I thought I was going to hate Jon Fine's Business Week piece about which newspaper would be the first to go all digital. I know that the blogging tradition dictates I'm obliged to get very angry and attack the guy because I completely disagree with the proposition he is exploring, but in the end I think Fine's piece was articulate, thought provoking and useful. Everything a column should be.

More importantly, he's started the conversation about what is probably going to be the central question of the next stage of newspapers on the internet and that's a good thing too.

You should read the original but I'll try and sum it up honestly for those who can't bear to leave Inksniffer for even five minutes. It says: US newspapers are currently losing a lot of money. They may have the worst revenue decline ever in 2007. At some point even the most profitable newspapers are going to be losing money. The least profitable are already deep in the ditch. Although there isn't enough online revenue to sustain the current levels of staff and content, maybe if the presses were ditched now and a paper like the San Francisco Chronicle went online only, that commitment would be rewarded by local advertisers and generate enough revenue to the web to maintain what you'd recognize as a newspaper online.

First of all Fine's piece exposes just how literally petrified one newspaper has been by the challenge of the internet. He quotes a statement showing that the San Francisco Chronicle have lost an average $1 million a week for the past six years. What on earth have Hearst been doing to stop that? A few cuts, a little belt tightening and not much real innovation on print, distribution or journalism. No smaller easier format. No thoughts about new flexible forms of delivery. It actually makes me quite angry. Newspapers that just sit there and hemorrhage cash while complaining about how little they can do about it deserve everything they get. I love print, but newspapers don't merit any different treatment from our customers than anything else they buy. We either respond to failure by improving how we serve them in a way they value or we go and do something else. (I'd love to help the Chronicle though in any way at all. Lots of potential. Call me.)

But the main thrust of the piece is about newspaper and online economics. So let's run some numbers..

The cost side of the equation is enticing: no presses, no distribution, no paper. The revenue side not so much.

People won't pay for it I'm told, so bye-bye circulation revenue, maybe 15% of your total.

Advertising revenue is growing moderately from a small base. The environment is competitive: advertisers have multiple suppliers to choose from and advertising is becoming a commodity where the marginal cost of production for the lowest cost producers is zero. That's already hitting home for newspapers, according to the the Wall Street Journal. I'm no economist but I'm sensing a lowering of the price over time. Broadband penetration is already high so there aren't many new consumers coming online either.

But te sun's shining so we'll take forecats at face value. Let's assume that online ad revenue will in fact continue to grow. As 50% of online ad revenue is search according to the IAB, it's likely that around 50% of future growth in the short term will be search, which newspapers won't get a sniff of. And the other 50% is being fought over by everyone who owns a local TV station, a national vertical site, pure players, or a neighbourhood blog ... and everyone in between. But let's ignore all that too and shoot for 20% annual growth in newspaper online ad revenue.

Let's look at how the numbers on a pure online venture would look to McClatchy. Here are some figures dotted around their 2006 Form 10-K filing - the boring stuff that would confuse the shareholders if they put it in the glossy annual report. The numbers I use are all pro forma - ie it assumes that McClatchy had owned the Knight Ridder titles all year.

"Online retail advertising increased $6.5 million in 2006 or 62.8% from fiscal 2005"

That sounds impressive. It puts online retail ads at $10.35m the previous year and $16.85m this. In the same report it says that 43% of ad revenue for McClatchy is retail. So retail advertising is worth $891 million to McClatchy and the online bit of it is worth $16.85m. Which is 1.89%.

In classified the online revenues are bigger. I calculate them at $111m from the 10-K numbers. There are documented industry concerns about whether this is inflated by including web ads for free for the customer whether they want it or not and booking some revenue to the web. I don't know if McClatchy do this, so let's assume they don't. That $111m, as far as I can tell, includes $32.3m, $16m and $2m from Careerbuilder, Classified Ventures and ShopLocal which aren't actually "newspaper websites" as such. Should we include that revenue? I think so. If McClatchy stopped print operations the money might still be there, though I suspect much of that $32.3m is "upsold" newspaper ads. So $111m of online classified revenue compares to print classified revenues of $825m. Which means that online classified, an area of the business which everyone will tell you is now owned by online, provides McClatchy 13.5% of the revenue that print classified does. Geez, it doesn't seem like print classified is entirely dead yet.

Of the total $2.09bn McClatchy ad revenue, online provides $60.3m or 7.65% of the total.

But hey maybe the cost savings of print, paper and distribution make this thing work.

It gets fiddly here but the audited combined accounts say that McClatchy spent 45% of revenue on "compensation". Translating that to the pro forma accounts it suggests that even with economies McClatchy's compensation bill will be somewhere around the $1 billion mark this year.

So online ad revenue is $160m. Staff expenditures are $1bn. All of which means that online ad revenues for newspapers would have to grow 20% every year for 10 years to pay for staff costs alone. assuming that staff costs didn't grow at all for 10 years. But let's be brutal (after all we're losing $840 million a year!). If the newspapers closed tomorrow you could cut a lot of jobs. Let's pull 50% out of the hat as a big dramatic number (I'm open to suggestions on alternative numbers). But even after that cut, the remaining staff costs will still rise for salary increases and new hires. If "compensation" increased at 5% a year after after a 50% cut in 2007, and online advertising revenue grew by 20% a year every year, then it's 2015 before compensation costs are covered.   And this is assuming that there are no costs other than staff to putting out the website. No buildings. No hardware. No software. No paperclips. Nothing else.

So to recap: even if you assume 20% growth in revenue every year, and cut your staff by 50% you probably can't even cover your payroll until 2015. And that's under the most generous competitive environment I can imagine.

It might work I guess. All I'm saying is that it might be better for us to invest in real print innovation before we decide to get into the dog of a business that the internet is going to be for us. Print still has a lot of revenue, a good base form which to redevlop our products and fight back. That's great news, because the path down which newspaper companies are being led right now just leads to layoffs and bankruptcy.