The NY Times was in the news yesterday – this time, a docile development related to its web site leadership. The Times was nominated for several Webby awards. In fact, the company has the largest presence of any organization with nine nominations, including the following categories: Best Visual Design, News, Newspaper, Best Copy and Best Practices.

Good news is a welcome relief at The Times. The “nation’s paper” is no stranger to front-page storylines. It is the center of several dramatic circumstances that involve controversy over future business direction. In a quick recap, there’s been shareholder discord over share price performance, governance structure (dual-class stock) and future strategy in response to the quickly vanishing newspaper business model. These issues are inter-related because different groups (broadly management vs. shareholders) hold different views on how the address the current industry climate and whether the corporate structure needs to be amended to respond decisively and effectively. Recently, hedge funds were successful in securing two seats on the company’s Board through a settlement with management.

With traditional offline revenue declining at a steady pace (January print revenues were down 9.8%), the foreseeable future does not look promising for overall financial performance. But is there light? In other words, as the core declines, how quickly is the revenue loss replaced by the digital business? Clearly this is a question of rates of change. Currently, the company does about $750mm a quarter in total revenue and about 90% is print. If the digital base, which is about $85mm per quarter, continues to grow at 15% annually while the core continues to decline at 10% annually, online will overtake offline 9 years from now. Can you say web 4.0? Even at 20% online revenue growth, we’re talking about 7.5 years for equivalency. Certainly a long way off and sufficient cause for shareholder anxiety.

Okay, it’s sounding bleak. Clearly, some bold actions will be required on the print side. This could include divestitures (Boston Globe, International Tribune), outsourcing (production / distribution), morphing ad sales programs to fit the new environment and re-positioning (dropping metro coverage, syndicating nationals news like Reuters does). A good list of ideas for structural change on the print side was provided by Jeff Jarvis. Collectively, these changes might reduce the blow while online has time to catch-up. There’s really no time to wait.

So how quickly can online come to rescue? Rather than focus on the quant aspects of the question, I think this is a period of qualitative decision-making for management and shareholders on the matter. It’s going to be difficult and potentially misleading to frame the value of the company’s online business in definitive numbers, especially trend-lines. As these things go, the ultimate value of a mostly digital business like The Times can be probably outside the bounds of number-crunching (this is not free license to be reckless with strategy, which calls into question the company’s spending on new headquarters). A business facing both the upside and downside of disruption would appear to have binary outcomes over the long term, implying the company will be worth either a lot more or less than its current share price.

The online prognosis is bright from a qualitative perspective. Let’s look into some of the fundamentals. First, the company’s traffic is growing significantly at scale. I’ll come back to the issue of scale later, but NYTimes.com had 20.5mm uniques in January ’08 versus 14.1mm a year earlier – an increase of 45%. The site is the 10^th most trafficked according to Nielsen. It is the most trafficked traditional media presence on the web. Traffic ranks ahead of NBC, CBS, MTV and Facebook. Those facts are no joke. What they tell us is that publishers can thrive in a world of content aggregation and fragmentation (aggregation increases net media consumption, while fragmentation does not displace leading mainstream brands). The Times seems to know it’s place in the ecosystem. Here are what seem to be a few legs of its current positioning:

–> Recognition that despite media fragmentation, there is a central place for authoritative, reliable, global journalism. The Times is obviously differentiated in this respect and people crave this even online despite all the other choices.

–> Recognition that entry points into NYTimes.com need to be actively harvested. The company, like other publishers, is doing SEM at a story, article and issue level. That’s smart and the wave of the future.

–> Recognition that not every user can be earned one story at a time. The company is doing a lot of drive engagement through related content and cross-programming of relevant content. Studies have shown that driving relevance in browsing options through user behavior analysis and other means can lift engagement (and therefore ad revenue) by up to 25%.

–> Recognition that monetization is a science which partners can help drive. As an example of this, the company has teamed with Yahoo to better monetize local advertising inventory. The ad platform business is still very fragmented, so as it begins to consolidate or integrate better together across ad products, I suspect there will be lift in ad performance at sites like NYTimes that have meaningful user relationships due to repeat usage and engagement patterns.

