How Sheldon Adelson Rewrote the Rules for Israeli Newspapers

The free daily Israel Hayom has caused advertising and circulation revenues across the sector to plummet, forcing local newspapers to rejigger their online and print businesses.

The free daily Israel Hayom.
Daniel Tchetchik

The goal of any media business is clear: to increase its exposure. From the most senior editor to the most junior writer, the highest-ranking executives to the sales staff in the field, everyone is focused on the task that matters most. In the journalism business, size matters more than anything else.

But every factor in the equation has a different perspective on the overarching goal. For the marketing and advertising department, it’s increasing advertising space or its price. For customer sales at a media outlet with a paid subscriber base, the goal is to expand circulation or to raise subscription prices. In the editorial department, meanwhile, the focus is on widening the spheres of influence.

The top managers are supposed to balance all these needs and find the right model for increasing exposure. Some outlets provide all their content for free, which makes for happy ad sellers and writers due to the large circulation numbers, but obviously eliminates revenue from readers. If all of the content is available only to paying customers, circulation drops, followed by the price that can be charged for ads, and as a result the amount of content that can be provided falls, and with it the outlet’s influence.

The business model chosen also affects the type of content that will be provided. An all-free model that depends on high reader numbers in order to attract advertisers will tend to turn to the broadest – not to say lowest – common denominators in order to reach as many audiences as possible. An outlet that uses a subscription model, on the other hand, will focus on the user experience and put greater emphasis on the quality of its content.

These considerations have become increasingly urgent in an era of plunging circulation rates and advertising prices for print journalism, alongside rising competition in the world of digital advertising from global giants Google and Facebook. All media outlets have been forced to cut back on the amount of content they produce, and in many cases to suspend some of their activities. Venerable periodicals have closed or moved to a digital-only model.

But many organizations have also had to shift from an ad-based revenue model to a subscriber-based one.

A study of the financial reports of global media giants clearly shows the rise in revenues from subscribers at the expense of advertising income, together with falling ad and subscription prices. Some of the big players have been more successful than others at maintaining their direct income from customers.

The New York Times is a case in point. (By way of full disclosure, the Haaretz English Edition is in a partnership with the International New York Times.) In 2011, advertising accounted for 56% of the organization’s revenue, with circulation revenues – digital and print subscriptions and newsstand sales – accounting for most of the rest. (The organization has additional, smaller sources of revenue.) Since then, both of these major revenue sources have dropped sharply. Advertising (print and digital) fell by 48%, while circulation revenue in both platforms fell by just 10%.

The New York Times tried to preserve its circulation revenue by erecting a paywall for its digital edition. In 2011 it announced that it would begin charging the most frequent users of its website and rolled out a number of subscription packages. By 2015, 57% of the organization’s revenue came from circulation.

Rupert Murdoch was the first media mogul to put up a paywall, when in 2010 he began charging for online access to The Times and The Sunday Times. Other prominent news organizations, including The Wall Street Journal – whose parent company, Dow Jones & Company, is owned by Murdoch’s News Corp. – have followed suit. Around 66% of the revenues of News Corp. from journalism come from advertising.

Risks greater in Israel

The drop in media advertising revenue abroad affects Israel as well. Local and international media outlets were stunned in April when Freedom House announced that press freedom around the world hit a record low in 2015. Israel’s rank dropped to just 32 points, and it was relegated to the “Partly Free” category from its previous “Free” appellation and a score of between 28 and 30 points. Previous downgrades were mainly due to security restrictions on journalists, including military censorship.

Freedom House ascribed the downgrade in its latest ranking mainly to the growing threat to other media outlets posed by the increasing influence of the free daily Israel Hayom, together with the unchecked expansion of paid content – some of it government funded – “whose nature was not clearly identified to the public,” particularly on the Yedioth Ahronoth group’s Ynet website.

The decline in ad revenue poses the greatest threat, naturally, to organizations that depend mainly on that income stream. In Israel the decline in ad prices was even steeper as a result of the oversupply of print media. Of course, it was Israel Hayom that changed the rules of the game. Among other things, it led to the free distribution of established newspapers such as Yedioth Ahronoth and Maariv, which give out hundreds of thousands of free copies. Israel Hayom also uses a predatory pricing strategy for its ad space, in the absence of any business model, forcing down ad prices across the industry. During this period, the Yedioth Ahronoth group launched a new financial paper, Calcalist.

Israel Hayom, which in 2014 bought the printing plant of Maariv, isn’t likely to disappear anytime soon, and the generous subsidies poured into it by owner Sheldon Adelson will likely only increase. Israeli newspaper publishers will have no choice but to try to increase their revenues from digital advertising, where Adelson is not a player and therefore wields no influence.

But the rise in income from digital ads has not, and is unlikely to, make up for the loss of print ads. That leaves increasing revenue from circulation as the main strategy. Haaretz was the first Israeli news website to put up a partial paywall, in 2013. The financial daily Globes followed suit, and Yedioth Ahronoth launched a mobile application that mainly offers content that must be purchased. Nonetheless, an estimated 60% of the latter organization’s revenue is thought to be from advertising.

Barring any unforeseen changes, if current trends continue Israel’s media organizations will be forced to rely more heavily on revenue from circulation, whether print or digital, and less on advertising. That will require the retraining of readers who have grown accustomed to access to free content on the Internet. At the same time, the outlets will have to create more value for their readers in order to persuade them to whip out their credit cards and pay for content.

Once again, the example of The New York Times is instructional in this area. In 2015 The Gray Lady reported advertising revenue from its various print editions of $422 million, or 30% of the total annual revenue of the New York Times Company of $1.465 billion. If the decline in income from print advertising continues at its current pace – in 2015 it fell by 8% – in five years’ time this income stream will fall to below $300 million.

The New York Times Company’s income from digital advertising last year grew by the same amount, 8%, reaching $97 million. Of that, $50 million was from its mobile apps. This impressive performance was achieved through the creative integration of advertising, including by the company’s native ad unit, T Brand Studio. If this trajectory is maintained, by 2021 the revenue of The New York Times from digital advertising will cross the $300-million mark to exceed income from print ads. When that happens, the organization’s core business will for the first time be digital rather than print.

Still, the growth of online ad revenue cannot make up for the loss of income from print ads. The digital ad market is flooded with enormous quantities of advertising, and it has more clever players – Google and Facebook – that are taking the big ad budgets away from even the biggest publishers. It’s a very different market.

The New York Times’ total ad revenue fell in 2015 by 3.6% from the previous year, to $639 million. Just four years earlier, in 2011, the company’s combined revenue from advertising was $1.2 billion, nearly double the amount in 2015.

An organization that anticipates a fall in revenues in its market can either shrink, which is what in fact The Gray Lady did, with widespread layoffs, or it can grow its income from other sources. That’s why The New York Times is investing so many resources into increasing its revenue from circulation.

In April the company announced that it would spend $50 million over the next three years on expanding its global audience. To that end, it created NYT Global, a team whose mission, according to a statement issued by New York Times publisher Arthur Sulzberger Jr., CEO Mark Thompson and Executive Editor Dean Baquet, is to “cultivate a much larger and deeper readership in core markets abroad and set up teams to pursue cross-market, pan-regional topics we believe The Times can dominate journalistically, appealing to readers and advertisers alike.” The company’s goal is to double its annual revenue from digital editions to $800 million by 2020, and to place a greater emphasis on mobile devices.