Thesis : NYT will reach its 10M paid subscriber target, approximately double current numbers, within the next 5 years if not sooner, which will drive stock price appreciation.
The Old Newspaper Industry
Historically, the newspaper industry used distribution advantages, since printing and delivering papers was very capital intensive to create local monopolies that allowed advertisers to efficiently reach a large number of consumers. The main reason newspapers grew and thrived was because they were the best medium for advertisers to reach an audience at scale[1]. The scale nature of the business meant that it was quite difficult and capital intensive for competitors to launch. The newspaper industry thus functioned by power law, meaning the top player grabbed most of the market share. Advertisers preferred the paper with the most circulation and readers wanted the paper with the most ads and news pages. Warren Buffett called this the ‘’Survival of the Fattest’’.
The survival of the fattest meant that when more than one paper existed in a major city, one typically pulled ahead and emerged as the winner. After competition disappeared, the paper’s pricing power in terms of advertising and circulation was unleashed.
The Internet’s Impact
Enter the Internet, which brought improved ad formats, allowing advertisers to reach large audiences on the Internet, rendering the newspapers’ capital-intensive competitive advantages of production and distribution worthless. All the newspapers which kept the artifacts of their old business models and do not produce great content, or do not have specific expertise or focus, or a digital product are dying, or slowly bleeding out. The effects on journalist employment have been devastating. The number of newspaper newsroom employees dropped by 51% between 2008 and 2019.
The NYT will benefit from reduced competition and increased distribution. I also believe the New York Times will benefit from modern power laws in the news industry, although its medium has changed from paper to digital. As content choice has exploded, curation and quality matter increasingly more. The Consumer Subscription Software (CSS) market is in the midst of an exciting period of growth that, per GP Bullhound, could see the average US consumer spending upwards of $100/year on digital subscription services by 2022 , up from around $10/year today. We’ll come back to curation later.
Distribution is now available to everyone in the world, so the New York Times has to compete on quality content. This means they must treat their newsroom like an asset and have invested by growing the number of journalists to 1,700 today, up 50% from a decade ago. This is a big change in mentality. The company has a goal of reaching 10M subscribers in 2025, which I think they can reach far ahead of schedule.
In the words of CEO Mark Thompson, ‘’you invest in great content, you make it attractive to users, you make it easy for those users to subscribe, you get more and more subscribers and that enables you to invest in more great content’’
The NYT's flywheel of success
There is evidence NYT is succeeding given their paid subscriber growth and their ability to attract talent to the newsroom. The last 5 years, the NYT has proven they can drive substantial paid sub growth hitting the 5M target well ahead of schedule. Indeed, since introducing a paywall in 2011, the NYT has grown its total number of subscribers from virtually none to 1M in 2015 to over 5 Million today, three times its print paper peak. Given the NYT’s prestige which has 180 years of history backing it as well as direct traffic generated, their plan to reach 10M paid subscribers seems highly realistic. A lot of this growth will depend on their News product, as well as other products which are becoming popular themselves, such as Cooking, Crosswords and The Daily, the most popular podcast in the world with over 1 billion total downloads. The podcast presents a substantial advertisement opportunity which is not monetized as of yet.
Trump Bump Confusion
Skeptics consider NYT’s recent success temporary and a result of Donald Trump’s election which caused an exceptionally volatile news cycle. I do not think this is true. As long as there is volatility anywhere in the world, the New York Times will do well. For example, during the Notre Dame fire last year, NYT was outperforming most French outlets in terms of coverage of Notre-Dame because the French audiences would think about the NYT as bringing insight to bear on that story.
The news cycle is not going to quiet down anytime soon. The American political system itself is not showing signs of imminent tranquility. Whatever happens in November, what will follow will be a complex and intriguing story for many years to come.
The Challenge
The main challenge going forward for the New York Times is converting visitors to their website or app into paying subscribers. The top of the funnel is certainly quite large, as over 240 million people around the world and of all ages visited their website in March 2020 alone. I would appreciate management being more transparent on churn rates, which are not disclosed right now. Yet I suspect the market only cares about paid subscriber growth, leaving retention rates as a secondary issue.
Similarities to Spotify and Netflix
The New York Times is similar in its business model to the streaming services, namely Netflix for video and Spotify for audio. NYT will never match Netflix and Spotify in subscriber numbers but they arguably have a better model as they own their IP versus having to pay studios or labels through expensive contracts. Furthermore, given NYT’s position as the #1 news player they can compete for Newsroom talent that other newspapers can not afford.
Similar to Spotify, the New York Times is platform agnostic and so is ubiquitous in our daily lives. Like Netflix and Spotify, NYT controls its distribution, so its marginal cost is 0$, indicating that profitability will be massive when scale is achieved. The three businesses are similar in the value-add of their curation as well. Since the Internet has created an abundance of content, curation is crucial to determine which content is worthy of consumption. I believe the value-add of curation is one reason the New York Times has been so successful, despite free user generated content being available online.
Valuation
Above is my high level valuation work.
In sum, The New York Times is a premium organization which is optimizing its flywheel of success by investing in great talent, which leads to great content, which attracts subscribers. The business model bears close similarity in its strengths to Netflix and Spotify.
A bet on the New York Times is a bet on continued volatility not just from the US political cycle, but elsewhere in the world. The execution of their digital transformation gives me great confidence that they will reach their goal of 10M subscribers in 2025, if not before. At today’s prices, the company’s stock is quite the bargain.
[1]This sentence also outlines the investment thesis behind Facebook and Google today.
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