L ast year, amid the greatest recession in the history of the financial system, the Financial Times turned a profit. How it did so in the wake of a downturn that has literally decimated the UK’s 1m financial sector jobs – plus many more in continental Europe, the US and Asia, where the FT sells about 70% of its 390,000-strong circulation – is a question increasingly asked by an industry looking for answers. Rival newspaper publishers look at its mixture of online paywalls, increasing subscriptions and cover prices and hope to see a panacea for their current ills. There is even a suggestion that the FT has unlocked the secret of eternal profitability. A spokesperson says: Given the amount of revenue we now generate from content there’s no reason why the FT should ever make a loss again.

Can this be the full story? And if it is, what has changed since the combined shock of the dot.com collapse and 9/11 led to the FT recording an operating loss of 41m and renewed calls for its owner, Pearson. to rid itself of the paper?

The answer, according to several financial analysts and FT employees, revolves around three key developments at the Pink ‘Un since the mid-noughties.

Subscription costs

Significant increases in the price that readers pay to read the FT’s journalism have played an important role. Since 2007, the cost of a printed copy of the FT has doubled to 2. In little more than three years, the cost of a basic online subscription has risen from 65 to more than 170.

Advertising revenues generated by ft.com from its desirable yet relatively small base of 11.4 million unique users (according to the FT’s own website) have also contributed. According to a source familiar with the FT’s finances, ft.com’s annual run-rate in terms of online ad revenues is not far short of 30m.

Last but not least, there’s the largely untold story of how the profits that flowed from the FT’s 50% ownership of the Economist helped it through the wilderness years – a factor that calls to mind Clay Shirky’s suggestion that if information doesn’t want to be free, it definitely would like to be cross-subsidised.

These developments underline the key selling point about the FT, of course. Its stock-in-trade – financial information – has a value, unlike most news. If someone has it faster than you, they could gain direct financial advantage. Secondly, most readers can claim it (and its nearest rival, the Wall Street Journal) on expenses or can claim against tax. Readers have therefore proved loyal despite the dramatic price increases over the past three years both in print and online.

John Ridding, the chief executive of FT Group, said that the FT generated a profit last year in early March, immediately after Pearson announced a sparkling set of financial results for 2009. Pinning down the figures turns out to be oddly difficult. Like many large quoted companies that own national newspapers, Pearson is reluctant to disclose how well, or how badly, its newspapers are doing.

To get some idea of the FT’s financial performance, you need to dig deep into both Pearson’s accounts and its annual returns filed at Companies House.

Pearson likes investors to focus on the performance of the FT Group, a big division with a turnover of 850m that includes the Financial Times, several specialist publishing ventures and Interactive Data Corporation, a provider of financial markets data. At this level, good news is abundant. Interactive Data Corporation alone turns over 500m a year. Alongside this, it is easy for the FT’s revenue base – believed to be in the region of 260m – to fade from view.

During her presentation to analysts in March, Marjorie Scardino. Pearson’s chief executive, pulled up one slide that detailed a remarkable transformation. In 2000, less than one-third of FT Group’s revenues were digital. Now the proportion is 73%.

The FT itself lags behind the transformation, but it is moving along the same curve. Last year, revenues from online subscriptions and digital advertising probably accounted for little more than one-fifth of the FT’s revenue base. Yet, according to sources at the FT, they are expected to contribute one-third of revenues by 2012.

Robert Grimshaw, the managing director of ft.com, has pointed out repeatedly during the past year that paywalls don’t necessarily mean giving up on online display advertising.

Neither Pearson nor the FT has ever disclosed hard numbers for ad revenues at ft.com. One source familiar with the situation suggests that the FT is not far off 30m a year in online ad revenues. After heavy investment in data analysis techniques, digital advertising revenues at ft.com more than trebled last year. According to another source print ad revenues crumbled last year with the rare highlight of a 3% increase in luxury goods advertising. While other publishers bemoan the declining prices that advertisers will pay to reach 1,000 users, ft.com claims to have held its online ad rates steady.

