Does the NYT’s purchase of The Athletic make business sense?
We need to properly understand the concept of bundling to decode this deal.
On 6th Jan, the New York Times announced a $550 million cash purchase of The Athletic, a subscription-based sports media business. As of December 2021, The Athletic had an impressive 1.2 million subscribers. However, they have been reported to be making losses and were looking to sell. This, to some, makes the $550 million purchase price seem an overkill.
Business models
To really understand the logic of this purchase, one must understand the NYT’s proposition properly. On the face of it, Financial Times, Washington Post, The Economist (my erstwhile employer) and the WSJ are all subscription based businesses. The NYT’s business model is very different from them.
The magic of bundling
To truly get under the NYT bonnet, we must understand the concept of bundling, first explained in a 1976 paper by William Adams and Janet Yellen (the US Treasury Secretary). Their key insight was that the real value of bundling comes not from combining products that were similar but by combining customers with different preferences.
Getting bundling right is not necessarily knowing each one of your customers but knowing how their preferences converge or diverge. By knowing how they are connected.
Let’s take a simple example. Imagine you own a software product business. You have two products, a spreadsheet and a word processor, both priced at $10. Analysts will pay $10 for the spreadsheet and journalists will pay $10 for the word processor. There is no way an analyst will pay $10 for a word processor and so is the case for the journalist and the spreadsheet. However, with a bit of research, you find that an analyst wouldn’t mind the word processor (have to write some supporting commentary at times) if it was for a throwaway $2 and the same if the case with the journalist and the spreadsheet. But that looks like a very bad deal to you.
Then lightning strikes and you combine the two into one product and price it at $12. In one shot, you have doubled your potential target audience! If you had 1000 customers a year for each product earlier, you were making $20,000. If you now have exactly the same number buying your combined product (there is no reason for them no to), you now make $24000. You just made $4000 dollars extra! Almost by magic. You just combined customers with different preferences.
Bundling and the NYT
Let’s not think of the NYT as a single paper but as a bundle of content types: opinion, sports, local news, culture, food. The earlier table and the one below is from Bharat Anand’s book The Content Trap (must read if you are in media and entertainment and/or interested in business models). The table puts a price to what different readers would pay for different sections of the paper:
Each group is willing to pay a lot for his preferred type and very little for anything else. The problem is amplified because you don’t know who is what type of reader. What content do you put behind the paywall? The NYT admitted that the paper didn’t know, and the answer might differ across readers. They set a single price across the bundle (in the above theoretical example that price would have been $18). NYT’s first approach to a paywall, TimesSelect, had reflected a view that the Times knew what content appealed to their readers. It failed miserably.
NYT and The Athletic
It would now have become obvious to you where this is going but let me lay it out anyway. It’s good to know that the NYT already has other digital subscription products than news - Cooking, Crossword, and now Wirecutter. These three are separate subscriptions and both Crossword and Cooking have done remarkably well as you can see from the chart below (Q3 2021):
‘Digital-only other’ is essentially standalone subscriptions to Cooking and Crossword. That’s 1.9 million paid subscribers. The Athletic has 1.2 million paid subscribers and that takes the total paid subscribers for the NYT offerings very close to the magic 10 million subscriber mark. One could argue that while the purchase adds to the subscriber numbers, it’s a business that’s struggling and will have a negative effect on the profitability of the NYT.
The Athletic Bundling Opportunity
That seems logical but totally misses the opportunity that the NYT has of using the power of bundling. You may ask, what is different between Cooking, Crossword and The Athletic. A lot. The chances of a Crossword enthusiast being willing to pay even $2 (see the above table) each for opinion, sports, community, culture, and food is slim.
Sports, on the other hand, has been an integral part of the ‘newspaper’ experience. A significant number of readers start with the ‘back page’ than the headlines (like your author). And because it’s been part of the newspaper reading experience, convincing a sports buff to pay an additional $2 each (sticking to Bharat Anand’s table) for opinions, local news, culture, food seems a doable task. More importantly, convincing an opinion junkie (subscriber to the NYT) to pay $2 for this wonderful take on sports is an even easier task.
What the NYT should do
NYT should definitely NOT merge The Athletic into the NYT. It should offer a bundled offering of the basic NYT digital + The Athletic. The basic monthly digital subscription is $17 for the NYT and $7.99 for The Athletic. I would introduce a NYT + The Athletic offer of $19.99/month. (It’s possible that the existing effective prices are lower, that doesn’t matter to the logic)
For the current 5.7 million digital-only news subscribers of the NYT, an additional $2.99 for The Athletic is a steal. Especially for the sports fans among the NYT subscribers who aren’t yet subscribers to The Athletic. You could easily see 25% of the current NYT base going for this offer over an 12-18 month period. That would double and a bit more The Athletic’s subscription base.
The promise to The Athletic subscriber is equally good. They get a $17 subscription to the NYT for an additional $12 dollars. The base is small compared to the NYT and hence you wouldn’t get huge numbers but combining both sides, a bump of 2 million subscribers is not difficult to see.
I really hope that the NYT doesn’t do the obvious: offer The Athletic at full subscription price (with special NYT subscriber entry offer for the first month) to its subscribers.
Think of all that magic waiting to happen.
What do you think they will do?
The author is building Your Marketing List, a marketplace that connects startups and small/medium businesses to quality digital marketing freelancers. His last corporate job was as the chief strategy officer of The Economist Group.