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The publishing industry has long been grappling with sinking advertising revenue, and the recent global economic meltdown has worsened the situation. This comes in the wake of a longer-term secular decline as more readers choose to get news free online, thereby making the print-advertising model increasingly irrelevant.
Circulation Falling Prey to Internet
Newspapers have fared far worse than magazines, as web-based news options have proliferated in recent years. The two-decade-long erosion in newspaper circulation reinforced the decline in advertising revenue.
Most media observers viewed 2009 as a watershed for the industry. Circulation has also fallen prey to budget cuts with newspaper companies reducing the number of print pages and newsroom staff to combat the downturn.
The slide in newspaper circulation, which ran through the 1990s and through the 2000s, is accelerating. Earlier, the circulation of newspapers was falling by less than 1%, but the rate of decline jumped to 2% in 2005, 3% in 2007 and 4% in 2008, with more and more readers migrating to the Internet.
However, recent data, issued by the Audit Bureau of Circulations (ABC), indicates that the rate of decline in circulation is easing. Newspaper circulation tumbled 5% for the six months ended September 30, 2010, reflecting an improvement over a decline of 8.7% registered for the six months ended March 31, 2010.
Despite the fall in newspaper circulation, some companies are reporting higher revenue from circulation due to the increase in subscription and newsstand prices. While the increase in prices for print editions is generating more circulation revenues, it is also resulting in subscriber losses due to the shift in preference for free online content.
Newspaper Advertising Trend Improves
With the gradual improvement in the economic scenario, positive trends are being witnessed in both print and digital advertising with advertiser spending gaining its pace. Consequently, the rate of decline in advertising revenue is decelerating.
According to the data released by the Newspaper Association of America, total advertising revenue for U.S. newspapers slipped 5.6% in second-quarter 2010 (April to June) to $6.4 billion, after falling 9.7% in the previous quarter, reflecting the 16th consecutive quarter of decline. The trend reveals a gradual improvement in the advertising environment.
Print advertising declined 7.6% to $5.6 billion, after declining 11.4%, 25.6%, 29% and 30.2%, respectively, in the previous four quarters. Classified advertising revenue dipped 6.3% to $1.4 billion, following a drop of 14.4% and 31.7% in the previous quarters.
Total advertising revenue at The New York Times Company ([url=http://www.zacks.com/stock/quote/nyt]NYT[/url]) dropped 1% in third-quarter 2010. At Gannett Co. Inc. ([url=http://www.zacks.com/stock/quote/gci]GCI[/url]), publishing advertising revenue dropped 5% in third-quarter 2010.
Print advertising revenues tumbled 8.1% at The McClatchy Company ([url=http://www.zacks.com/stock/quote/mni]MNI[/url]) in third-quarter 2010 and 6% in second-quarter 2010 at The Washington Post Company ([url=http://www.zacks.com/stock/quote/wpo]WPO[/url]), respectively. Publishing advertising revenues dropped approximately 10.3% at Journal Communications, Inc. ([url=http://www.zacks.com/stock/quote/jrn]JRN[/url]) in third-quarter 2010. Newspaper advertising revenues, excluding online advertising at The E.W. Scripps Company ([url=http://www.zacks.com/stock/quote/ssp]SSP[/url]) fell 7.1%.
Online Advertising Gaining Traction
The Internet-based advertising model, which also fell prey to the economic downturn, is now re-gaining traction. According to the data released by the Newspaper Association of America, online advertising revenue climbed 13.9% to $743.9 million in second-quarter 2010, after rising 5% in the previous quarter.
Advertisers are migrating to the Internet driven by increasing online readership and lower advertising prices online than print.
Revenues from Washington Post’s online publishing activities, mainly washingtonpost.com and Slate, rose 14% to $26.9 million in second-quarter 2010. Display online advertising revenues jumped 20%, and online classified advertising revenues on washingtonpost.com rose 5%.
Online advertising revenues at McClatchy rose 1.6% to $47.5 million, helped by retail and classified advertising, including auto, real estate and employment as major categories but were offset by national advertising.
Online newspaper advertising revenues at E.W. Scripps slipped 4.2% to $7 million in third-quarter 2010, as most of the online advertising is tied to print classified advertising, which remained weak during the quarter. Pure play online advertising revenue climbed 7% to $4.2 million. Internet advertising revenues at The New York Times Company surged 14.6%.
Efforts to Mitigate Losses
In an effort to offset declining revenues and shrinking market share, publishers are scrambling to slash costs. This has compelled many newspaper companies to undertake cost-cutting measures, such as the trimming of headcount, pay cuts, furloughs, suspension of dividends and matching contribution to employee 401(k) funds, voluntary retirement program and closure of printing facilities. Asset sales, even at trough valuations, have proven to be a less viable option in the midst of tight credit markets.