That said, where can The Times improve? It’s starting to act on some compelling initiatives that hold lots of potential and are almost impossible to value, except in qualitative terms. Here are some opportunities for the company to establish tailwinds to its digital transformation:

o Selective Content Aggregation – There are news content categories that The Times can dominate as an aggregator. These are generally mid-tail content categories – not too niche and not mainstream. The prime example is the deal category, which encompasses transactions across the private equity, venture capital, corporate and other deal making arenas. The company aggregates its own coverage along with that of third-parties in the form of a daily email newsletter / blog called DealBook. It’s a brilliant execution of aggregation on the mid-level scale. Besides “generalized deal news”, other categories that fit this model include variants on science, gadgets, fashion, lifestyle and health news that appeal broadly to affluent consumers. Taking a step back, any valuation of the company would need to consider the potential of such aggregation (how many categories and how material can they be).

o Brand Extensions –- If you think this is content aggregation is not a material opportunity, consider the potential of related brand extensions. For example, there are an endless number of web content brands which are establishing themselves as category killers on some scale. Examples would include Huffington, All Things D, Scoble, TechCrunch, etc. Some of these brands are venture capital backed, which provides some comfort that can grow into material businesses. The Times has done a similar job with Bits and DealBook. But it hasn’t driven these brand extensions to the same level of platform potential. That would require baking out a fuller product portfolio for each extension (conferences, blogs, newsletters, research, etc.). Doing so requires each extension to key off its own business plan.

o Aggressive Expansion into Web Video - The Times and CNBC in a content agreement for business and finance video starting in January. That’s very smart and more will be required. Multi-platform is the name of the game. To remain relevant, publishers will need to provide a wider variety of experiences that cross-thread in new and unanticipated ways. Without video content, the door could be left open for the News Corp’s WSJ or another nationwide newspaper to better meet user needs. I’m sure The Times appreciates the higher monetization potential of video content too. It’s early efforts in video have already demonstrated results – it’s Webby nominations include work for its online video segments. These segments include the kind of interative, flash slideshows with narrative overlays that The Times is now prominently featuring on the site.

o Federated Blog Networks - Forbes is doing it and there are companies like Federated Media which focus on this. This may be a challenging admission for the hi-brow Times to buy into, but there’s certainly logic to the idea. As users trickle up and down the content tail, it’s important to have coverage and presence literally everywhere. That’s not necessarily a dynamic which introduces substitution or cannibalization, the two most common economic concerns. The other set of concerns, of course, relates to editorial consistency and brand management. These are important considerations, but they can be managed. A separate level of value (the one which Federated and others are solely focused on) is the idea of leveraging capability at scale for fragmented players and sharing in the gains. This is exactly the kind of logic that is so important to The Times right now.

Rolling it all together will take time. It’s a new model and different link in the chain to play than in the print business. Skeptics ask questions like “are we trading dollars for pennies?” In the online world, aggregation is a fact of life. There’s aggregators for content and monetization. That means sharing a big slice of the pie, but that pie is clearly growing (look at unique vs. max print subscribers during the heyday of print) and potentially more lucrative (margin-wise). Also, to look at aggregation in black and white is limiting. We’ve discussed ways that The Times can itself be a leading aggregator in certain categories, albeit a more labor-intensive version in comparison to technology-driven aggregation.

Just as importantly, it’s important to recognize the huge barriers the company has erected in the online content. Increasingly, the web business is defined by scale. It’s happening in advertising, content and commerce. Already operating at unique scale in terms of global capabilities in news content and journalism, The Times has clearly nailed the online manifestation of these assets in a way that leverages unique facets of the web (examples: day-part programming, related content, blog integration). Now the company can advantage its position as a major web starting point for “level 2” aggregation. In other words, leverage scale across the organization and monetization of content, both its own and that of third-parties.

One clear flaw in the business plan has been lack of acquisitions. The Times has the opposite problem of most media organizations – organic initiatives are very strongly executed. Internal innovation has gone very well. But the company has been too cautious in its online media acquisitions. In 2007, those transactions totaled just $35mm in value. That may need to change and there are already signs it will (example: equity investments in companies like WordPress /Automatic).

So, is all of this a call for optimism?  No, not at all.  Not until bold strategies are executed to re-formulate the print business.  For those of us impressed by it’s progress on the web, we hope those steps come soon so as not to distract from the digital destiny of this great franchise.

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Filed under: Management, Innovation, Traditional Media

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Tags: Webby, Shareholder Dissent, Dual Share Structure, Newspaper Industry, Blogs, Video,