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April 1, 2010, 2:16 p.m.

The Newsonomics of iPads and tablets, floor by floor

[Each week, our friend Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of the news business for the Lab.]

AppleMania meets Rummy’s oft-noted trilogy of known knowns, known unknowns and unknown unknowns this week. The iPad is finally here.

Predictably, opinion is widely split on the impact of the tablet on future of news publishing. We don’t know enough, in truth, to ground any certainties. We can, though, start pecking away at it. Here’s a start. One way to assess the new is to connect it to the old.

So let’s build on the traditional cost-and-revenue structures of newspaper operations. I recall the floor-by-floor layout of the Pioneer Press, in Saint Paul, in the ’90s, a time our staff still filled almost all the floor space.

Bottom floor: HR and Finance. 2nd floor: Circulation. 3rd: Production. 4th: Marketing. 5th floor, advertising. 6th and 7th, newsroom. 8th, Exec suite.

So in a tablet world, what’s the impact on the major cost and revenue divisions of the news enterprise, knowing that HR, finance, marketing and executive suites have already seen their own slimming-downs and won’t be much affected?

Let’s start with the newsroom and with “production.” The traditional newsroom provides the meat-and-potatoes of the tablet experience, the text-reading experience. Yes, the iPad should turn “e-readers” and “e-editions” into trivia game answers. Most publishers look at their first tablet products as lite versions of what’s to come, incorporating a few gee-whiz features to salute the innovation. In those first versions, content production doesn’t need to change much.

Soon, though, it will. News companies will need to hire up and skill up — designing, creating and presenting reader-pleasing content. That’s enough of a challenge for monthly and weekly magazines; for dailies, it’s truly a transformative process. Dozens of newsrooms have incorporated videographers, design-savvy producers, and social net masters into workflow, but even in those newsrooms, the resources aren’t sufficient to create the truly new product the tablet enables — a product worth consumers paying for. Then, there are the hundreds of newsrooms who have relatively few of the skills they need at all. Newsroom (and Production) Net: The tablet demands new investment, mainly in new hires, somewhat in new training. With papers still in cutting mode, where will the money come from?

Circulation: It’s an accident of timing that the tablet launch coincides with the Year of Experimenting (Perhaps Dangerously) with paid content. Journalism Online’s Press+ system will soon test niche play from prep sports to obits to metering schemes of several kinds. The New York Times is neck-deep in its begin-metering-in-early-2011 plan. News Corp is erecting walls, the latest around the Times of London, as it just announced a paywall there to go up in June. Yet the timing of the iPad launch means that tablet economics will inevitably color – and may drive – paid content plans.

The Apple model, in a sense, just sets a new cost-of-distribution. While web distribution has been free-plus, the cost of Apple distribution — if you charge for news products — is a predictable, and seemingly stable 30 percent. Just give me 30 percent off the top, says Steve Jobs. Ironically, that 30 percent isn’t far off from the costs of physical distribution for newspapers.

With many news publishers planning on charging for iPad apps (though free, lite apps-as-teasers will probably be near-universal), we see the model of tablet “circ” emerging. Publishers look at the Guardian example (charging about $3.75 one time for its iPhone app), and have two reactions:

— Wow! They got 100,000 people to pay in just a couple of months!

— One-time sales are peanuts. We’re going to charge ongoing subscription rates for our apps/news products. Right now, each edition of a magazine is a separate app, as the Apple store is architected.

So, almost overnight, we’ve got a new model of paid content and supplier/distributor business model. The content company gets 70 percent; the distributor (Apple, first at least and foremost at least for now), gets 30 percent. That’s the inverse of the detested, standard Amazon model, 70 cents to Amazon and 30 to the publisher.

What might be the impact of such a split? Well, let’s estimate that The New York Times serves about 75,000 customers with its Kindle product, a nice little niche. The price is $13.99 a month. That’s $168 a year. With the standard split (the Times may do better), that would be $50 a year to the Times and $118 to Amazon. That would be $3.75 million a year for the Times (and $8.85 million to Amazon).

If the split were 70/30, the numbers would be reversed, netting the publisher another $5 million a year. That’s not huge money, but we can see how it would scale over time, as is clearly the intent with Wall Street Journal’s new $17.99 iPad product.

Now, Apple-delivered apps will not be the only way to monetize content, but expect to see the approximate 70/30 split become a model, a good starting point.

Circulation Net: News and magazine publishers now see a second digital revenue line. It’s 70 percent of X (the retail price) multiplied by Y (volume of sales). As news companies reinvent not only products, but new business arrangements with the distributors of the day — from Google/Amazon/Yahoo to Comcast/AT&T/Verizon — expect to see the Apple model invoked as “fair.”

Advertising: Early returns have been blockbusters — big advertisers like Chase supporting the New York Times iPad launch and watchmaker Hublot subsidizing two months of the FT product, for instance — and that buoys hope. At launch, iPad advertising is like Triple A office space in the city; it’s the new shiny, slick must place to be.

As the shine wears off a bit, it’s likely to become a great test ground for a new merger of brand and performance advertising. Brands love the idea of owning their own tablet experience, directly embedding themselves into customer experience, given the multitouch capabilities, video, and social upfront natures of this new platform. Connect that to direct-response advertising (glossy magazine with built-in wifi), and you’ve got all kinds of opportunities for engaging customers and watching the resulting metrics, minute by minute. Branded premium pricing may mate with AdWords performance-based pricing; who knows what the offspring will look like?

The first advertisers are the big national ones, and they in turn will want to associate with products that best use the new medium — the better to attract the kind of customer they want: leading edge, willing to try something new.

Ad Net: Tablet-based advertising should add, unexpectedly, to top line revenues in the second half of 2010 and more strongly in 2011. Expect though, a big split here: those companies I call the Digital Dozen, the 12-15 companies with national and global publishing reach and resources, will be the ones to create the best out-of-the-box news and magazine products – and they’ll be rewarded with a small surge in ad revenue. Those unable to play at a significant level will in turn reap few rewards.

POSTED     April 1, 2010, 2:16 p.m.
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