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Industry Outlook

The publishing industry has long been grappling with sinking advertising revenue, and the global economic meltdown has worsened the situation. The economic downturn came 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. Circulation has also fallen prey to budget cuts with newspaper companies reducing the number of print pages and newsroom staff to combat the downturn.

Despite the fall in newspaper circulation, some companies are reporting improved revenue from circulation due to the increase in subscription and newsstand prices. On the flip side, while the increase in prices for print editions is generating more circulation revenue, it is also resulting in subscriber losses due to the shift in preference for free online content.

Newspaper Advertising Revenue Still in Red

According to the data released by the Newspaper Association of America, total advertising revenue for U.S. newspapers slipped 6.9% in second-quarter 2011 (April to June) to $5.99 billion, after falling 7% in the previous quarter, marking the 20th consecutive quarter of decline. The last time the Industry witnessed an increase in revenue was in the second quarter of 2006.

Print advertising declined 8.9% to $5.19 billion, after declining 9.5%, 6.8%, 7.1% and 7.6% in the previous four quarters, respectively. National advertising sales declined 8.8% to $985 million, retail dropped 8.1% to $2.96 billion and classified plunged 10.9% to $1.25 billion during the second quarter.

Print advertising revenue at The New York Times Company (NYT - Analyst Report) dropped 6.4% in second-quarter 2011. At Gannett Co. Inc. (GCI - Analyst Report), publishing advertising revenue dropped 6.5% in second-quarter 2011.

Print advertising revenue tumbled 11.8% at The McClatchy Company (MNI) and 12% at The Washington Post Company in second-quarter 2011. Publishing advertising revenue dropped approximately 9.7% at Journal Communications, Inc. (JRN - Snapshot Report). Print advertising revenue at The E.W. Scripps Company (SSP - Snapshot Report) fell 7.7%.

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 8% in second-quarter 2011 to $803 million from $744 in the prior-year quarter, reflecting a sixth consecutive quarter of growth, and contributed 15.5% of total revenue, up from 11.6% in the year-ago quarter. Advertisers are migrating to the Internet driven by increasing online readership and lower online advertising prices compared to print.

Digital advertising revenue at McClatchy rose 1.6%, helped by retail and classified advertising, including auto as a major category, but was offset by national advertising. Total digital advertising revenue at The New York Times Company grew 2.6%, whereas digital advertising revenues at the News Media Group surged 15.5%.

Efforts to Mitigate Losses

In an effort to offset declining revenue and shrinking market share, publishers are scrambling to slash costs. This has compelled many newspaper companies to undertake cost-cutting measures, such as trimming of headcount, pay cuts, furloughs, suspension of dividends and matching contributions 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.

To curb shrinking advertising revenue 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 multi-platform 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 revenue for each copy sold.

Pay As You Access

The newspaper companies are transforming their business models to better position themselves in a multi-platform media universe. Although the U.S. economy is witnessing 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 2010.

With steadying newspaper budgets we could 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 (NWSA - Analyst Report) 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.

Despite global economic unrest and losing its lustre in the stock market on account of the recent phone hacking scandal that resulted in the closure of the News of the World publication, and no longer able to acquire the remaining 61% stake in the British Sky Broadcasting Group, News Corporation posted fourth-quarter 2011 financial results that beat the Zacks’ expectations.

Business newspapers, such as The 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 moved toward the pay 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 on March 28, 2011 launched a pricing system similar to that of the Financial Times' metered system, whereby after browsing a certain number of free articles, readers will be asked to subscribe for complete access to its articles on phones, tablet computers and the Internet.

The New York Times Company has fixed monthly charges of $15 for accessing more than 20 articles on its website and a smartphone application; $20 for unlimited online access and on Apple Inc.'s (AAPL - Analyst Report) iPad tablet computer application; and $35 for online, smartphone and iPad application.

The company also indicated that the users of NYTimes.com will be able to read 20 articles per month without spending a penny. However, readers visiting The New York Times Company’s website via blog links or social-media sites such as Facebook or Twitter will be able to access unlimited number of articles. But traffic reaching the company’s website through search engines such as Google Inc. , Microsoft Corporation's (MSFT - Analyst Report) Bing and Yahoo Inc. (YHOO - Analyst Report) will be able to view five articles per day before being asked for a subscription.

We believe the success of the pay model depends on the accessibility of new articles across the web. Potential customers will be reluctant to shell out if content is available free of cost elsewhere. However, The New York Times Company notified that the number of paid digital subscribers reached 224,000 at the end of second-quarter 2011.

OPPORTUNITIES

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 get in line with industry trends.

Gannett 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 digital revenue. However, the company’s high dependence on advertising revenue, a derivative of the health of the economy, remains a potential threat.

WEAKNESSES

The newspaper industry continues its struggle with plummeting advertising revenue due to economic headwinds. Although murmurs about advertisers returning to the market are gaining ground as the economy recovers, but the positive effects have yet to be realized.

Circulation revenue has fallen prey to the Internet as web-based news options have proliferated in recent years. Publishing companies are now also introducing the 'pay and read' model, as a new revenue generating stream. However, we believe that people will be reluctant to pay extra for content, if it is available free of cost elsewhere.

We currently have a Neutral outlook on publishing industry, which is supported by the Zacks #100 Rank.

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