In a Q2 report filed earlier this week, the  New York Times  announced a 6.6% decrease in ad revenue and an 8.3% increase in circulation revenue, thanks to the addition of 509,000 online subscribers. That’s an 80% boost in digital subscribers over the past year. Although total revenue increased less than 1%, clocking in at $515.2 million, the last time the  Times  reported any revenue increase was a year ago. Following the report, the  Times‘s stock rose 11%. Thursday.  This does not seem to be an isolated spike in earnings; in the first quarter of 2012, the  Times reported a similar trend, with rising circulation stats and falling ad money. Investor confidence in the  Times‘s strategy is high, indicating financial sector and media industry support for a move away from an advertising-centered revenue model. But Rick Edmonds, writing for Poynter, advises caution.  He speculates that much of the reported growth in digital circulation results from discounted subscriptions, and that some print subscribers are simply migrating to the digital platform. The long-term profitability of the Times‘s growth plan remains questionable, even as advertising revenues fail to keep pace with a growing subscription base.  

The combination of more subscribers and less ad money has become a common symptom of print media transitioning to digital. The Financial Times  reported today that its digital subscribers exceed print subscribers, digital revenues constitute 50% of all FT Group sales, and that sales are growing.  Yet, the  Financial Times claimed that “advertising demand remains volatile and visibility poor.” The pathological loss of advertising revenue in spite of expanding digital readerships prompts two questions: 1) will advertising revenues eventually recover and 2) is digital subscription growth sustainable?

1.  Advertising revenues will eventually recover.  There are a number of reasons why advertising revenues are declining, including: uncertainty about the efficacy and efficiency of digital advertising, the diversion of print advertising funds into new media initiatives and paid sponsorships, a lack of confidence in the viability of print-to-digital transitions, and low reader tolerance for the invasion of content by advertising materials. Advertisers are better informed and warier about the performance of ads on digital media platforms than in print. Whereas formerly, advertisers relied on imprecise metrics to evaluate ad performance, measuring the ROI of digital advertising is simple, accurate, and rapid. That’s bad news for media companies, who have lost their advantage in negotiations with advertisers. The world of digital advertising is unbluffable, insofar as advertisers suddenly have a lot of information about what they can and should pay for advertisements. It’s as though publishers and advertisers are playing poker face-up—but the advertisers have the bigger chip stack.  

Nevertheless, it’s actually in the best interest of advertisers to improve the efficacy and efficiency of digital advertising. If advertisers and publishers can develop better advertising vehicles, it’s a win for both parties. As confidence increases in the power of digital advertising, the asymmetry of bargaining scenarios will even out, because digital publishers will possess an object of definite value to the advertiser.

Consequently, advertising revenues will eventually recover, if and only if the growth of digital subscribers is consistent and sustained.

2.  Digital subscription growth is probably not sustainable.  Unfortunately, digital subscription growth is not sustainable…indefinitely. That is, the total available audience for the digital New York Times  is not substantially larger than the total available audience for the print  Times. Such an assertion bucks conventional wisdom. Lower prices and more diverse content, including multimedia, should make a digital  Times attractive to previously unavailable or untapped consumer demographics. Still, the Times brand needs a considerable makeover in order to capture a much wider market than it currently commands. And once discounted subscription drives are exhausted, such a brand transition will become prohibitively difficult.  

What if the entire  Times  print circulation switches to digital? Would that be enough to make a compelling case to advertisers? The  Times  is entering uncharted territory. The behavior of those stubborn and loyal print readers in online environments is a big unknown. Furthermore, efforts to convert print subscribers into digital subscribers could turn off new demographics that were never print subscribers.  

Unless the  Times  can maintain digital subscription growth and simultaneously build-out better advertising systems, positive earnings reports will again recede into happy memory.