2005 Annual Report - Newspaper Economics

Advertising, which accounts for about 75% of revenues, may be experiencing, more subtly, some of the slow but inexorable slide evident in circulation numbers.

First off, the national economic recovery was not as robust as expected. According to the Newspaper Association of America, newspaper advertising expenditures through the first nine months of 2004 increased 3.8%, to $33 billion. Classified was up 5.1% to $11.5 billion, national up 3.7% to $5.9 billion, and retail up 2.9% to $15.6 billion.²

Results for the industry and individual companies were erratic through the year. The third quarter was up roughly 9% at Gannett, for instance, but flat for Dow Jones and The New York Times, essentially reflecting the fact that local advertising was doing better than national.³ Analysts used phrases like "sloppy" and "unsatisfying" to describe the 2004 ad recovery. At best they gave a neutral to mildly negative assessment of 2005 prospects.

Help-wanted classified, the worst problem of recent years, bounced back by 15 to 25%, but that didn't recoup the drastic drop.⁴ Stop-and-start job formation could be partly to blame, but the limited bounce-back strongly suggests that the industry has lost a share of its highest-margin category to Monster.com. and other non-newspaper electronic services.

Daily Newspaper Advertising Revenue

1984 to 2003

Design Your Own Chart

Source: Newspaper Association of America data

The 2003 data is based on fourth quarter estimates.

Many markets experienced a fresh wave of retail weakness. Others found automobiles and real estate off from last year's healthy levels. At the Mid-Year Review Conference for investors, The Wall Street Journal reported especially bumpy month-to-month ad revenue performance and a further indefinite delay in getting back to the level of the mid-1990s. That prompted an analyst to raise the question of whether executives at the Journal's parent, Dow Jones, were considering the possibility that this might be "the new normal."

Paul Ginocchio of Deutsche Bank Securities pointed to the impact of Wal-Mart and other big-box stores on the soft retail recovery. Sure, the industry coped for a while. But Wal-Mart and its ilk have continued to expand relentlessly. Since the end of the last recession in 1992, superstores' share of the general merchandise market has grown from 16% to 50%, according to data collected by Deutsche Bank. Retail ad growth at newspapers is just 1.8% for the year, compared to 4% in 1991, the first year of recovery from the last economic slump. And even the traditional department stores are shifting some of their budgets away from newspapers to data-based and direct-to-customer marketing.⁵

The Newspaper Association of America commissioned a "Horizon Watching" study of industry prospects that yielded surprisingly downbeat results. Titled, "Why the Current Business Model Needs to Change," the report spotted threatening trends in many major advertising categories. In real estate, for instance, the online virtual home tour is starting to supplant the newspaper's old role as undisputed king of the category, and entirely new business models like Lending Tree are siphoning off some of the action. The study suggested that newspapers should be exploring some radically different ways of operating, counting on fees from direct sales and higher subscription charges within 5 to 10 years to absorb 20% of the revenues now carried by advertising. The study also suggested publishing reduced, special-format editions some days of the week. Whether the traditionally conservative industry will actually reconfigure its revenue model is highly conjectural. For now the action is focused on developing on line, building both the volume and variety of advertising and broadening into niche publications.⁶

On the other side of the spectrum, both niche and online activity continued to show rapid growth, well started in 2003, through 2004. Newspapers continued to launch youth-targeted free weekly tabloids and supplements aimed at Spanish-speaking and other ethnic audiences. Daily freebies, like the Chicago Tribune's Red Eye, Quick in Dallas and a scaled-down version of The Washington Post, expanded and consolidated distribution. Red Eye even has some paying customers. The publications were approaching the break-even point, and their publishers were claiming the best of all impacts from circulation - attracting a new audience but also finding that a surprising number of those who grabbed the quick read for a daily commute bought the mother paper on Sunday or occasionally other days.

Foreign-language papers also flourished, with Knight Ridder and others entering the field. Nor is that just a big-city phenomenon. The Herald News in Fall River, Massachusetts, launched a Spanish weekly to go with a Portuguese-language supplement that is now 20 years old. In an unhappy coincidence, the two most aggressive players in Spanish-language launches - Tribune Company and Belo - were also the most prominent culprits in the circulation scandal. And scandal and Spanish-language ventures did overlap when Tribune's investigation determined that Hoy had overstated paid circulation by at least 50% and relied on the phony numbers in its boast to advertisers about passing El Diario/La Prensa in circulation. Late in the year, Tribune announced it was converting Hoy's sister startups in Chicago and Los Angeles to free distribution.

That was a useful reminder that while the immigrant, second-language audience is rapidly expanding, it is not necessarily ripe pickings for the big companies. There are plenty of long-established publications that know their local audiences. San Francisco, for instance, has six Chinese-language dailies; this whole genre of paper has flourished under the radar. Also, a Mexican-financed company announced it planned competitive launches in a number of Texas markets (see Ethnic Media Ownership).

A third category of niche is providing nice ad revenue growth, if not much editorial excitement. These free-distribution publications are typically on topics like home and garden, upscale real estate, travel, fashion and shopping. They tend to be inexpensive to produce, easy for an existing newspaper sales force to add to its offerings, and thus frequently profitable nearly from the first issue.

Finally, online has been a bright spot for newspapers in a year without many bright spots. Quarter after quarter, the public companies announced online revenue growth of 30 to 60% over the same period a year ago. Display rates are rising, especially for so-called contextual ads, customized to interests the online visitor shows by what he is reading. And many of the companies are venturing into other online commerce like auctions or direct sales.

Still, the volumes in question are small in comparison to those of the conventional newspaper. At best, some papers are beginning to claim they account for a meaningful share of ad revenue growth. They are profitable but not as profitable as the mother paper. And the industry is taking only baby steps toward charging for some specialized content like archives or supplemental sports packages.

How profitable are these sites? It varies. McClatchy said that a fourth of ad revenue growth in the first half of 2004 came from online sources. That number may be higher than most. The editor of a major Florida newspaper whose Web site is among the most popular in the country told the Project privately that for every dollar the Web takes in, the paper still takes in $60. E.W. Scripps said it expected online and niche to account for 20% of revenues within five years.

Also at issue is the fairly sluggish development of online content - with a few bright exceptions, it's often little more than a recycling of that morning's print edition.