About Time

Newspapers’ $1 billion bet.

This morning, the New York Times Co. announced it was buying for $410 million in cash. The deal comes fast on the heels of Dow Jones buying for $519 million in cash, and the Washington Post Co. paying an undisclosed sum for Slate. (Click here for the requisite disclosure.)

Why are the nation’s elite newspaper companies investing the cash thrown off by their fine broadsheets into online companies with shoddy profit histories?

One answer is obvious. Print advertising has barely been keeping pace with the rate of economic growth. According to the Newspaper Association of America, newspaper advertising rose just 3.8 percent through the first three quarters of 2004 and is forecast to rise by just 4.1 percent in 2005. Meanwhile, online ads grew by 25 percent in 2004 and should rise at the same clip in 2005, according to forecaster Robert Coen of Universal McCann.

Each of the big three papers already has robust online offerings, with plenty of space for online ads. And each has powerhouse ad sales teams and relationships with major national advertisers. But since the online versions of the Times, Post, and Journal only generate so much traffic, there’s a limit to how much interactive advertising they can sell. The Journal, which charges for access to its online content, has a particular incentive not to clutter up its site with ads.

But are online ads reason enough to invest in online media? In general, newspapers act as if they have don’t have a penny to spare. Last spring, Dow Jones’ efforts to nickel and dime its staff on benefits and salaries occasioned a rare outburst of journalist trade unionism. And yet the company has $519 million in cash to spend on MarketWatch? Even if MarketWatch thrives under Dow Jones, it could be a cannibalizing success. is one of the few content sites that large numbers of people have proved willing to pay for, with some 712,000 paying subscribers. If Dow Jones manages to upgrade MarketWatch and continues to maintain its free model, won’t subscribers to the Journal and the pricey Dow Jones news service start to wonder what they’re paying for?

These deals posit that it’s easier to overpay for an existing business than to build one from scratch. The Times could build something better than for far less than $400 million, and Dow Jones could construct a really great free Web site loaded with content, stock quotes, and charts for a half a billion. But doing so would mean spending lots of money in the short term, and there would be an inevitable lag time for revenues to show up. In other words, in an era when the core business is growing slowly, investing in internal Web content would mean taking a substantial hit to earnings. When you use cash to buy businesses that are turning operating profits, by contrast, your results can look better quickly.

The big content deals would be easier to swallow for shareholders and employees if old media companies hadn’t in the past shown a propensity to overpay for online properties at exactly the wrong time. Primedia, the magazine company that is selling, bought it for $690 million in stock in the fall of 2000. Had Primedia waited a few months it could have had for a fraction of the price. The New York Times most likely lost money on its small 1999 investment in, which is now itself for sale. Dow Jones just paid $18 a share for MarketWatch. In the third quarter of 2001, MarketWatch traded at only $1.06. Why didn’t they buy it three years ago?

The final problem with these deals is hard to measure. It’s that they just feel slightly behind the curve. Online ads are growing. But those ads go all over the place—to portals, to established media sites, but also to search engines, e-mail, and blogs. The Times and Dow Jones have made a big cash bet (and the Post has made a much smaller one) that established sites will receive more than their fair share of this growth. But there’s no guarantee. The biggest beneficiaries of the surge in online advertising may prove to be Yahoo! and Google or Gawker and InstaPundit.