If Newspapers Can Hold On For Another 24 Months Their Internet Income Might Just Reach The Point Of Becoming A Viable Growth Platform

Philip M. Stone August 27, 2006

The current edition of The Economist spells gloom and doom for the newspaper industry – it’s editorial headline sums it up, “Who Killed the Newspaper” – but if newspapers continue with gusto their Internet investments they may well have the last laugh
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Arthur Sulzberger, New York Times publisher, probably summed up best what newspaper publishers need to remember – that they are not in the ink-on-paper business but rather that they are in the news business. The distribution method doesn’t matter so much, what is important is that the company can make money from the news.

Now that Internet revenues are starting to become respectable some Wall Street analysts are coming around to that view, too, although they are still in the minority. Debra Schwartz at Credit Suisse believes that the share prices for most American newspaper companies may have hit their bottom. She says there is at least hope now that their Internet investments will grow to the point in the next two years that they will equal 10-15% of overall contribution, and at that figure it starts to offset print’s decline.

And since share prices usually indicate what Wall Street thinks a company will do in the future, rather than reflect on its past performance, she believes that may be the light at the end of the tunnel.

Internet revenues at Tribune Company, for instance, which stood at 6% last year have now grown to 7%. The company has targeted that figure to grow to 12% within three years. Online at the Washington Post represents 10% of total revenue.

At the New York Times, where about.com and the newspaper’s own web site are growing revenues ever faster, the digital share of overall income is now about 8%, with online revenue growing 27.5% in July over the same period a year ago. Even so, Standard & Poor Ratings lowered the company’s long-term corporate credit and unsecured debt rating and warned of possible future reductions.

Goldman Sachs is still among the pessimists. “Anemic revenue growth and pressure on operating margins, despite aggressive cost control efforts, continues to translate into a downward bias in earnings estimate revisions.” It doesn’t like the fact that classified advertsing growth is slowing with June’s 0.2% the weakest performance for some three years.

While everyone accepts that Internet revenue is going to grow in leaps and bounds, the unanswered question is whether print’s revenue will grow, albeit much slower, or whether print is in such decline that as Philip Meyer predicts in his book, “The Vanishing Newspaper”, print turns out the lights in Q1, 2043.

Print statistics are not encouraging. July turned out to the weakest advertising month yet this year. That’s probably one reason for the continuing general disillusionment with newspaper shares that have dropped about 4% since then.

US newspapers need a strong September, but they have September 9 hanging around their necks. That’s the day that Federated Department Stores, the largest newspaper retail advertiser in the US with an annual newspaper-advertising budget of $830 million, rebrands all of its stores as Macys. That is expected to cut way down on all those Run Of Paper (ROP) pages of weekend sales at variously named stores in town  -- no more May, Burdines or Foleys and the like  – they’ll all be called Macy’s and one ad fits all.

Not only that but the company is expected to significantly shift its media mix towards television, magazines, and the Internet. Some analysts believe that anywhere between $200 million to as much as $425 million may be withdrawn from newspapers within 18 months.

Paul Ginocchio, respected media analyst at Deutsche Bank, headlined his report on the situation, “Federated Impact May Be Greater Than Papers Expect”. Most newspapers average around 15% or more of their ROP revenue from department stores, so if Macy’s makes great spend changes it is really going to hurt.

One reason for the Federated shift -- they want to attract young buyers and there are certain national television shows, magazines, and of course the Internet where the young do congregate. As far as the Internet is concerned, newspapers have their marching orders – their web sites are the most popular in town and they need packages to get Federated onto them.

Where they have a problem is the print edition itself. The fact is that right now it uses the “one size fits all” marketing strategy. Whether you are 18 or 80, you still get the same newspaper delivered to your door. One day publishers are going to get bright and put their demographic information to good use and start targeting

households with newspapers aimed at various age groups – even if that means just front section pages are different. Extra cost? yes. Maintaining readership, probably.

Meanwhile print is still deep into its cost-cutting exercises and this will no doubt continue until that Internet money really starts to make a difference. According to Bear Stearns, approximately 2,500 jobs were shed in 2005, and this year through June 950 further jobs are gone and that compares with 450 at the same time last year.

Analyst Alexia Quadrani wrote recently, “We may once again see the publishers announce another round of significant staff reductions before year end in an effort to bolster 2007 financial performance.”

Belo has already announced a buyout plan at the Dallas Morning News for 85 newsroom employees – 20% of its editorial staff -- the Washington Post saw 170 employees take early retirement in June, but the saddest case my be in Ohio at the Beacon-Journal – the one Knight-Ridder newspaper that McClatchy could not find some local ownership connection and so sold it off to Canada’s Black Press Holdings.

The company said originally it expected not to make any layoffs, but a month later it has now announced 40 newsroom layoffs – 25% of editorial staff -- and will cut further jobs in other departments. How those employees must now hate McClatchy and Knight-Ridder and remember back to the days when it was the flagship of the Knight empire, before Ridder came long. The paper has won four Pulitzer Prizes.

If that is not to be the continuing future of newspapers then they must adhere to what Mark Nisenholtz, senior VP for digital operations at the New York Times who obviously has a bias towards digital, told Business 2.0 Magazine.  “The signal change of the past 18 months is that there are no pure print people left,” he said. Everyone is now into print and the Internet.

There are a lot of publishers and editors out there who disagree – who believe that since print is the medium people pay to read then that is the medium to be protected at all costs. Breaking a newspaper story on the Internet is nonsense as far as they are concerned.

And unless those editors and publishers do not come around to the view that is not ink on paper but rather making the best use of all possible mediums – print, Internet, mobile and the like so that they all complement one another  -- then it will be those same people who will be turning those print lights out in 2043.

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WAN Takes Issue With The Economist - September 28, 2006

No international newspaper organization is going to accept the premise of The Economist’s headline from an August Issue “Who Killed the Newspaper?” and now the World Association of Newspapers (WAN) has made its view abundantly clear – newspapers are not dead.

WAN CEO Timothy Balding did not hold much back at a September publishers meeting in Moscow when he commented on The Economist article:

“Unfortunately for The Economist and its reputation as a serious journal, the facts about the health of the newspaper industry in almost all respects contradict that headline and the poorly researched story behind it. We, and all of you, I’m sure, are well used by now to the mythological and frankly mendacious picture that is being painted of a press industry in agony and fast approaching its end. This picture is simply untrue.

“Yes, the newspaper business is in transition, yes, there are unprecedented challenges to all of us from new technology, new news distribution platforms, new audience and advertiser needs. It nevertheless remains the case that newspapers remain incredibly strong and influential and that we have learned to adapt and change and turn many of the new media evolutions to our advantage.”

So there.