Newspaper Economics

Profit margins in the newspaper industry were one of the better economic figures of the year, at least on the surface. They were off just a bit from 2004. The 13 publicly traded companies fell an average of 1.5 percentage points to just below 20%. The average pre-tax operating margin for these companies was still higher than the high-flying pharmaceutical or oil industries. That figure, though, clearly did not impress investors, who now put little weight on profitability alone. Big profit margins on flat revenues, for example, suggest a stale industry to Wall Street.3

The investment community is now more focused on revenue growth (what they call the “top line”) and on the broader question of whether newspaper companies are nimble enough to invent new business models and find a way to grow in the Internet era.

When it came to revenues, Wall Street was far from excited. Total revenues from newspaper operations at those companies rose only an average of 2.2%.4

Newspapers generate their revenue from two different sources, circulation and advertising. In 2005 the ratio was roughly 20% circulation to 80% advertising. Two decades ago the ratio was closer to 30%-70%, but as circulation has declined the percentage it contributes to total newspaper revenue has also gone down.

Circulation revenue was down at most companies, 3.5% on average for public companies . At Tribune, the country’s second largest newspaper chain in revenues, for instance, it was off 7%.5

As for advertising, the newspaper business has historically followed the country’s general economic cycles, falling slightly in advance of a recession and rallying in the early stages of an upturn. During the last serious downturn in 2001 investors stayed calm as both revenues and earnings fell. In 2004 and 2005, however, there was nothing especially ailing in the economy, yet advertising growth went soft anyway. The Newspaper Advertising Association estimated overall ad revenue growth in the first three quarters of 2005 to be 3%.6 The fourth quarter was even worse.

An obvious culprit is the movement of ad business to online. It is not so much that advertisers are quitting newspapers in droves; they are not . Surveys consistently show, though, that companies are leaving their print and broadcast ad budgets flat and increasing online display and straight-to-the-consumer online marketing. Examples abound, from the auto companies’ design-your-own-car sites to Expedia and other book-it-yourself travel services (like Hertz, which went six months without advertising in the New York Times).

Newspapers are far from outright losers in the online game. Ads on their sites continued for a fourth straight year to grow at rates of 30% to 60%, faster than online advertising as a whole. But the online rates are much lower than print rates. What’s more, Google and Yahoo grew even faster, with the great majority of their revenues from advertising, and they have become the stock market’s darlings.