A Local News Revival

In Victoria, British Columbia, Andrew Wilkinson has been working on a local news project for just over a year. He started by hiring a journalist to create “something to skim that gives me a rough sense of what’s happening” and ran Facebook ads to collect emails.

So far it’s working. In September he shared an update in a Twitter thread: the paper, called Capital Daily, had amassed over 40k free daily email subscribers. Victoria only has about 367,000 people, so this represents around 10% of the population. Not too shabby for a startup media company.

I’ve been mulling over the local news idea since I saw this thread because it’s easy to imagine how this could scale through multiple cities. There are 349 cities in America with a population over 100,000, and an additional 4,115 cities with a population between 10,000 and 100,000. If 10% of each city subscribes to a newsletter, and the Average Revenue Per User (APRU) of a subscriber is even $20, then we can estimate the Average Revenue Per Citizen (ARPC) to be around $2. If we extend the average revenue per citizen to these other cities, it's not hard to imagine nine figures in revenue going to… someone.

While some local newspapers have successfully pivoted to national coverage (like the NY Times or Washington Post), most of them are shrinking or have closed. This is because of three main reasons: disruption from the internet, involvement from private equity, and poor management.

Therein lies the opportunity. You could create a local newsletter for your own city. Then, if you are feeling ambitious, create newsletters for more cities. There are three things that make now the perfect time: a new editorial product (short, concise daily briefings), a new marketing channel (local keywords in Facebook Ads), and a new cost structure (no legacy overhead).

Local news has been left for dead by both readers and writers. There are some people trying to revitalize local news, and that’s exciting. But there’s still a long way to go. Is Capital Daily a one-off fluke, or is there a real opportunity here? I spent some time thinking about it below.

Why Newspapers Died

For years, media distribution was limited by the cost of delivering physical newspapers. This may seem like it would make newspapers a bad business, but it actually made them a great business. Because it was costly to operate a printing press, delivery trucks and a whole bunch of people to manage it all, newspapers were hard to copy.

There was also strong demand from advertisers to reach newspaper readers. The main advertising channels back then were in television, radio, direct mail, billboards and newspapers. Of those, newspapers were one of the most effective. They had a captive audience: there was often just one newspaper in town, so if an advertiser wanted to reach a citizen, the newspaper was the best way to do it.

These things created a “local monopoly” for many newspapers.

Usually, a monopoly is a good thing for the company and a bad thing for the customers and competitors. And it was no different with newspapers. They were excellent businesses to own because they had large moats. Not only did Warren Buffett famously invest in newspapers, but many other private equity funds did as well.

As an example, Liberty Group Publishing (later to be called GateHouse Media) was formed in 1998 with the backing of Leonard Green & Partners. They bought 160 local newspapers from Holliger International (a media conglomerate that has since gone bankrupt) and subsequently expanded to 330 newspapers by 2000.

But private equity involvement wasn’t always so pretty. In the late 1990s, newspapers weren’t exactly a growing industry. But because of the structure of these private equity firms, growth wasn’t an issue. They cared about inking out cash flow.

See, private equity firms can even make money on a shrinking business. By taking out debt to buy the business, and paying down that debt over time, their equity value can rise even as the top line falls. Think of it like this: imagine you buy a rental house for $300k, using $60k of equity and $240k of debt. Now imagine over the course of 10 years the house decreases in value to $270k. Let’s say over that time period you paid off $160k of the debt with rent (two thirds of a 15-year mortgage), leaving you with outstanding debt of $80k. Despite the house dropping in value from $300k to $270k, your equity increased from $60k to $190k ($270k home value - $80k of existing debt). This is how you can make money on shrinking assets as long as it has good cash flow.

As a result of this structure (along with general mismanagement), newspapers declined. Journalists and editors were cut from payroll. The front page morphed into a mosaic of smiling real estate agents and $5 off coupons for Ricky’s Diner. By cutting editorial and optimizing advertisements, local newspapers slowly saw their product deteriorate. Readers dealt with it because it was their only option.

That is until the internet came along and broke their monopoly.

The internet allowed anyone to publish to a worldwide audience. Previously local newsletters had a one way track running from the keys of their journalists to the attention of citizens. Now, anyone could hijack that train.

Consider the sections of a typical newspaper: national news, local news, opinion, business, lifestyle, classifieds, and comics. For each one of these, except local news, there were now national publications or social media platforms that provided a better service with more resources, and were only a click away. Local newspapers now competed against the New York Times, Gawker, Craigslist and Farmville, in addition to Facebook, Twitter, and Netflix.

Now that people in small towns weren’t simply getting news from one spot, advertisers had less incentive to advertise with them. Advertisers pay for attention, and attention was shifting online. Newspapers no longer had a captive audience.

All of these factors -- a deteriorating product, private equity involvement and internet disruption, -- has resulted in a continual decline in newspaper circulation since the late 1990s.

(Source)

So if there’s a downward trend for local newspapers, why am I writing about it?

Will This Work Now?

As I mentioned at the beginning, there are three reasons I think local newsletters (not newspapers) could be revitalized. These are a new editorial product, a new marketing channel, and a new cost structure. Let’s walk through them.

Editorial Product

The editorial is the biggest issue with local newspapers right now. There are a few things that new local newsletters should focus on.

First, cut everything except local news. Newspapers of old added national news and lifestyle sections because it was such a hassle for readers to get that information from anywhere else. Now that it’s a click away, let the New York Times and Facebook handle it.

