Newspaper Economics

One of the most critical business questions at this juncture is whether newspapers are losing their power to raise ad rates as circulation losses accelerate. In many ways the biggest strength of the industry in the expansionary 1970s and 1980s was its ability to raise advertising rates 5% or 10% a year, even without growing circulation, and with little market resistance. Competition first began to emerge in the 1990s from diverse quarters like alternative weeklies and publications like the Auto Traders, a group of free specialty publications that consisted of nothing but listings of cars for sale. Ad rates still rose, but by a little less.

Then Internet competitors — some of them very well capitalized like Google and Yahoo — came along and changed the landscape unmistakably by matching ad placements to topical searches.

Even amid the new competition, though, newspapers have had an advantage over other media. Their advertising rates have never been tightly tied to circulation numbers (unlike magazines, where publishers guarantee a rate base and refund advertisers money if they fail to meet it). Historically, many advertisers simply have wanted to be in the newspaper, diminished reach or not. It has continued to deliver the single largest audience (in most places all local television stations combined draw more people, but no single one does.) That is the short explanation of why big circulation losses have not translated directly into lower sales, profit margins, and earnings.

The circulation losses of 2005, though, may finally be great enough to curtail the papers’ bargaining power. If they lose their leverage in negotiating packages with advertisers, that might cause advertising revenues to begin to fall rather than merely flatten.15 As soon as that happened for a year or two, it would signal the erosion of newspapers’ hold on local-market advertising and cement the industry’s going-nowhere image on Wall Street .

The issue is central enough that several companies broke with the tradition of confidentiality surrounding advertising rates and got specific about price increases in December 2005 Media Week presentations to investors. The New York Times said it planned a 5% increase at the mother paper and an average of 3% at its New England and regional groups. USA Today planned a 6% increase, Tribune between 3% and 6%.16

Those companies offering revenue forecasts were guarded. Gannett, for instance, reported 3.4% total newspaper revenue growth in 2005. It forecast “low to mid-single-digit growth” in 2006. With the online contribution at Gannett up nearly 50% for 2005, traditional print advertising is weak.

In short, 2006 shapes up as a testing year.