Brazilian newspapers have broken audience records and digital subscriptions have increased. Why are they still in crisis?

After the implementation of paywalls, Brazilian newspapers had a significant increase in paid digital circulation and audience. From 2014 to 2015, digital subscriptions increased by an average of 27 percent, according to the Instituto Verificador de Comunicação (IVC).

Additionally, Brazilian newspapers today have the largest audience in their history. “When we add digital and print circulation, the mobile and desktop audience, we have never had so many (people reading) newspapers in Brazil,” said Marcelo Rech, president of the National Association of Newspapers (ANJ), who is also the editorial vice president of Grupo RBS. Folha’s website, for example, has broken records since the implementation of its paywall in 2012.

Even with the growth of paid digital circulation and audience, many Brazilian newspapers continue to close in the red or show very little positive results.

According to an October column from Folha’s current ombudsman, Paula Cesarino Costa, O Estado de S. Paulo ended 2015 with a loss of $3 million Reais, and Infoglobo, the company that publishes O Globo, had a loss of $51.5 million Reais (about US $14.8 million). Also, according to the ombudsman, Folha ended 2015 with a net profit of only $2.6 million (about US $756,000). And 2016 should be an even more difficult year for newspaper companies in Brazil.

One of the reasons is the fall in advertising revenue, which, according to Costa, is a global trend, accentuated in Brazil by the current economic crisis. The increase in digital subscriptions has not been able to compensate for the sector’s losses with print ads, and digital advertising revenues are still low, as in the rest of the world.

Additionally, while paid digital circulation increases, print falls. From 2014 to 2015, according to IVC, print shrank 13 percent in Brazil. Thus, a trend in the sector is that the digital circulation will surpass that of print for Brazilian newspapers, as has already happened with Folha, since August 2016.

This change has a major impact on business accounts, because circulation and advertising revenue for print is not equivalent to digital revenue. “A subscription to Folha’s printed newspaper costs an average of $93 Reais (US $27.04), while the digital is about $30 Reais (US $8.72),” said Murilo Bussab, Folha’s circulation and marketing director, to the Knight Center. That is, revenue decreases even if the total number of subscriptions increases.

However, a good point is that the profits obtained with a print and digital subscription are considered similar by the market. As digital does not have print and distribution costs (without logistics and transportation), the result of the operation is practically the same, according to experts.

“It depends on the supply and strategy, but in general, digital subscriptions maintain margins of print. And that change meets a need of the user, it retains user loyalty,” Rech said. According to him, Brazilian newspapers are right not to try to impose a business model on the reader, but to offer the service that the user considers best.

As Bussab points out, the fact that profit is equivalent does not solve the problem, especially in the case of companies that work with digital and print at the same time. “It’s an estimate [that profit is equivalent], because it’s difficult to calculate that. How do you allocate some specific costs to one product over another? Printing and distribution is easy, but what about service, marketing, management? This is mixed,” he explained.

Although profit is similar, as Bussab affirms, print has high fixed costs that impact the result of the company. As the circulation of the paper falls, the presses become more and more idle and the cost of each print copy gets higher.

“Our estimate is that the profit of a digital subscription versus a print subscription is the same. Except that the press still exists, at the same size. So in terms of reach, the people who pay to read is good, the operation is good in terms of result, but there is a structural problem: the company is set up to meet a minimum volume of print matter that is decreasing,” he pointed out.

Therefore, Bussab explained that the trend is that print becomes more and more of a luxury product. He said the price of the paper subscription of Folha, since the implementation of the paywall, has been readjusted over inflation. At the same time, he stresses the importance of adapting the structure of the company for the decrease of print circulation and the fixed cost of the press.

Another major obstacle to balancing accounts in this migration to digital is advertising. Revenue from digital advertising is lower than that of print, because, among other reasons, there is greater competition. The advertiser can choose to buy space on Google or social media and reach the same audience for a lower price, for example.

Additionally, the impact of the print ad tends to be greater. “Advertisers will pay more on paper for the same thousand people that are reached with digital, because it gives a much better return,” Bussab said.