Second, provide a concise, daily update of what is going on. It works. Many of the most successful media brands of the past few years (Morning Brew, Axios, TLDR, The Hustle, etc.) use this style to great success. Once you get a consistent reader base, you can hire other journalists to write deeper stories.

Third, and most important, focus on journalism as the product. Jacob Donnelly (who has written extensively on this topic) said it well in A Media Operator:

“I’ve said it before and I’ll say it again, but the journalism is the product. The ads are not the product. The only way you’re going to get people to pay for your local news is if the product is exceptional. Most local media companies have failed at that.”

I agree with Jacob here. Once you have an engaged audience, you can monetize in any number of different ways: paid subscriptions, events, advertising, merchandise, etc. But in order to do that, you have to have an audience that trusts you.

Marketing Channel

There are two interesting ways to grow a local newsletter.

The slow and steady way is by having a great newsletter day after day. Your readers will share it with their nearby friends and family. With limited resources, this is the way to go.

The faster way is to use paid marketing. Be careful: don’t make this a crutch for your product. If your newsletter isn’t any good, your churn will be high and you’ll have spent a lot of money for nothing.

But, paid marketing can supercharge your growth. In the Twitter thread that Andrew Wilkinson wrote, he mentioned that he spent $200k to acquire his 40k free email subscribers. He mentions that there is little competition on Facebook: “These keywords are untouched. Nobody is spending money on news audience acquisition.” While you would have to validate this, there’s a good chance that a lot of these keywords are also cheap for your own market.

Cost Structure

Here’s a shortlist of the expenses that a newspaper paid for that an online local newsletter won’t have to pay for (at least to get started):

Printing press
Delivery trucks
Distribution centers
Newsstands
Rent for employees
A complex website
Advertisement Salespeople
Photojournalists
Graphic designers
Editors (maybe)
Managers

To begin, you only have the costs of a journalist ($60k / year), some software, admin & bookkeeping costs (<$5k per year), plus whatever you want to spend on paid marketing.

What about the Napkin Math?

So how do you do it?

At the beginning of this piece, I discussed Capital Daily. With some simple, ahem, napkin math we can estimate what a P&L would look like for them. Then we can see if it would work in other cities.

Let’s start with revenue. According to the thread, Capital Daily has 40,000 subscribers -- let’s assume our newsletter could do the same. The newsletter is daily (7 days per week) and makes money by selling advertising.

To get an estimate of the revenue, we first have to figure out how many impressions we would get. Let’s assume a 35% daily open rate. For a daily newsletter this is strong, but not unreasonable. So with 40,000 daily subscribers, that’s 14,000 daily impressions.

There are 365 days in a year. If we multiply 365 by the 14,000 daily impressions, we get a grand total of 5.11 million impressions per year in the newsletter.

To monetize those impressions, we can sell ads. We likely have a few different ad types. Perhaps we have one ‘feature ad’ at the top. For this ad, they can charge a higher CPM, maybe $40. Then, we might have 3 other ads in the middle of the newsletter. These are smaller ads and so we can charge a lower CPM, maybe $20.

So in total, we have 1 feature ad at $40 CPM and 3 smaller ads at $20 CPM each. With 5.11 million impressions per year, that sums to $204k in revenue from the feature ad and $102k in revenue from each smaller ad. Add all of this up and the revenue is around $511k per year (or a ~$13 ARPU).

What about the costs?

In order to write a newsletter, you need a journalist. A mid-level journalist typically costs around $60k per year. Let’s assume you need one to write the daily newsletter and one to write longer-form pieces. Two journalists cost you $120k. This pretty much covers the product side of the business -- other costs, like software, are negligible (MailChimp is $120 per year and Webflow is $432 per year).

The other big expense is marketing. Capital Daily used Facebook ads to acquire users. Our newsletter could do the same. According to Andrew, they spent $200k to acquire the 40k daily readers (for those in the back, that's a $5 subscriber acquisition cost). This is a very important detail of the strategy: “These keywords are untouched. Nobody is spending money on news audience acquisition.” Capital Daily was able to get over 40k free subscribers (>10% of Victoria’s population!) at a $5 acquisition cost.

Even with a $13 APRU (which could be much higher with any amount of paid subscription), this means it’ll just take a few months to pay back the marketing cost.

The basic structure is there: $500k+ in top line revenue, $120k in personnel, <$5k in software & admin, and an optional amount on marketing.

Do People Actually Want This?

Over the years there have been several examples of companies trying to crowdsource local news. Patch is one. NextDoor is another. Even Facebook competes in this industry.

And while these businesses might move information around, I can’t help but believe they aren’t the future. Citizens want to have a good local news product they can support, written by someone they trust. In every other part of our life that’s how it works — we have our favorite book author, sports star, and movie actor. Why not also have our favorite local reporter?

Turns out that I’m not the first one to suggest this idea, and Andrew Wilkinson isn’t the first newspaper to try this. Over the past few years, local newspapers have been popping up all over the country (and beyond) to serve high quality journalism. The Charlotte Ledger reports on business news in the greater Charlotte area. Importantville discusses the intersection of politics and power in Indiana. Chicago Public Square is a blog about the happenings in Chicago. There are many others.

The good thing about local news is that there are many noble reasons to want to see a renaissance. It keeps the public informed and helps illuminate issues that the government or corporations don’t want citizens to know about. It’s also nice to have someone dig through news stories and save you time by summarizing what’s important 😁.

But it certainly is nice when an innovation in how we do business can allow a positive product to be viable in this world. It’s not often that you find a business opportunity that’s also indisputably a positive force for the world.

Local newsletters are working in Victoria. Just about 4,000 more to go.