Large US Newspapers Had An Awful February -- Can Publishers Still Maintain Their “Cyclical” Argument Or Is The Reality That Advertising and Circulation Revenues Are In Perpetual Decline With No Signs Of Recovery?

Philip M. Stone March 22, 2007

Advertisers gave most large US newspapers a financial thrashing in February, bringing shivers and chills to many boardrooms and on Wall Street. Publishers can’t do much more than pray that February is just part of the “cyclical” argument and everything will eventually get better. But what if February’s slump is not cyclical, but much worse – the formation of a new, much smaller, newspaper advertising landscape.

“Freefall” seems to be the popular word analysts are using to describe February’s newspaper financial performance. And we have not seen any analyst brave enough to walk the plank and say the decline is over or even that the end is in sight.

It’s really not “news” any more to write that most newspapers experienced lower or flat circulation and advertising revenues in any month over a year ago, or even the previous month, but there was always the basic message that newspapers were still making very good margin, it’s just that now it is a few per cent lower than what they were used to.

But February’s slide is far worse than that. These are huge percentage reductions. No newspaper can continue experiences reductions like these month after month, and continue producing today’s quality product.

Let’s look at the largest companies on a year-on-year February comparison:

• Gannett saw its advertising revenues down 3.8% (USA Today was down 14%). The company tried to blame it on bad weather but Peter Appert, an analyst at Goldman Sachs, said in a client note "the deteriorating momentum in classified suggests that revenue trends will likely remain under pressure irrespective of the weather." On the national advertising front there were indications of advertising spend being diverted even more to the Internet.
• McClatchy said advertising revenues were down 5.2% and total revenues were off 5.1%.
• Tribune said advertising revenues were off 5.1%, circulation revenue was down 7%.
• The New York Times Company saw newspaper advertising down 6% with total revenue dropping 3.6% (digital making up more than half of print’s losses).
• And at the Wall Street Journal, advertising revenue dropped 10%.

Those are the kind of numbers that a journalist might expect to write about on a full-year’s result if a newspaper group had a really rotten year. To write about those numbers representing just one month is soul-searching. Classifieds are the main cause for the grief. At McClatchy, for instance, automotive sank 15.4%, real estate was off 16.3% and jobs were down 11.6%.

Even if this is cyclical, just how much lower is this cycle going to go before the upturn? No one is really prepared to answer that, but nasty storm warnings continue to be posted. Media General, a public company that owns three metropolitan newspapers, 22 daily “community” newspapers, 100 weekly newspapers, 23 network TV stations and has 75 Online operations,  said Wednesday it would report a first quarter loss. The shares got bombed $4 on a day the general market soared.

What’s worrying here is that if one wanted to invest in a public newspaper company that should have a good chance of weathering the storm then probably Media General would be it -- heavy in the community newspaper field, and light with metropolitan newspapers.  But instead of confirming the predictions of analysts for 20 cents a share quarterly profit the company shocked the market with a forecast of a loss of some 26-30 cents a share.

"In February, Media General experienced a continuation of the difficult market conditions we saw in January," Chief Executive Marshall Morton said in a statement. "Unfortunately it will not be possible to make up in March what was lost in the first two months of the year, although we expect to recover most of the shortfall later this year," Morton said (the cyclical spin argument).

Morton blamed a sharp decrease in newspaper classified revenue and a decline in national advertising revenue. The publishing division saw February revenue fall 4.2%.

This all points to how important a debate The Project for Excellence in Journalism has raised in its 2007 annual report. “The key question is whether the investment community sees the news business as a declining industry or an emerging one in transition”, the report asks? “If one believes that news will continue to be the primary public square where people gather – with the central newsrooms in a community delivering that audience across different platforms -- then it seems reasonable that the economics in time will sort themselves out.

“If one believes, however, that the economics of news are now broken, with further declines ahead, then it seems inevitable that the investment in newsrooms will continue to shrink and the quality of journalism in America will decline. One thing seems clear, however; if news companies do not assert their own vision here, including making a case and taking risks, their future will be defined by those less invested in and passionate about news.”

So, it is all just a bad, deep cyclical problem but things are going to get better, or there is a fundamental change going on out there? If the former, then for how much longer before things get better? If the latter, can quality newspapers survive on far less resources?

The stock market seems to be leaping ahead indicating the economy is in pretty good shape. And yet newspapers are seeing less business. The sad fact is that the economic cycle has already turned but newspapers have not shared in that joy. There is an obvious diversion of funds away from newspapers and to the Internet, and it doesn’t look like that Internet bubble is going to burst any time soon.

Those publishers that are waiting for the “cycle” to change are going to be real disappointed. There is a new landscape out there and the only way a newspaper is really going to cope is by having a business plan that gets its digital revenues growing faster than even the annual 30% plus a year that newspaper web sites are now producing.

That means seeing if its web advertising rates can be increased, does news really have to be given away, is there some sort of financial combination of higher advertising rates and charging for some news parts that can increase those digital revenues quickly?

It’s the race to get those digital revenues up as quickly as possible as print continues to fall that will decide a newspaper company’s future. Publishers at the moment are still behind -- print losses exceed digital gains – and that needs to get fixed quickly for newspapers to have a sound financial future.

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