With Circulation Spiraling Down and Internet Advertising Increasing, What Is The Newspaper Industry’s Solution for a Financially Successful 2006? It’s to Hike Up Advertising Rates and Increase the Cover Price! When Will They Learn?

On both sides of the Atlantic it seems that newspaper publishers anxious to hold onto their 20% margins in an ever-increasingly competitive market for news and information haven’t many new ideas on how to do it, so its back to raising prices in a declining market. Kind of makes you wonder what business school these people went to?

In the US some of the largest newspapers – many of them suffering major circulation declines due mostly to the Internet and no longer counting bulk copies, and experiencing flat advertising revenues as more of the ad budget is spent online -- are talking of 2006 advertising increases that in some cases could approach 6%. This in a climate when overall US circulation dropped 2.6% in the last six-month reporting period, and Fortune 500 companies say they are going to increase their Internet spend by some 30% this year.

And in the UK, the Guardian and Independent national newspapers have already increased their cover prices by 10p (17%) daily.

USA Today is talking of a 6% advertising increase compared to 8% in each of the past two years. The 8% increase last year contributed to a 6% decline in paid advertising pages, and there is every reason to believe a 6% advertising increase is going to reduce those paid advertising pages even more. Only the bean counters will know at what point the exact wash occurs.

The Boston Globe that saw circulation drop 8% in 2005 is talking of a 3% ad rate increase for 2006. That’s going to be a hard sale.

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According to TNS Media Intelligence’s most recent quarterly survey of ad spending planned by Fortune 500 marketing bosses, they expect to increase their online spend by at least 30% in 2006 over 2005. Now that’s not 30% additional money – it means about the same spend is going to be divided differently between various media with those being thought to giving the most value for money doing best. And that’s the environment in which US publishers want to increase their ad rates. That’s not going to be easy, given that many advertising houses are publicly saying they no longer see newspapers as value for money. It also explains why US publishers want to count readers to their popular online sites within their readership numbers.

When it was “business as usual” (before the Internet came along) US newspapers were used to annual advertising increases of around 4% to maintain 20% margins. Circulations were usually steady or increasing and the advertiser’s choice in those days was to decide how much to spend on newspapers vis a vis radio, television, magazines and outdoors. But the Internet has changed all of that.

The TNS report caused Credit Suisse (CS) to dramatically alter its online ad spend forecast for this year. Whereas CS had previously forecast the US 2006 advertising spend to increase some 21% to $14.9 billion, the bank has now revised the spend upwards to $16.6 billion – a 32% increase.

Of course all of that needs to be put into perspective – it means the total advertising spend on the Internet will be about 6.5% in 2006, up from 5% in 2005, but the Internet is still a small fish in a large advertising pond.

But those extra billions that will be spent online have to come from somewhere else – it is not going to be all new money.

One silver lining for newspapers is that they are not the print media in the most trouble. Those Fortune 500 managers indicated they were looking first at severe ad cuts in magazines.

According to a research analyst at Credit Suisse, consumers now spend about 30% of their media time online whereas the current online spend is just 5%. Again, not rocket science to figure out where the advertising spend is going to grow.

Newspapers could do well to learn lessons from their advertising retailers. At the Wall Street Journal, newly named ceo Rich Zannino, who has years of financial experience with such firms as Saks 5th Avenue and Liz Clairborne sees the way to growth not so much by increasing advertising rates but rather trying to entice additional advertisers.

The Journal last year raised ad rates 4% and ended up with a 2.1% decrease in advertising linage – how much of that decrease was due to the ad rate hike or just plain softness in the technology and financial advertising sectors only the accountants will know -- but this year the Journal is settling for a 2.5% ad rate increase -- still rather a risk given the softness of the Journal’s bread and butter advertising sectors.

Back in the UK, newspapers have been spending millions redesigning themselves. The Guardian recently switched to Berliner size at a cost said to have been around £100 million -- what with new color presses and all -- but after some early marketing successes that saw circulation on some days said to be up by some 60,000 helped by free DVD giveaways the “newness” has worn off and the Guardian has little new circulation to show for its reformat.

The Guardian’s circulation had sunk to its lowest point in years shortly before the launch and the financials were not been helped by a long continuing softness in the public sector advertising on which it is particularly dependent.

So the answer to all this from management is that beginning this week the Guardian raises its daily price by 10p to 70 pence, matching an increase last week by the recently compact formatted Independent.

That’s two newspapers with serious cover price increases. It seems hard to believe that it was just last year that The Times signaled an end to the 12-year cover price war in the UK by raising its price to 60p. Rupert Murdoch, owner of The Times, recently said the days of the newspaper cover price wars are over. It seems UK publishers have seen that as a green light to increase prices.

But if the public weren’t willing to pay 60p for the newspaper then what makes publishers believe they will be willing to pay 70p?

The main problem that newspapers face is that while their Internet properties are doing very nicely indeed that total Internet revenue does not yet come close to matching what is earned from print. And while that shortfall is as prevalent as it is it seems the main game in town continues to be to savage costs and to increase prices.

As the Wall Street Journal got some new retail blood into their senior management to see such situations with different eyes, that might not be a bad idea for other publishing houses, too.