The New York Times Company (NYT) & Netflix, Inc. (NFLX)? The Death Of The Advertising Model

As part of the digital revolution, the idea that companies can be supported by advertising revenue is dying.

Before I became a broker, I spent my career in magazines and newsletters. It was a truism then that customers who would pay $40 per year for a magazine – which then had to be supported by millions of dollars in advertising – would pay $2,000 per year for a newsletter – if that newsletter contained specific, useful content. Not general interest stuff, but high-end content that was valued by the subscriber.

That’s what we’re seeing – on a smaller scale – playing out for content providers online. People can pirate things, sure, and there’s still a lot of free content available, both online and through television. But the premium stuff, the actual good stuff, people are willing to pay for. The smart companies are figuring that out and going in that direction.

Which brings us, believe it or not, to The New York Times Company (NYSE:NYT). After a decade in which analysts and other members of the yammering class have predicted the end of newspapers, the Old Grey Lady switched to charging for its content. No more free lunch for readers who wanted the good stuff without the ads. It seems to have worked, as the number of online subscribers is above 650,000 and growing. Revenue is down due to a drop in ad sales, but death is no longer imminent. The Times has figured out a way to leverage what it does best.

Copying what works

The seeds of The New York Times Company (NYSE:NYT)‘ new model were established a few decades ago, actually. The rise of premium movie channels on cable television such as Showtime and HBO proved in the 1980s that people would pay a certain amount for entertainment content. Heck, the Times‘ CEO Mark Thompson actively called out Netflix, Inc. (NASDAQ:NFLX) as the model the Times is pursuing.

You can’t say it’s not working. Netflix, Inc. (NASDAQ:NFLX)’s shares are sitting pretty at $213.40 having gone through two very quick runs so far this year, one in January and one in April. In all, it’s up 101.13% for the last twelve months. It’s still not very profitable…but it IS profitable and there are people who would have bet a great deal that wouldn’t happen. Good for Netflix, Inc. (NASDAQ:NFLX). I just wish it would do two things: split, so it’d be more affordable, and offer a dividend, which I know is unrealistic right now. But someday it will–that’s what makes it investment-worthy.  The company has figured out what it does best and is committed to pursuing profits that way.  I expect that Netflix, Inc. (NASDAQ:NFLX)’s next set of moves will move its profitability into the mid-single digits and reward shareholders handsomely.