General overhead and administration -- which includes such items as capital equipment, rent, free-lance fees, travel, satellite time, and accounting support -- will account for about 23% of gross revenues, or nearly $11 million. This includes the cost of depreciating equipment and an allowance for bad debt. In its first year of operation The National will lose at least $15 million.
Price expects his paper to break even probably around its fourth year of operation. What will circulation be then? Price will say only that the number is somewhere between 500,000 and 1 million. The National's likely break-even figure is about 740,000 (see "Financials," page 5). At 1 million circulation the paper's gross profit should be around 14%. Since The National will be printing the paper at multiple sites and selling fewer than 50,000 copies in most markets, it will likely achieve few economies of scale as circulation rises. Its large variable costs -- production, distribution, administration -- will continue to rise. Above 1 million circulation, though, the differential between revenues and fixed costs begins to widen, as more and more copies of the paper are sold and advertising revenue increases to about 35% of total revenue.
But getting from zero to 1.3 million looks tough. USA Today, after all, has spent about eight years and $500 million building circulation to its present 1.7 million -- and even now is barely breaking even. Price and company, by comparison, intend to spend $100 million to get to 1.3 million circulation and hefty profitability.
Nonetheless, Al Neuharth, founder of USA Today, thinks The National might have a chance. This, after all, is a subject he has considered. "A sports daily was one concept we looked at 10 years ago before we started USA Today," says Neuharth. "I thought the concept was good, but in the end we went for a general-interest publication with an emphasis on sports." He adds: "Our sports section has hooked by far the highest percentage of our readers, maybe higher than the other three sections combined."
Another affirming journalistic force is Dow Jones, publisher of The Wall Street Journal and distributor of The National. Dow Jones not only has clout at the newsstand. Its name lends credibility to The National's efforts; its sales force ensures that bills get paid on a timely basis. In return, The National has something to offer Dow Jones -- the potential for a great fit. The Journal's market research reveals two interesting facts. First, 98% of the Journal's readers read a second paper. Second, next to business news, the Journal's readers are interested in sports.
Every wholesaler that takes The Wall Street Journal in New York, Chicago, and Los Angeles will also take The National. In addition, a good number of wholesalers who don't distribute the Journal have taken The National. This considerable interest is reflected in what is known as the draw -- the number of copies the wholesalers take.
At the outset The National projected its daily draw at 250,000, assuming about 70% of those papers would be sold on day one. Two weeks before the newspaper was launched, wholesalers, who had been talking to newspaper and magazine retailers about their customers' buying habits, came back with another number. They told The National to raise the draw to 380,000.
Interest in sports has mushroomed in the past decade. Attendance records continue to be set. The airwaves grow ever-more saturated with sporting events and sports information. Advertisers see sports as a great vehicle to reach a prime audience -- affluent males between 25 and 54.
The National hopes to be the print version of this phenomenon -- a pipeline to this hard-to-reach audience. Before it had published even a single issue, the paper had signed commitments for 1,200 pages of paid advertising for 1990. At $9,800 per full-color page in all three editions of The National, the paper offers its advertisers low out-of-pocket expense. (Incremental discounts would lower that number further.) Advertising sales director Peter A. Spina says The National's strategy is to cultivate charter advertisers that will not see large increases in cost per thousand as circulation picks up. The National might continue to look like a bargain to loyal advertisers for years to come. USA Today (circulation 1.7 million) charges $66,000 per color page. Sports Illustrated (circulation 3.1 million) charges $113,000.
Another facet of The National's strategy is to rely initially on circulation for 75% of revenue, and advertising the balance. (With most magazines the ratio is about 50-50.) This will take pressure off the ad pages. Spina will not be forced to chase advertisers. Rather, he can court -- and showcase -- blue-chip advertisers that do not often advertise in sports publications. It is a given that The National can wallow in beer, cigarette, and automobile ads. But keeping those advertisers in check and enticing an IBM or American Express into the paper will be key. Charter advertisers thus far include Philip Morris, Panasonic, Minolta, AT&T, Nike, and Sears Roebuck. Those companies may have come in because The National offers advertisers another advantage: the pass-along factor -- how many readers see each copy. The National is projected to have a pass-along number between 2.5 and 3.0. This compares favorably with daily newspapers, which are in the 1.2 to 2 range. Moreover, daily papers reach a mass audience. The National reaches a choice slice of the market.
The National also offers urgency. A color ad can run within 48 hours of being placed. It produces, as well, a hard-core audience, its ranks uninflated by discounts, free alarm clocks, and promises that the bill isn't due before the next millenium. The National is a demand buy. The reader plunks down his two quarters to buy the paper -- now.
