Can Print Cut Enough Fixed Costs, And We’re Not Talking Editorial, To Survive The Long-Term Structural Shift To Digital Advertising?

Philip M. Stone June 10, 2010 Follow on Twitter

Gannett says its Q2 earnings are going to come in at the high end of estimates; Moody’s says print revenues will stabilize by next year, so does that mean happy print days are here again? Regretfully, no.

Read the details of the Gannett announcement and all the improvement is coming from the broadcast division. Print is still seeing advertising declines, albeit not at the horrible percentage levels of the past couple of years but still declines. And Moodys warns that after some stabilization that 2012 could turn bad again. So the long-term print outlook remains negative and even if the US economy continues to get better and advertising increases it’s digital that will benefit the most.

Moodys says print’s “long-term outlook is still negative”. Translated, that means this year will see a 10-15% print ad fall which is good news when you consider last year it fell by 27%, and in 2011 Moody’s says there’ll either be a slight fall or perhaps a slight increase. But in 2012 Moodys thinks it will definitely turn negative again, as it will for later years, because it says there will be a fundamental shift underway of the ad spend from print to digital.

Sure, print is getting digital to pay via various platforms, top among them being tablets, with advertising rates today some four or five times higher for tablets than for web sites, but will those rates hold?  What obviously is true is that newspaper publishers no longer think of themselves as just in the print business but rather they are producing products available on as many platforms as possible of which print is just one.

And yet even with Moody’s negative long-term view of print, investors are still putting new money into getting newspapers out of bankruptcy, or buying them at valuations perhaps 50% or more less than just two years ago. But Moody’s is still rating those investments as “speculative.”

Take the $700 million of notes issued a couple of weeks back as part of the $1.1 billion price tag for Canwest Newspapers. Moodys has rated the $400 million six-year senior secured loan as having “speculative elements” and the $300 million eight-year second lien as “lacking characteristics of a desirable investment.”

And that’s for loans on which Moody’s think the new owners have all the right ideas. “In addition to normalizing the debt load, and with it, leverage and coverage measures, management plans to reposition the business as an aggregator and manager of news and current events content. Simultaneously, we expect CWLP to continue to restructure operations and expect outsourcing efforts will be key to re-positioning the company as an advertising-based digital age news and current events content company. We anticipate reduced capital expenditures and enhanced operational flexibility at the cost of reduced start-to-end of the process control, and reduced margins.” Given that, the actual ratings seem to lack the confidence of the verbiage.

Note what Moodys said about outsourcing. This is becoming more and more a part of its analytics. It doesn’t like that newspapers spend only about 14% of cash costs on editorial while 70% of costs go to printing, distribution, and corporate functions. So, Moodys wants capital investment cut way back – forget new presses, for instance, outsource that job – and it wants far less money spent on delivery – outsource that, too --  and it believes more should be spent on a better editorial product that will improve sales on the digital platforms. About time the money people caught on to that one!

What Moody’s sees as the disease still  infecting print is the combination of high fixed costs and high debt which is why it is still nervous about newspaper debt. “If newspapers can't monetize the content in new digital channels at the same level as with print, or cut structural costs enough to keep up with the changing competitive environment, the prospect of additional recapitalizations or shutdowns will grow, adding further pressure to ratings,” the ratings agency warned.

“This disconnect is a legacy of the industry's vertical integration beyond content creation and into the production and distribution of newspapers. Ultimately, we expect the industry will need to reverse the vertical integration strategy through cross-industry collaboration and outsourcing print production and distribution processes. Although newspapers may lose some of their in-house control over press time, they would also release resources to beef up investment in content and technology.”

And publishers have understood this. More and more neighboring newspapers, not just co-owned but also competitors, are joining forces in ways not thought possible just a few years ago – they are delivering one another’s papers in outlying overlapping circulation areas, they are even printing the competition – all in a determined attempt to get capital investment down, and make the best use of capital investments already made. Just a couple of weeks ago, for instance, the Detroit newspapers, that had stopped home delivery four days a week last year, announced they will sell newspapers in bulk  to independents at a fixed price and it is their  business to sell the delivery subscriptions at a price they set. 

And that’s why the financials for tablet platforms are so important – very few fixed costs. There are a lot of “ifs” involved, but if tablets become as popular as PCs, and if advertisers continue to pay high rates for tablet impressions, and if Apple and the other vendors don’t get too greedy with their revenue splits, then tablets may well explode financially as the newspaper/magazine platform of choice.

Just think, for that platform no newsprint costs, no ink, no delivery trucks, no presses; just far higher margins for a product already produced for print with just some added bells and whistles. Perhaps the margins won’t climb as high as when print was in its prime with 30%+, but who knows maybe with the reduced cost base for that platform even that might be possible. Anyway it’s still something to dream about.