Why the NYT Is Looking to Cut Costs, Even Though It Turned a Profit

22. New York Times for iPad

All the news that's fit to print ... on an iPad.
photo: Ramin Talaie/Getty Images

So the good news is that the New York Times turned a profit in its most recent quarter. Not a huge one, mind you, but in the current media environment simply being profitable is an achievement. The bad news? The paper’s executive editor announced a new round of restructuring that could result in more layoffs.

But if the Times is profitable, why does it need to restructure? The short answer is that the paper squeaked its way into the black by cutting costs. Revenue isn’t growing, despite its immensely successful digital paywall—which now has more than 1 million subscribers—and print advertising revenue continues to decline at a rapid pace.

The paper has also set itself the rather ambitious goal of doubling its digital revenue to more than $800 million in the next five years. If it continues to grow at the rate it did last year, that’s going to take a miracle.

In the fourth quarter, the NYT’s revenue was so flat it barely had a heartbeat. Revenues were $444.68 million in the fourth quarter of 2014, and $444.68 million in the same quarter this year (although that was still better than Wall Street Journal publisher News Corp., where revenue for the newspaper division sank by 8%). For the full year, revenue fell slightly.

A big chunk of the NYT’s (NYT)$63.2 million profit for the year (almost twice what it made in 2014) came because of lower costs, primarily depreciation and severance. In 2015, the paper spent only $7 million on severance, down from $35 million in 2014. If not for that, its profit would have been virtually identical to the one it made the previous year, for a return of about 2% on revenue of $1.6 billion.

In an internal memo, editor Dean Baquet said that the paper must continue to restructure, and suggested that this might result in cost cutting in the newsroom. “To secure economic success and the viability of our journalism in the long term, the company has to look for judicious savings everywhere, and that includes the newsroom,” he said.

Evan Williams says Twitter is primarily a news network

Somewhat surprisingly, despite the turmoil all around it and the rapid decline in print revenues, the Times‘ newsroom is more or less exactly same size it was almost a decade ago—about 1,300 staff. Although Baquet said he was “not anticipating any layoffs” this year, the paper will likely continue to shed older, more expensive staff in favor of younger, cheaper hires with more digital experience.

Among other things, Baquet said that a new strategic restructuring group will look at what must change in how the newspaper’s traditional editorial systems works. For example, he said: “We deeply value the craft of editing, but in the digital era should we continue to edit every update of every story at the same level?”

That might offend long-time NYT desk editors, but it’s a sign the executive editor is prepared to rethink even long-established practices, including having multiple desks handling similar stories. “How much of our coverage is duplicative because we have never resolved overlapping jurisdictions?” Baquet asked.

The bottom line is that newspapers like the Times are structured the way they are because that’s what made sense when the news was printed on paper and shipped to people’s houses, or to physical newsstands and hotel lobbies. As that method of delivery has been replaced by digital, new processes and habits have become necessary.

Get Data Sheet, Fortune’s technology newsletter.

The business environment has also changed dramatically. It’s an unpleasant reality, but the business side of a digital information company—even a strong one like the New York Times—may not be able to sustain the kind of infrastructure and cost base that a print-based newspaper model could. The problem for the Times and every other paper is that most of its revenue still comes from that part of the business.

Despite being one of the largest English-language news websites, print advertising still accounts for more than 70% of the NYT’s advertising revenue. Last year, ad revenue fell 3.4%, despite a rise in digital ad revenues, because print revenue is declining faster than digital revenue can fill the gap. And while circulation revenue grew (and now makes up more than 50% of the total) it grew by a fairly anemic 1%.

At this point, the Times makes about $400 million a year in digital revenue, with about half of that coming from digital advertising and half of it from the paywall. But even put together, those two don’t add up to as much as it gets in print revenue every year—and they would have to grow twice as quickly as they are now to make up for the decline in print revenue (the paper’s all-in operating costs are about $1.5 billion).

And that, in a nutshell, is why the New York Times is looking at further restructuring and potential cost cuts, despite the fact that it turned a profit. And the challenges it is facing are multiplied a hundred-fold for media companies that don’t have the kind of global reach the New York Times does.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

Read More

Artificial IntelligenceCryptocurrencyMetaverseCybersecurityTech Forward