It’s A New Year But For Newspapers It’s The Same Story -- Share Prices Hitting 52-Week Lows With Advertising Declines Accelerating, But The Sliver Of Silver Lining Is That Web Display Advertising May Shoot Up And Newspapers Must Take Advantage

Philip M. Stone January 8, 2008

US Newspaper ad revenue declined 8.6% in 2007, according to JP Morgan analyst Imran Khan, far worse than the 1.7% decline in 2006, and he believes the decline will accelerate in 2008, but that will be positive for online search and display advertising. Now if newspaper web sites could only increase their web display advertising share then all may not be lost, but it doesn’t look like they are.

Newspaper market value for publicly traded companies have reached levels that no-one would have imagined even a year ago. McClatchy shares went under $11 a share last week, and they closed at $11.32  Monday. Remember this is the company that on  March 10, 2006,  the day it announced it was buying Knight-Ridder, had a $54.24 closing share price. The deal cost about a net $4 billion after dumping those newspapers it didn’t want, and yet today the company’s market capitalization is under $1 billion – at some $930 million. McClatchy valued at under $1 billion? If ever there was an opportune time for the family to take the public company …  

And talking of families, although the Sulzbergers have always denied thought of taking the New York Times Company private, its share price is also hemorrhaging closing Monday at $16.84 -- that’s down some 28% in the past 12 months. nytimes.com plays an important part in the company’s future so the announcement Monday that it and CNBC have teamed up to share material on one another’s web site should not go unnoticed – indeed if you were watching CNBC on Monday there was no way that deal could go unnoticed so heavily was it promoted. As one example, in a five-minute interview with Larry Ingrassia, the Times’ business news editor and his CNBC equivalent each was congratulating the other on what a great deal it is. CNBC benefits from getting some good NYT business text news on its web site  and nytimes gets CNBC video which will keep people on its site longer (remember time spent on the site is the up and coming measurement tool).

Unsaid was how the combination makes sense in fighting Rupert Murdoch. Both companies are facing competition from Murdoch – the NYT from the  Wall Street Journal and CNBC from his new Fox business cable business channel (which apparently has less than 10,000 viewers daily according to the first figures released this year), so a growing relationship between Murdoch’s principal targets seems a natural.

But as a classic case of what is happening to American newspapers take a look at the Seattle Times. The publisher has written staff that for the years 2007 and 2008 the newspaper expects a drop in print revenue of $33 million. The company has found ways to save $21 million for the coming year but executives still need to find another $6 million in savings. “With the company at bare bones, these cuts will hurt deeply going into 2008 and the remainder of the decade,” according to publisher Frank Blethen.  And this from a newspaper, incidentally, that already sees 10% of its revenue coming from digital activities. The Blethen family owns 50.5% of the newspaper, and hapless McClatchy owns the rest from the Knight-Ridder deal.

The message is pretty clear for newspaper groups that they need to increase their online revenue as quickly as possible as there seems to be no respite in site for print advertising declines. If it is a given that newspaper print advertising revenues are going to decline even more, then it is plain common sense for newspapers to be active where that ad money is flowing – the digital world.

Khan, the JP Morgan analyst, said he believes that online display advertising rates will increase by some 4% in 2008 and that CPM-based display ad revenue will increase by 20% by 2009 hitting some $10 billion. Khan says that currently some 85% of display advertising revenue is sold at less than $1/CPM so if a newspaper web site can actively increase its visitors and at the same time increase its CPM rate by even just a few pennies then that will make a big difference to the bottom line.

The bad news from Khan, however, is that even though online continues to race to new heights the speed of acceleration is slowing. “We expect revenue growth to decelerate to 21.2% in 2008, from 25.6% in 2007,” Khan said. But whereas newspaper companies are doing far worse than the general stock market, he sees online businesses doing very well, far exceeding the gains of general stock market. “We are projecting 34% earnings growth for our coverage universe, compared to 8% for the S&P 500” (an index containing the stocks of 500 Large-Cap corporations, most of them  American). TNS Media Intelligence in a report Monday forecast that online display advertising should grow some 14.4% in 2008.

But with fears of recession hitting the US all bets could be off. A recent Advertisers Perceptions survey of 2,047 US ad executives indicates that many do not believe their budgets will increase during the first half of this year over the same period a year ago. Online is still the medium that will see the most gain according to 97% of those surveyed but when it comes to newspaper print advertising around 85% believed that it would stay the same or decrease, with a sizeable one-third thinking there will be a decrease.

Newspaper web sites should be gobbling up much of this increased web  business but according to a report from Borrell Associates local newspapers are actually seeing their share of online revenue  reducing as the spend goes up. Newspaper web sites are not keeping up the pace, having 44.12% of the local online market in 2004 but only 33.4% in 2007. Much of that loss can be put down to the growth of local TV web sites that have the local video surfers crave while newspapers are still just getting into the video game.

So now some larger metropolitan newspapers are trying to play advertising catch-up, hence the deals they are making with such companies as Yahoo who are far too smart to get into the print newspaper game themselves but smart enough to offer newspapers a national online-ad sales network and make money from newspapers.

The real task for newspapers is to fully integrate their online and print advertising platforms to offer media buyers an unbeatable combination. It seems such a common sense thing to be doing, but many publishers still focus on the larger revenue that print produces – online, after all, provided on average just 7.1% of Q3, 2007 newspaper revenues according to the Newspaper Association of America, and most forecasts don’t expect that to double to a meaningful level for at least five years.

So print will be the mainstay for some time to come – hence that is where the main effort remains -- but the only way that print is keeping decent margins is by cutting and cutting and cutting costs. Newspapers today talk of new business models but what that really means to print newspaper readers is that they are getting less and paying more, and they know it.   It’s understandable that publishers want to protect as much as possible the existing business, but read the writing on the wall and put great effort, too, into gaining the new digital revenues that newspapers must have to survive.

As Gordon Borrell, chief executive of Borrell Associates, put it, “Newspapers are tied too closely to defending their print products and have not seen the Internet as an innovative and competitive tool to go out and compete.” He might have added they keep to that philosophy at their peril.

Borrell believes a major newspaper problem is using the same sales staff for online and print. Convergence seems on paper to make sense -- it costs less -- but does it actually provide the higher margins?

“Nearly all local media companies that have focused on convergent sales strategies have begun experiencing slower growth. They may be reaching a saturation point at which their traditional reps have sold all the online advertising they can to their existing customer  base,” the Borrell report said. “The option that a single operation can successfully deliver content in multiple media types has rarely worked for local media in the past, especially when it includes the expectation that a single rep will sell multiple products at wildly different price points.”