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UBS’ Own Analysts Sum Up Best What They Heard at Their Media Week: Newspapers Are Investing Online – Where Growth Potential Is Best – But That’s Just A Small Part of the Overall Financial Picture and The Bigger Part Is Having Severe Problems

It wasn’t so much doom and gloom for newspapers at the Media Week meetings last week as much as it was that with a few exceptions things don’t look like getting much better in the short-term, and while their Internet activities are doing very well indeed, when seen as part of the overall revenue picture, those activities, for now, contribute a mere pittance.

Shares rose when the New York Times and The Wall Street Journal reported some good advertising numbers, and Gannett said its revenues would be at record levels – albeit on the back of cost cutting – and Tribune announced even more layoffs, but it was Washington Post Chairman Donald Graham who cut right through it with his words basically covering the industry as a whole: “The web site simply has to come through, ours and that of other newspapers, for us to be successful.”

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Circulation Increases Four Times As Fast As The Internet Is Growing – No, Don’t Get All Excited -- It’s Visitors to Newspaper Web Sites. On the Other Hand, Maybe That Is Something to Get Excited About!
For all the really bad news about US newspaper circulation figures – down 1.2 million in the past six months – there was one piece of good news: the numbers show undeniably that newspaper web sites are the most frequently visited for news and information.

The Bad News for Newspapers Keeps Getting Worse: “Newspaper Revenue Shifts to the Internet” Cries Out One Headline, “Bank Warns Newspapers of Rough 2006” Screams Another
Just what a newspaper publisher doesn’t want to hear: “The consistent growth in overall Internet advertising shows marketers may be shifting more of their total advertising budgets online,”, according to David Silverman, a partner with PriceWaterhouseCoopers.

Did You Notice That All Those Big Newspaper Deals This Year to Buy Internet Sites Were for Cash, Not Shares?
Could the average 15% drop In newspaper 2005 share prices have something to do with that?

Overall Global Advertising In 2005 Is Forecast Lower, But the Internet Spend Keeps Going Up With Television Feeling the Worst Pinch of Ad Placements Going Elsewhere
The television share of global advertising appears to have peaked at 38% and is now on the way down, led by two of the world’s leading television markets – The US and Japan – according to new report issued by the ZenithOptimedia Group.

US Newspaper Internet Sites Grew 2004 Advertising By 26.7%; Print Newspaper Advertising Rose by 3.9%. Which Do You Think Is the Growth Market?
For those newspaper publishers searching for double-digit advertising growth opportunities in 2005 they need look no further than their own web sites. Statistics released by the Newspaper Association of America showed record advertising revenues for US newspaper Internet sites in 2004 of $1.5 billion.

Graham noted that the Washington Post web site is now responsible for 11% of the newspaper’s overall ad revenue – more than most other newspapers are reporting – and yet even that 11% does not stop the newspaper from reporting a profit decline.

UBS analysts put it in a similar vein: “Several publishers focused on their online business as areas for potential growth. Many of the companies are investing incrementally, and we believe that the growth profile in these online properties is superior to that of traditional print publishing. However, we caveat this point by noting that online revenues still comprise only a small percentage of most publisher’s businesses at this point.”

Graham admitted the 11% earnings from the Post’s web site was “significant” but the real question that no one had the answer to was just how much revenue can newspapers expect from their web sites in the future and will that revenue at some point surpass the revenue that print loses?

And so it was that the day after Newspaper Day at Media Week Fitch Ratings came out with its comprehensive survey of the U.S. media and it can be summed up in one word: Negative.

Fitch, a global ratings agency, had little good to say for newspapers or broadcasting, as it fears management will continue to be pressured to increase shareholder value and that means heavy borrowing to finance share buybacks, special dividends and the like.

And Fitch is worried by the continuing shift away from traditional media advertising.

“One trend that will continue to shape the media landscape in 2006 is the ongoing shift in advertising money from traditional media into nontraditional media, most notably the Internet, as network and broadcast television, radio, and newspapers experience slow growth and audience declines.” And while it noted traditional media’s Online investment  “offers a diversified venue for advertisers, incremental contribution from these sites has been relatively immaterial to date.”

Fitch noted that Internet advertising now represents only about 5% of the annual US advertising spend, but that advertising has grown some 34% through the first three quarters of 2005, and it believes it could reach up to $12 billion by the end of the year.

“Fitch believes that with continued growth in the online advertising category expected over the next 3-5 years, the traditional media companies’ established advertising categories will continue to be challenged, as large advertisers and marketeers devote more of their advertising budgets to this new media form.”

 

 

 

 

 

 


Newspapers will never fall to the internet...

For newspapers in particular Fitch believes circulations will continue to decline as readers flock to the Internet and the advertising dollars follow. Making matters worse is that it expects to see further spend consolidation by advertisers (Federated Department Stores consolidating various stores under the Macys brand this year led to a lot of lost local display advertising)

But when it comes right down to it, everyone agrees newspapers remain pretty good cash cows. The struggle now is trying to maintain those very healthy 20% margins. Difficult to do in an environment when readers are leaving, advertisers try new media, costs continue to grow – newsprint up some 9% this year, probably more next year —and the new online revenues are not making up yet for the lost print revenues. 

And a new warning came from an unexpected corner. Martin Sorrel,, the man who is chairman of the world’s largest media time and space buyer. said that while  currently only about 4% of WPPs total business comes from Online, WPP intended to concentrate more and more on Internet business because it produces higher profit margins.

When it comes to traditional media buying,  advertisers watch the inflation rate very carefully, he said, but the Online environment is completely different. – no penny-pinching and  much higher profit margins.”

“We have strong double-digit margins in this area.” Sorrell said.

Just what newspapers needed to hear!



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