SPECIAL REPORT: Will E-readers Help Save Newspapers?

By: Jennifer Saba If anyone deserves to be down on his industry, it's David Hunke, newly appointed president and publisher of USA Today. In recent years Hunke helmed two of the most challenged metros in one of the most daunting markets as CEO of the Detroit Media Partnership, which has cut home-delivery days of the Detroit Free Press and its joint operating partner The Detroit News to three days a week ? a radical move among big-city papers.

So what tone would you expect he'd adopt during a breakfast

meeting for media in early June in New York ? an event he attended along with newly appointed USA Today Editor John Hillkirk, to candidly field questions about The Nation's Newspaper and the industry at large?

Hunke, as it turned out, was no killjoy. On the contrary, he was upbeat and excited about the direction and the future of news-papers. While he declined to predict an advertising upturn for the second half of the year, Hunke did offer a positive take on opportunities for newspapers. It had to do with what many are defining as a "fourth distribution model," thanks to the market emergence of digital e-readers.

USA Today is "extraordinarily bullish" on wireless devices, he said, adding, "You will hear us [say] that hybrid solutions are the key to us moving forward." Along with many other newspapers throughout the country, USA Today is in discussions with e-reader manufacturers.

"Lots of people are saying the old newspaper model is dead, but I don't believe that's true," says Roger Fidler, program director/digital publishing of the Donald W. Reynolds Journalism Institute at the University of Missouri. "We're back to saying that what we need is a revenue stream from the reader and a revenue stream from advertisers, which is the old newspaper model," he adds. "It's a very good model if you can make it work. The hope is that e-readers will provide a new platform."

The industry has been aware of such portable readers' potential for years ? major newspaper companies such as Hearst have even invested in their manufacture. But only within the past year or so have consumers taken hold of the concept, and now there's a gathering buzz about e-readers. Newspapers like The Philadelphia Inquirer are making monthly subscriptions available on Amazon's Kindle, for example.

One of the things that makes e-readers so appealing is the characteristics they tend to share. They are light, non-obtrusive, and easy on the eyes. They store loads of books in digital form. They carry newspapers via a wireless connection. And the experience hews more closely to reading the print edition rather than a newspaper Web site.

Publishers are also feeling the love for e-readers' potential, though no one interviewed for this story said these devices would alone provide the badly needed fuel to help put newspapers back in the black. "From a newspaper perspective, it is seen as an additional platform, even an additional opportunity, more legitimately, to charge for content where people have less flexibility to charge online," says Randy Bennett, senior vice president of business development at the Newspaper Association of America.

What they also represent is a way for publishers to cut costs in addition to capturing new readers and revenue streams. Derek Robinson, business development manager at Cox Media Group, which is studying e-readers closely, says, "What newspapers are drawn to in general is cutting general print and circulation costs, which can represent 30% to 50% of a newspaper's total costs. In an e-reader model, this distribution would cost virtually nothing from a publisher's perspective."

Dallas Morning News Publisher James Moroney thinks e-readers give newspapers a new lease on life. As dailies, including his own, pull back on circulation to "core areas," e-readers can expand readership outside costly distribution routes. For people willing to subscribe via an e-reader, "it takes out the print and distribution costs, and most importantly in a certain way it does a lot to variable-ize the cost of your business," he says. "If I'm delivering electronically, it changes the business model."

E-readers, by the numbers
E-reader manufacturers, most notably Amazon and Sony, guard their sales numbers like state secrets; guessing the number of these devices in the marketplace has become something of a parlor game. But Forrester Research, a market research company that covers the emerging sector, estimates that by the end of 2008, Amazon and Sony had collectively sold one million e-readers in the United States.

While this number seems small considering that daily newspaper circulation was at roughly 48 million copies in 2008, according to the E&P International Year Book, Forrester notes that the demand for e-readers has finally increased: After 10 years of sputtering, "the market has finally found a foothold," Forrester analyst Sarah Rotman Epps wrote in a May report. By 2012, Forrester anticipates an e-reader market potential of 12 million people.

Currently, the devices deliver content via a wireless network ? say, Sprint ? or through WiFi and Bluetooth technology. Most all e-readers today use displays provided by the company E Ink. They are lighter, suck up less power and are less of an eye strain than LCD screens. While the manufacturers have yet to provide a product with color capabilities, that is expected to change sometime in 2011. Pixel Qi, a competitor to E Ink, is working on bringing color screens to e-readers, All Things Digital's Peter Kafka reported.

