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Essay
Economics
By the Project for Excellence in
Journalism and Rick Edmonds of The Poynter Institute
As businesses, newspapers are strong, highly profitable and
resilient. In good times and mediocre, the industry now boasts
operating margins in the low-to-mid-20% range, a bit less
than Microsoft and Dell but higher even than pharmaceuticals.
Over the last quarter century, the business has weathered
the phenomenal rise of WalMart (only rarely a newspaper advertiser)
and the decline of traditional department stores (once the
reliable source for page upon page of display advertising).
Newspapers went with the flow as retailer preference shifted
to preprint inserts, and they developed new categories like
travel and telecommunications. What happened in 2004?
From one perspective 2004 was a solid year: ad revenues were
up about 4% over all, profits up a little more thanks to tight
cost controls, and margins matching the previous two years,
though still well off the peak of 1999 and 2000.
But beneath those numbers, there are pressures on revenues
and profits that seemed more downbeat in 2004 than before.
Ad Revenue
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.
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.
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.
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.
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.
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.
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
more in the 2005 discussion on the ethnic press)
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. (See
more on online
content)
Profits and Stock Performance
Even in a sluggish year, newspaper profits remains strong.
Public companies used a good share of cash flow to buy back
their own stock, pumping up earnings per share by leaving
fewer shares on the market. Add in tight cost controls, and
the public companies were able to increase earnings per share
by about 8%, twice what ad revenues grew.
The industry was treading water, though, on operating profit
margin. The Merrill Lynch analyst Lauren Rich Fine estimated
it at 22.9% in 2004, dead even with 2003 and down from 23.8%
in 2002. Fine predicts margins will inch up to 23.1% in 2005,
but that's still well below the pre-recession peak of 26.6%
in 2000.
It was also a bad year for newspaper stocks. They far outperformed
the weak market of 2001-2003, reflecting investor preference
for "dull" but reliable stocks and a conventional
view that newspapers come roaring out of recession. But 2004
didn't provide the expected ad-growth bounce, and both analysts
and their investor clients turned more negative on advertising
and circulation growth prospects. Tribune Company trailed
the market average by nearly 20%. The New York Times Company,
Dow Jones, Knight Ridder and Gannett were flat or slightly
down for the year. The Washington Post Company, Pulitzer and
Scripps were comparatively strong performers, based on the
healthy growth of their non-newspaper divisions (such as educational
services and lifestyle cable networks).
Fine also compiles data on circulation revenue per paid customer.
Those numbers suggest a split in strategy among the companies.
Gannett, which prices aggressively and has accepted big circulation
losses, realized $157 per paid customer in 2003. At McClatchy,
which emphasizes circulation growth and charges low subscription
rates to get it, the figure was $113 per customer.
Even though circulation is a secondary revenue source, gaps
that wide can have an earnings impact. But McClatchy's healthy
profit margins and ad-revenue growth imply that it is more
than making up the difference on the ad side what it may be
leaving on the table in circulation revenue.
Finally, it is at least likely that disappointing financial
performance and soft prospects translate into skimpy spending
on the newsroom. Publishers discovering their business isn't
as big as they thought or hoped (Dallas, for instance) have
decided they cannot afford the current level of news-editorial
effort. Tribune, whose stock performance was under particular
pressure, led this round of newsroom belt-tightening with
particular focus on the Times-Mirror properties it acquired
in 1999. Big cuts were announced for Newsday in November,
smaller ones at other papers. And with circulation dropping
sharply at both the Chicago Tribune and Los Angeles Times,
it looked as if they could be in line for cuts in 2005.
In sum, the business picture is a very mixed bag: healthy
for now but with troublesome trends in major indicators that
ultimately spill over into the resources companies are willing
to devote to their news operations.
Click
here to view footnotes for this section.
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