For Pedro Silva, president of IVC, there is also a time of adaptation for the advertising market, which would be re-educated in relation to digital. According to him, at first, only scope mattered. Now, the context of the ad is beginning to be taken into account, which may alter the market values in the future. “These premium outlets, like the big newspapers, transfer reputation to the brand of the advertiser. When you go to a worse site, you see lower quality products,” he said in an interview with the Knight Center.

Subscriber base

The big challenge to improving newspaper accounts is, according to Bussab, increasing the digital subscriber base to offset not only the fixed cost of the printing press, but also the losses with print circulation and advertising. The good news is that the digital audience has grown a lot in recent years.

“We have 160,000 digital subscribers, but we have 20 million total in audience, of people exposed to Folha content. It is in this gigantic aquarium that we need to fish, and it would not be too much to compensate for the losses. But we have an estimate, a rough calculation, of the order of 1.5 to 1.8 digital subscriptions for one print. We would need to have around 100,000 more digital subscriptions for the company to be ok,” Bussab said.

To increase the revenue of newspapers, you have to persuade readers to pay for the content. On the one hand, experts believe that a change of mentality of readers is necessary. According to them, the communication companies themselves contributed to creating a culture of gratuitousness when they entered the internet.

“It was believed that the internet had no cost of distribution, so we did not have to charge and advertising would sustain the business. This was not true. To change this culture, it takes time. It is not overnight. But I really trust it will take place,” Bussab said.

In addition to a slow cultural process to attract subscribers, journalism companies need to invest in exclusive, interpretive, differentiated, in-depth content and analysis, Rech said. For him, the excess the information on the internet benefits the newsroom, contrary to what was expected.

“We live in a flood of fake news. In this world of hyper-information, newspapers produce a scarce commodity, which is reliable information. They stopped being just news producers to being certifiers of the information. High-quality outlets, like The New York Times, have tremendously expanded their subscriber base and gained a global scale,” Rech said.

Circulation exceeds advertising

With this migration to digital, another trend is that revenues with circulation exceed those of advertising in newspapers, according to experts. “For many newspapers in Brazil and abroad, [revenue circulation] is already higher,” Rech said.

The turnaround has already occurred in newspapers, such as The New York Times, in 2012, with the increase of digital subscriptions and a drop in advertising revenue. The World Association of Newspapers and News Publishers (WAN-IFRA) also announced that, in 2014, the global average circulation revenue surpassed that of advertising for the first time in the century.

Folha’s revenue, according to Bussab, was traditionally 65 percent advertising and 35 percent circulation, as was the case with other premium newspapers. “Today, at Folha, revenues of both [circulation and advertising] are close. It is not only that circulation is growing, but advertising is also falling, unfortunately.” He affirmed, however, that it is difficult to know how much of this is a reflection of the economic situation and how much is the result of the structural change of the business.

“In this year, of crisis, it is very difficult to do this type of analysis. It’s all very confusing. But when we solve this problem in digital, probably the revenue will be reversed: about 65 percent from circulation and 35 percent from advertising,” Bussab said.

According to the director, Folha’s goal is increasingly to diversify its sources of revenue, in addition to advertising and circulation. “The big secret for the traditional media industry is how to monetize this whole new audience. Digital subscriptions are certainly important, but I do not think that’s the only way.”

Currently, a significant part of Folha’s revenue comes from its publisher, with the sale of books and collections, the research institute Datafolha, the organization of events and seminars, and its logistics company, which delivers to e-commerce clients.

“Datafolha does market research, on launching of beer, for example, as any other research institute. And today, Folha has one of the largest order logistics companies in Brazil, because we have trucks traveling with newspapers all over the country, so we deliver other products,” Bussab explained.

He pointed out that this diversification has allowed the company to pass – not without difficulties – through these years of crisis. “We are investing our energy today in creating parallel businesses, tied to our core business,” he said.

*The Knight Center contacted newspaper O Globo but received no response.

Note from the editor: This story was originally published by the Knight Center’s blog Journalism in the Americas, the predecessor of LatAm Journalism Review.