Many have credited Amazon with singlehandedly driving demand for this portable technology. "Amazon created a model out of thin air," says Guy Vidra, head of business development and emerging media at The Washington Post. "They created a killer app for books, and they should get a tremendous degree of admiration for embarking on a pretty significant opportunity."

In May Amazon unveiled its latest version, the Kindle DX, with a larger screen that is, at least in theory, more attuned to newspapers. The DX is one-third-of-an-inch thin ? "as thin as most magazines," Amazon boasts of the specs ? weighs less than a pound and has a 9.7-inch auto-rotating screen. It can hold up to 3,500 books, periodicals and other documents.

Subscriptions to The New York Times, The Boston Globe and the Washington Post are available on the Kindle DX, and the papers are tentatively working on subsidizing the device's purchase cost in exchange for a long-term subscription. The Post is working on a trial in which the paper subsidizes the cost of the DX ? currently going for a hefty $489.00 at retail ? as part of a bundled subscription. "We have yet to formulate the details of the plan," says Vidra. "The expectation is to roll it out in the summer or fall."

Despite those sexy specs, it remains to be seen how newspaper-friendly the DX proves to be. Writing a review of the product at Slate.com, technology columnist Farhad Manjoo said reading a newspaper on the DX is confusing. He deemed the navigation "terrible" and wrote that it's difficult to determine the importance of each story because the Kindle presents them all with equal billing.

Part of the reason news-papers aren't easy to read on the DX is because Amazon is still working with the format for its older, smaller Kindle devices, so the screen space isn't entirely utilized. Until the DX and newspapers work out the kinks in presentation, he concludes, "the Kindle is an imperfect match for the paper. Indeed, it's not even as good as a smartphone."

So Amazon might have whipped up a frenzy for e-readers, but by no means does it own the marketplace. Apple, too, is rumored to be developing a tablet-sized computer.

Gadgetheads will recall that it was Sony that rolled out the Bookman back in 1991, and Forrester notes the manufacturer remains a strong competitor. Since E&P went to press, Sony introduced the "Daily Edition" with a touch-sensitive screen that downloads books and other materials including newspapers through AT&T's wireless network. It plans to retail the product by December for $399. While the Daily Edition can support newspapers, no partnerships were announced during the unveiling in New York in late August.

Sony lately has been making the rounds gauging the interest of news-paper executives. "If newspapers are considering a direct distribution model and are looking for partners, Sony is open," says Forrester's Epps. A Sony spokeswoman would only tell E&P that the company is not ready to discuss publicly what it may be doing with newspapers: "It's definitely an area of opportunity, but we're not at a point where we can disclose our plans."

If we build it, will they come?
Two other manufacturers plan to capitalize on the market: The Hearst-backed First Paper and Plastic Logic.

Hearst has kept details about its e-reader close to the vest. It made the curious decision to sell its stake in E Ink ? along with several other investors, including Intel and Epson ? in June for $215 million to the Taiwan-based company Prime View International.

Paul Luthringer, Hearst's executive director of corporate communications, says the newspaper and magazine publisher has invested in a separate company that is creating "an entire e-reading ecosystem for consumers, featuring a broad range of content from multiple publishers." While Luthringer declined to elaborate, Forrester analyst Epps viewed a prototype of those digital readers and said the device is larger than the Kindle DX ? roughly the size of a standard 8-by-11-inch sheet of paper.

"They have paid a lot of attention to the design and the interface," she notes. "The experience of reading newspapers on a First Paper device will be much nicer than reading it on a Kindle. It's news-paper-friendly and newspaper-savvy."

Newspapers are what Plastic Logic has in mind as well. The maker of this e-reader, which is built on sturdy plastic, intends on hitting the market sometime during the first quarter of 2010.

The model, which was viewed by E&P, has the dimensions of a letter-size sheet of paper (it's pictured on our cover) and is as lightweight as a rigid placemat. The final product is anticipated to weigh around 14 ounces. It's all touch-screen, and content is rendered in grayscale.

Plastic Logic, which plans to change the name of the product once it hits the market, is going after professionals who carry around loads of paper (think attorneys). The e-reader enables the user to make notes on a document ? highlighting, circling part of text, etc., using your finger as a stylus ? and even transfer that document back to a desktop, laptop or other device via 3G (it partnered with A&T in July), wireless, USB or Bluetooth connection.

Already Plastic Logic has partnerships in place with USA Today, the Detroit Free Press and The Financial Times. And as E&P went to press, Barnes & Noble announced it launched an eBookstore and is working with Plastic Logic.

The newspaper prototype viewed on the device ? an edition of the Detroit Free Press ? was in its early stages but resembled a PDF.