The Tribune Company, owner of the Los Angeles Times and Chicago Tribune, had filed for bankruptcy. Newspaper companies such as McClatchy, Gannett and The New York Times Company have trimmed their headcount.
To curb shrinking advertising revenues and improve market shares battered by the recent economic downturn, the publishing companies are now even considering charging readers for online content. Newspaper companies have been remodeling and restructuring themselves to better align with the growing need of marketers, targeting younger people, affluent households and other demographic groups with multiple web and print publications.
The publishing companies are adapting to the changing facet of the multiplatform media universe, which currently includes mobile, social media networks and reader application products in its fold.
Publishers now do not concern themselves about the total number of copies distributed, but focus more on whether copies reach the target audience. This strategy helps newspaper companies attract advertisers and, in turn, generate more revenues for each copy sold.
Year 2011: Pay As You Access
Over the last two years, newspaper companies have remained focused on transforming their business models to better position themselves to a multiplatform media universe. Although the U.S. economy is witnessing signs of recovery with a sluggish improvement in the advertising environment, we believe 2011 will not mark the resurrection of the publishing industry. However, it is expected to fare better than 2009 and 2010, as steps taken to curb the mayhem start paying off.
With steadying newspaper budgets, we should see fewer layoffs, more focus on web and local content, reduction in print pages dedicated to business or sports content, increase in subscription and concentration on profitable circulation.
News Corporation ([url=http://www.zacks.com/stock/quote/nwsa]NWSA[/url]) has taken a leap towards an online subscription-based model for general news content. News International, a subsidiary of News Corporation, began charging readers for online content for The Times of London and Sunday Times of London effective June 2010.
Rupert Murdoch, the Chief Executive Officer of News Corporation, has long been pushing for the online subscription model for all general news websites. But newspaper companies have been reluctant to tow the line for fear of losing readership and, in turn, advertisers.
Business newspapers, such as Financial Times and The Wall Street Journal (owned by News Corporation) have long been following an online pay model. But levying access charges on readers for online access to general news content is a first for any news publication.
Another media giant, The New York Times Company, has already taken a leap towards the paid model. During third-quarter 2010, the company’s New England Media Group property, the Worcester Telegram & Gazette, launched a subscription-based model for its website.
The New York Times Company also plans to introduce a 'pay and read' model for NYTimes.com in 2011, with plans to launch a paid subscription website, BostonGlobe.com in the second half of 2011. The company will adopt the Financial Times' metered system, where readers after browsing a certain number of free articles, are being asked to subscribe.
However, we believe, people will be reluctant to shell out if the content is available free of cost elsewhere. To combat this, Rupert Murdoch has been devising ways to prevent Google Inc. ([url=http://www.zacks.com/stock/quote/goog]GOOG[/url]) from accessing News Corporation’s articles or content through its Internet search engine.
Despite the tough times faced by the publishing industry, there are a number of defensive names in the group that can hold their ground. Companies are radically changing their business models to fall in line with industry trends.
Gannett ([url=http://www.zacks.com/stock/quote/gci]GCI[/url]) is diversifying its business by adding new revenue streams to make it less susceptible to economic conditions. The company is also streamlining its cost structure, strengthening its balance sheet, and rebalancing its portfolio. The company is witnessing higher broadcasting and digital revenues. Consequently, the company posted better-than expected third-quarter 2010 results.
Moreover, with advertisers gradually returning to the market, Gannett hinted that the rate of fall in advertising revenue is decelerating. The company holds a Zacks #3 Rank, which translates into a short-term Hold rating.
The newspaper industry has long been grappling with plummeting advertising revenues due to economic headwinds. Although murmurs about advertisers returning to the market are gaining ground as the economy recovers, but a full recovery has been elusive thus far.
The New York Times Company’s ([url=http://www.zacks.com/stock/quote/nyt]NYT[/url]) third-quarter 2010 earnings dropped more than 50% from the prior-year quarter. The company’s top line also dipped 2.7% following a fall in print advertising and circulation revenues. The company cautioned that circulation revenue in the fourth quarter might fall by 4% to 5%. A slowdown in digital advertising has also led the company to forecast a 10% rise for the fourth quarter as against a 14.6% growth in the third quarter, reflecting sluggish advertising trend.
We are also apprehensive of potential risks that the company faces from its high dependence on advertising revenues. To mitigate this, the company is adding new revenue streams by diversifying its business, thereby making it less susceptible to economic conditions. The New York Times Company holds a Zacks #4 Rank, which translates into a short-term Sell rating.
We currently have a neutral outlook on publishing stocks, which is reflected in its Zacks Industry Rank of 116 out of 255.
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