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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.1 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.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 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 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 2000.7

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.8 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.


1. Newspaper Association of America presentation (Washington, D.C.). “Why the Current Business Model Needs to Change.” Published April 21, 2004. Available on line at

2. “Newspaper Advertising Rises Nearly 4 Percent in Third Quarter.” Newspaper Association of America Website, November 18, 2004. Available on line at:

3. press release, October 12, 2004. Available on line at:

4. Rick Edmonds, “What Top Executives Are Talking About.” Poynteronline, June 25, 2004. Available on line at:

5. Deutsche Bank Securities (New York, New York). “Wal-Mart takes a bite out of local.” Paul Ginocchio et al. Published September 20, 2004.

6. Newspaper Association of America presentation (Washington, DC). “Why the Current Business Model Needs to Change.” Published April 21, 2004. Available on line at

7. Merrill Lynch (New York, New York). “Newspaper Industry Primer (8th Edition).” Lauren Rich Fine. Published August 26, 2004.

8. Merrill Lynch (New York, New York). “The Newspaper Industry.” Lauren Rich Fine. Published June 21, 2004.