Detroit has unexpectedly become a hotbed for newspaper innovation. After drastically cutting back on home-delivered copies, the Detroit Media Partnership ? over which Hunke still has oversight ? was enchanted by the potential of e-readers during a World Association of Newspapers meeting in October 2008.

The Partnership decided to work closely with Plastic Logic to launch trial e-reader editions of the Detroit Free Press and the Detroit News on Plastic Logic during the first quarter of 2010. (Detroit is not in an exclusive partnership with Plastic Logic, and both papers are also available on the Kindle, for instance.)

"We want to get input from a range of people," says Patricia Kelly, the Partnership's senior vice president of digital and client solutions. The papers plan to tap a variety of consumers, including single-copy buyers, Web site users, loyal print subscribers and even non-readers. Kelly asks, "One of the things we want to understand, will it open this audience" ? people who don't read the newspaper in any form ? "up to us? We believe that we not only have a potential audience with existing readers, but also with current non-readers."

Kelly stresses the work in this area is a small test, and is still in its infancy; there are many details to hash out. One strategy being explored involves the papers offering a lease-to-own option for consumers who would make a small down payment on the device and then pay a monthly fee for a year or two, which would include a portion for the device and a portion for the newspaper subscription.

Pricing, for now, is still an X-factor. "One of the hard things to do with modeling is you don't have the advertising model figured out," says Kelly. "There are things we plan to test in Detroit, but there's also work to be done industrywide and with the advertising community collectively, so that newspapers aren't working in a vacuum."

For its part, Plastic Logic says it's working on basic advertising inserting capabilities in its e-reader, confirms Daren Benzi, vice president of business development.

Other matters also need to be addressed. The Detroit papers will be updated every day on the e-reader, but "the question about whether to update more frequently is kind of still out there," Kelly says. The e-reader version of the papers will not be constantly refreshed as, say, news is online. "Even though [e-readers] connect wirelessly, they are not meant to be browsers," she says. "It's not a netbook, it's not a PC, it's not a browsing device. It's a reading device."

Kelly says the Partnership is currently working on what the digital edition will look like, and it's a debate going on at other newspapers interested in launching their own editions. The print edition, though, will be the starting point.

That said, the e-reader version won't be an exact replica of the print edition (as it currently is with e-editions) since questions still abound about digital rights management. But the Partnership recognizes that what people like about the print edition and the e-edition is that it's edited with a start and finish in mind.

Of the Kindle DX, for example, Slate's Manjoo laments that the news is presented as a list broken out by sections with headlines and a one-sentence summary: "It's your job to guess, from the list, which pieces to read. This turns out to be a terrible way to navigate the news."

So what about the ads?
What's interesting about e-readers is that they will most likely resemble the best aspects of print. The missing link, however, is the advertising model. "Your two big components are subscription revenue and advertising revenue, and the biggest unknown right now is, how much are advertisers willing to pay?" asks Cox Media Group's Robinson. "We would love to see that ad revenue as close to print revenue as possible."

Without advertising, newspapers stand very little chance of making any meaningful revenue from the e-reader platform.

"If [newspapers] do nothing except make their content available on these devices, the opportunity is moderate at best," observes Epps. "This is not something that is big enough to support their businesses. Our data show that e-readers are bought by people who are frequent book readers. No one is going to buy an e-reader just to buy newspapers. It's important for newspapers to understand that, and keep that in mind."

Consider how Amazon is handling its newspaper partners. During a U.S. Senate hearing on the future of the industry, the Morning News' Moroney revealed that Amazon sets the subscription price of newspapers ? currently capped at around $10 to $15 a month. Moroney testified that Amazon takes 70% of that revenue, leaving 30% to the content providers.

Amazon is also picking up the carrier's costs, meaning that part of that 70% pays for wireless service and the cost of making the device. So unlike a wireless mobile company, where the consumer buys a phone for a nominal price (or in many cases receives a free phone) for a monthly service contract, Amazon picks up the tab rather than the consumer, for the service.

Not that the bill is all that large. Roger Entner, senior vice president, head of research and insights/telecom practices at Nielsen IAG (which collects ad metrics) estimates that Sprint, which is partnering with Amazon to deliver data to the Kindle, is receiving about $2 per user ? not per subscription.

Additionally, the DX has no advertising platform available to publishers and it does not reveal to newspapers who is actually subscribing to a digital version of the daily. Amazon effectively owns the customer experience, shutting out the publisher.