Readership base

This is despite the relatively small readership base of ft.com compared with daily rivals in the UK such as the Guardian’s website, which had 29.8 million uniques in February and generated 25m in revenues last year. Enders Analysis suggests that Times Online (22.9 million uniques last month) generates between 15m and 18m in advertising revenues.

Of course, ft.com charges readers to view its content online. The no-mercy approach to pricing applies across the board – in print and online. In 2003, a basic subscription to ft.com cost 65 a year. Since then, the site has placed more and more of its content behind a paywall. Now, it costs 170 a year to read the FT online. And that’s just for a basic subscription that excludes access to Lex, the financial column. Last year, about 90,000 individual subscribers paid an average of 150, giving the FT 13.5m. In addition, there are 37,000 corporate subscribers. The FT is more likely to be expensed than many of its rivals.

The FT has displayed a striking efficiency in starting to squeeze revenue from its readers in recent years. Yet the readers don’t seem fazed. The number of subscribers paying for access rose by 15% to 127,000 by December 2009. The amount of money that ft.com generated from online subscriptions rose by 43%. As one insider puts it: We’re still seeing no sign that readers are thinking twice about putting their hands in their pockets.

But the really important point about the FT’s digital revenues isn’t yet their size. It’s the amount of profit they generate. The cost of acquiring a digital subscriber using traditional direct mail shots amounts to less than 50. Doing it online is far cheaper: according to one source at the paper, subscribers who respond to email promotions cost 25p each to convert.

For all of the potential of ft.com, however, the mystery persists: how far along the road to sustained profitability has the FT travelled in recent years? Looking at the numbers Pearson reports for FT Publishing – a subsidiary of FT Group – brings us a little bit closer to an answer. This smaller division contains the FT plus an assortment of highly-profitable specialist publishing ventures. Last year, FT Publishing turned over 358m and generated an operating margin of 11%.

In relative terms, this is a creditable performance: not all business publishers generated profit margins this large last year. But the stated profit margins at FT Publishing are flattered by dividends from the Economist Group, the highly-profitable publisher of the Economist, in which Pearson owns a 50% stake.

It would be a mistake to assume that the FT’s profit margins are necessarily 10.9%, says one financial analyst. Pearson’s levels of transparency about this have been less than ideal, but it’s true that the dividends from the Economist have been very helpful over the years.

Quite how useful becomes clearer at Companies House, where Pearson files accounts for Financial Times Ltd, the subsidiary that owns the FT as well as a small stable of magazines that includes The Banker and Investors Chronicle. The accounts of Financial Times Ltd are as close as it’s possible to get to establishing how the FT is performing. Between 2002 and 2006 – during its painful climb back into profit after the last recession – the company generated cumulative underlying operating losses of 84m.

During the same period, these losses were partly offset by 71m-worth of what the accounts describe as income from shares in group undertakings and dividend income. Some of this income derived from joint ventures such as FTSE, which generates financial market data in partnership with the London Stock Exchange. Dividends from the Economist also contributed to this cash inflow. Last year, the Economist Group paid out 24m in dividends to its shareholders.

The good news for the FT is although these subsidies helped it through the lean years, Financial Times Ltd generated operating profits of its own in 2007 and 2008. The exact size of the profit – if any – generated during 2009 remains to be seen. It may be slim: one analyst suggested little more than break-even for the newspaper and ft.com. But that in itself would remain a significant achievement.

The road to profit hasn’t been easy. During the noughties, for example, the FT’s losses were greater than many suspected. The length of time it took to emerge out of the red and into the black was significant. Along the way, cross-subsidies from the Economist helped almost as much as the nature of the FT’s business. The FT’s recovery has not all been about paywalls: digital advertising has played a major – and frequently underestimated – role. The residents of No 1 Southwark Bridge may think it is the answer, but can other newspaper publishers follow the same route?