Put More Money Into the Newsroom

The newspaper industry is still taking some hard hits, most recently with news of USA Today's publisher, Gannett Co., Inc., which laid off almost 700 employees. Robert Dickey, president of Gannett's community publishing division, wrote in a recent memo to employees, “National advertising remains soft and with many of our local advertisers reducing their overall budgets, we need to take further steps to align our costs with the current revenue trends.”

Although local advertisers are cutting back, budget cuts may not be the best solution for local newspapers, according to recent research from a professor at the Penn State Smeal College of Business.

“Local newspapers have panicked and cut back on newsroom and sales force costs, treating them as cost centers, not investments,” says Shrihari Sridhar, assistant professor of marketing. “Yes, they are costs, but they're creating the equity needed for the newspaper to grow.”

Sridhar and coauthors Prasad Naik of the University of California-Davis and Murali Mantrala and Esther Thorson of the University of Missouri examine the budget allocation strategies of a local daily newspaper with a circulation of more than 100,000.

A newspaper is a quintessential example of a platform firm operating in a two-sided market, where the demand from one group (readers) influences the demand from its other customer group (advertisers). Examples of other firms in two-sided markets include shopping malls (shoppers and retailers), sports clubs (spectators and sponsors) and payment cards (cardholders and merchants).

The researchers evaluate how the local newspaper should invest its marketing dollars in its newsroom and sales force and how these investments should change over time.

Their results show that the impact of investing in the newsroom was much larger than that of investing in the sales force, “which is contrary to the practice of cutting newsroom investments to shore up profits followed by many troubled newspaper companies today,” they write.

The researchers demonstrated the practical benefits of their algorithm for the focal newspaper firm. They told the managers they were under-spending on newsroom resources and that, by reallocating resources to optimal levels, they could increase profits by about 28 percent.

The researchers' recommendation influenced the local newspaper's management team to increase their annual newsroom budget by $500,000, or 18 percent.

“We don't want to make this seem like evidence of why newsroom investment should be increased in every newspaper in the country,” says Sridhar. “Yet, there is proof that newsroom investments help the newspaper's bottom line the most.”

He adds that for the last 10 to 15 years, there have been serious cutbacks in newsroom budgets, proving that not many newspapers are thinking about this in the same manner as the researchers are.

Sridhar notes he and his colleagues are also looking at another issue related to newspapers—hybrid platforms comprised of both online and print news.  The researchers acknowledge that while print is facing trouble, online is taking off, albeit at a slow pace.

“We're looking to see if advertisers see print and online as complements or substitutes,” says Sridhar. “We're also interested in the newspapers' perceptions of each platform, what they think the platform should do, and the impact of growing one or both.”

Their paper, “Dynamic Marketing Budgeting for Platform Firms: Theory, Evidence and Application,” is forthcoming in the Journal of Marketing Research.