So newspapers are looking for several things when partnering with these devices: control of subscription pricing and the ability to contact the subscriber, as well as to offer advertisers another outlet. Hearst's First Paper and Plastic Logic are aiming to meet those needs, and are pitching publishers on the prospect. Plastic Logic's Benzi explains that newspapers can buy the e-readers directly from the company and then act as a retailer by selling the devices and their content directly to consumers. "Some newspapers may prefer this type of retail model so that they are able to help accelerate the device and content even more rapidly than Plastic Logic may do on its own," says Benzi.

The First Paper device features a touch screen that will show advertising as well. "They built this device with the needs of periodicals at the forefront," Epps says.

The Washington Post's Vidra says a lack of advertising capability in e-readers is "primary" among the challenges. "I think there are a lot of moving pieces out there," he adds, and is all too aware the industry needs to find a model that advertisers will embrace. "It's a smart way to cut some expenses and generate a really healthy revenue line, but I think we are going to have to be really careful about how we do it."

Speaking the same language
The Reynolds Journalism Institute's (RJI) Roger Fidler has been carrying the flag for e-readers since 1981. "It's something I really believe can make a difference," says Fidler, who's been aware of its potential since heading up Knight Ridder's Information Design Laboratory in the mid-1990s. "The issue right now is how can newspaper adapt in a way that will be beneficial to readers and advertisers as well as to journalism and the news media."

RJI is home base for the Digital Publishing Alliance (DPA), a group of 32 publishers, associations and universities, including such members as the Los Angeles Times and NAA. The DPA's raison d'etre is to come up with a set of standards around content presentation and advertising formats. "Advertising is a critical component, and without standards and working together all that will do is create a lot of confusion and delay adoption," adds Fidler.

The DPA held a meeting in May at the same time that Amazon unveiled its Kindle DX model. At that meeting, a working group made up of Fidler, the Boston Globe's John Forcucci and Joel Swanson and the Los Angeles Times' Sean Reily was formed to explore the possibility of creating an e-reader consortium that would develop technical standards for digital newspapers displayed on e-readers. "We are trying to counter the tendency for every news-paper to do its own thing," says Fidler. An attorney specializing in consortiums has been involved in the process.

The standards are basically technical ? the group says it's not trying to force members to have a unified look. Rather, the creation of ad standards and general content specifications will avoid problems that are by now all too familiar to the newspaper industry. Advertisers complain that different specs and ad formats among newspapers make it difficult to make uniform buys. "What we are afraid of," says Forcucci, IT director for business solutions/news at the Boston Globe, "is a Tower of Babel with too many different devices with different standards."

iPhoning it in
Why bother with e-readers when consumers can read newspaper content on smartphones and other mobile devices? Forrester points out that already the iPhone is used as a "de facto" reader. It also syncs with the Kindle and has Web-browsing capabilities.

New York-based ScrollMotion released a new iPhone app called the Iceberg Reader, with which people can download from a list of 170 daily newspapers. Or the NewsFuse, another application that delivers news content from several sources in one app for 99 cents. With all that, asked Forrester in its report, why would someone pay $13.99 for the New York Times e-reader version when you get it for free?

USA Today's Hunke was asked the same question during that breakfast meeting in New York. Executives at the Gannett daily said they were stunned by the success of its iPhone app: More than 1.6 million people had downloaded it ? for free. But Hunke says USA Today is pursuing all avenues of distribution.

Martin Nisenholtz, the New York Times' head of digital operations, recently said the company was considering charging for mobile access. Apple, at least, is putting into place tools to do that, according to Art Howe, CEO of Verve Wireless. The latest OS for the iPhone, he says, "is going to give publishers the technology to redefine publishing news and advertising delivery."

That includes the ability to deliver user-location information at the browser level. For example, when users access a newspaper Web site, the browser knows the user's location. The newspaper can send relevant content, and more important, targeted advertising within two blocks of a reader's location. "This makes advertising on mobile highly potent with high CPMs," Howe adds.

The NAA's Bennett argues that mobile devices like smartphones and e-readers can co-exist. "These mediums serve different audience segments," he says. "Some people are happy with the New York Times app on the iPhone with snippets of news. There are others who prefer the newspaper experience."

The experience of reading a newspaper in a print format still appeals to many people. And while there are lots of ways to get news, publishers would be foolish to discount the many readers who still like packaged, edited content. "There are a lot of people still today that have a very strong loyalty to the newspaper product, the portability and ease in which they can get through it," says Moroney, noting how e-readers are closer to the print product than content delivered on a smartphone or even on the Web.

"The experience of reading a news-paper is a bit akin to going to the movie theater," he adds. "I can watch a movie at home for a whole lot less, but there is something about going to the theater. It's an experience."