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.
Another model that content providers such as the Times can follow is Amazon.com, Inc. (NASDAQ:AMZN)‘s . I’m not a huge fan of Amazon.com, Inc. (NASDAQ:AMZN) as an investment. I think it’s been too long stuck in the “any day now, we’ll reward investors’ faith” mode. For me, 20 years of that is more than enough. Still, the company has figured out how to make some dough on content. Via Amazon.com, Inc. (NASDAQ:AMZN) Prime and its other streaming options, Amazon.com, Inc. (NASDAQ:AMZN) has figured out how to get people to pay – on both a subscription AND a one-time usage basis – for content. I don’t often say this, but well done Amazon.
This still doesn’t make Amazon.com, Inc. (NASDAQ:AMZN) a good investment risk. Yes, Prime seems to be doing well. However, the overall lack of anything remotely like a real profit makes me believe that the firm is overvalued. The firm has an EPS of -$0.09 per share, and the recent weak guidance led to a one-day plunge of more than 6%. I think that, unless Amazon.com, Inc. (NASDAQ:AMZN) starts committing to increasing its profitability about 10% or more (it’s currently at 0.19% for 2012), more investors will realize that the company’s share growth is a house built on sand. Keep your money elsewhere.
Who else is in the mix?
The New York Times Company (NYSE:NYT) isn’t alone in trying to figure this out. There are many media properties having to adjust to the death of big advertising. One that is also going through a transition – and one that investors might want to take a look at – is The Washington Post Company (NYSE:WPO). Very thinly traded for years, The Washington Post Company (NYSE:WPO) has stuck to giving away the best political coverage in the country. However, recently it announced that it will go paywall – like The New York Times Company (NYSE:NYT) – sometime this summer. The Post is going to try to leverage its readership’s dollars to make up for declining ad revenue. That said, the company made a bit of money in 2012 (with higher net margins than Netflix, Inc. (NASDAQ:NFLX)). Its shares are up more than 16% over the last year – a touch more than the S&P, believe it or not.
Can it work?
The big question is: can charging a small amount for news and entertainment content pay off in the long run? My guess is that it can and both the Times and the Post (and Netflix, Inc. (NASDAQ:NFLX)!) will come out of their current changes in good shape. It may take a while, and investors might get ulcers getting there, but there’s profit to be made by investing in all three firms if you have the patience and some risky money to invest.
The article Content Is King: The Death of the Advertising Model originally appeared on Fool.com and is written by Nate Wooley.
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