For example, ‘Digital Revenues Rose 50 percent, Despite Print Revenues Declining 30 Percent’ is the type of sleight-of-hand that newspaper companies’ investor relations departments use to distract attention from the fact that the good news of the digital operations’ gains doesn’t compensate for the print operations’ larger losses.

The only number I care about is one these financial reports don’t state, but which I’ve invented and call the Dead Tree Digital Replacement Index.

The DTDR takes the change in the net income (i.e., gross revenue minus gross expenses) of a newspaper company’s digital operations and divides it by the change in the net income (i.e., gross revenue minus gross expenses) of that newspaper company’s print edition operations. Note that DTDR calculations include no special charges (such one-time gains from the sale of an operating division) and is calculated before taxes or depreciation.

If a newspaper company has a DTDR greater than 1, then the growth in its digital operations revenue gains are more than compensating for the company’s print operations’ losses. In other words, it’s a company with a healthy core. But if a newspaper company’s DTDR is less than 1, that means the company’s print operations are losing money far more quickly than its digital operations can compensate. In other words, it’s a newspaper company whose core operations are unhealthy.

Now, before some of you quibble that a newspaper company can have a DTDR of less than 1.0 but be still financially healthy because it also owns non-newspaper businesses that compensate for any losses by the print operations (companies such as Scripps Howard with its cable television networks or The New York Times Company with About.com), remember that I’m formulating an index that examines newspaper companies’ core business of newspapers and nothing else.

I also don’t calculate DTDR indexes for newspaper companies whose print operations had net gains or digital operations had net losses, but there are precious few such companies today. The DTDR is short-hand mathematics, and I’ll leave it to any mathematicians out there to help me fine-tune it. The bottom line in the DTDR is that newspapers’ digital operations had better be more than replaciing any revenues that printed editions are losing.

Let’s calculate some examples of the Dead Tree Digital Replacement Index.

The Tribune Company’s says its digital revenues increased 17 percent to $66 million last quarter. Although the company’s press releases don’t mention the digital operation’s expenses, let’s just say for simplification that this 17 percent increase of $ 11.22 million was the overall change in Tribune’s digital operations’ net income. The press releases do mention that the company’s Publishing division revenues declined 9 percent or $95 million and that this division’s expenses increased by 1 percent or $7 million. So, the change in its Publishing division’s net income was a loss of $102 million ($95M + $7M). The Tribune Company’s DTDR would thus be 0.11 (11.22 divided by 102), which is woefully unhealthy. If you calculate the reciprocal of the DTDR, you’ll see it indicates that the Tribune Company’s print operations are losing money nine times quicker than that the growth of company’s digital operations can compensate.

The New York Times Company’s say its digital revenues grew 23.4 percent or $15.3 million last quarter, but that print revenues fell 4.5 percent or $36 million. Its press releases don’t include expenses, but a simple calculation would nevertheless shows a DTDR of 0.425, which is better than Tribune Company but still unhealthy.

The Washington Post Company reported that its digital operations earned 2.9 million more this quarter but that the company’s print operations lost $17.7 million more. The DTDR here is only 0.164. Not good.

Are all newspaper companies’ DTDR indexes below 1?

Yes, outside of Scandinavia, the Baltic Countries, and a few companies in the Netherlands, most newspaper companies’s print losses are larger than digital gains.

It will be interesting to see if newspaper companies’ DTDR indexes move closer to 1 during the next few years. However, history indicates you should bet against that happening: The gap is growing. Newspaper companies print losses are outpacing digital gains.

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