Nuts and Bolts of Prime and TPM

A TPM Reader wrote in on Friday and asked a simple, but for me, unexpected question: what do the fees for Prime pay for? Not in the sense of what do you get but what do we use the subscription fees for? This question caught me off-guard because to me the answer is obvious: everything. Prime today is the backbone of our entire business model, our largest single source of revenue and almost half of total revenue. But perhaps it’s not as obvious on the other side of the screen. So I thought I’d explain it all in a bit more detail. Some of this will probably seem like inside baseball. But you may find it interesting if you’re a Prime subscriber or if you’re interested in the economics of digital publishing or both.

Before I get into the details I want to make one point clear. As we introduce a new subscription tier probably some Prime subscribers are wondering: does this mean another slice of the content – reporting, analysis, editor’s blogs, commentary – will go behind another paywall. The answer to that is a flat no. And that flat no will not change. We’re adding a bunch of cool things. But they’re not writing or content or the news reporting we publish. The goal and scope of Prime remains the same: break down the ‘fourth wall’ of journalism and give our readers access to all the collective and evolving knowledge of our editorial staff that cannot be fit easily or sometimes at all into conventional news writing. Our goal is to provide a deeper layer of insight, guidance, detail, previews that don’t easily fit into confines of conventional news writing.

So now, what does Prime pay for? Alright, let’s dig into this.

Until late in 2012 almost 100% of TPM’s revenue came from various kinds of advertising. In October of 2012 we launched Prime. We started Prime for a number of reasons. But a critical one was that we believed the digital advertising market was going in a bad direction, especially for small publishers. This proved to be prescient. But the terror wouldn’t really get underway for a few years. And for the next few years Prime accounted for under 10% of TPM’s revenue.

The inflection point came in 2015.

Here are some key data points. In 2015, TPM brought in just under $2.4 million in advertising revenue. In 2018, that number will have dropped to just over $1.2 million. In other words, a 50% drop in what was once our sole form of revenue over a three year period.

Yikes!

This would of course have been catastrophic if we had not been building Prime in the background. Annually (and later monthly) renewing Prime subscriptions were a relatively small part of our budget in 2012, 2013 and 2014. But in 2015 it rose to just over $400,000. Between 2015 and 2018 that number rose to roughly $1.4 million. So the growth in recurring Prime subscription revenues came close to equaling out the drop in advertising revenues.

But expenses were also growing. From 2015 to 2018 our expenses went up substantially, almost a 100% going to growth in salaries and benefits, especially on the lower end of our salary scale. From 2015 to 2018, average and median salaries both went up over 25%. Salaries for non-managerial editorial staffers went up 39%.

So what do your Prime membership fees go to? Pretty simply, running the company. Prime is now the backbone of our entire business model. It’s not differentiated to one part of our operations or another in anyway. In fact, in a sense the way we talk about it is a little anachronistic. Prime is simply a subscription to TPM. It pays for running the entire site.

The more global picture is that we’ve been trying to manage an overall business transition for the company over roughly the last three years. It has two parts. The first is moving from a business model based almost exclusively on advertising to one which is heavily diversified and based mainly on payments from readers for various kinds of subscriptions. The second is increasing salaries and benefits to have a better workplace and attract and (especially) retain talent. Doing these two things at the same time is a difficult stunt to pull off. But so far we’ve been able to pull it off. I would say we’re about 2/3 way through the transformation.

The key going forward for us to is to get to a point of relative equilibrium in which we have subscription revenues at a sufficient base that we think the diminished level of reliance on advertising and other revenue sources is stable over time. That’s why we’re focused now on launching Inside and the new ad-free version of Prime we’re introducing next month. Different readers have different capacities to pay and different things they’re interested in. What we’ve been working toward is a mix that allows us to get roughly two-thirds of total revenue from subscription fees – a mix of Prime, Ad-Free Prime and Inside, while keeping the majority of content free to the public and the rest available for a small fee (Prime).

That’s why we’re super focused now on these two new offerings. If those launch successfully, the combination should put us where we need to be over the course of 2019. But Prime remains the bedrock and our core focus. Nothing is permanent of course. But with these three offerings we believe we’ll have a solid foundation to build on and grow with going forward.

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