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 has reinforced the decline in advertising revenue. Most media observers viewed 2009 as a watershed for the industry, but the picture remains gloomy.
The slide in newspaper circulation, which ran through the 1990s and into 2000, is accelerating. Earlier, the circulation of newspaper was falling by less than 1%, but the rate of decline accelerated to 2% in 2005, 3% in 2007 and 4% in 2008 with more and more readers migrating to the Internet.
According to the Audit Bureau of Circulations (ABC), newspaper circulation tumbled 10.6% for the six months ended September 30, 2009. 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 higher revenue from circulation due to increase in prices for subscriptions and single copies. At The McClatchy Company (MNI), circulation revenue climbed 5% in fiscal 2009.
Newspaper Advertising Revenue Continues to Shrink
According to the data released by the Newspaper Association of America, the year 2009 marked the lowest level in the newspaper-advertising revenue since 1986. Total advertising revenue plummeted 27% to $27.6 billion for the year. In the last three months of 2009, advertising revenue plunged 24% to $7.7 billion.
Print advertising revenue dipped 29% to $24.8 billion, with classified advertising revenue down 38% to $6.2 billion in 2009.
Print advertising revenue tumbled 31% and 23% in fiscal 2009 at McClatchy and The Washington Post Company (WPO), respectively. Publishing revenue at Journal Communications, Inc. (JRN) and Gannett Co. Inc. (GCI) dropped 20% and 28%, respectively. Newspaper advertising revenue, excluding online advertising at The E. W. Scripps Company (SSP) fell 27%.
Internet Not Immune to Downturn
The Internet-based advertising model, which appeared to be a revenue driver, has also not remained immune to the economic crisis. The financial distress seen in the economy has impacted all business sectors, including auto, real estate and retail, and has hurt advertising demand.
Adding fuel to the fire have been heavy job losses. Consequently, online advertising, including auto, employment and real estate, fell. According to the data released by the Newspaper Association of America, online advertising revenue dropped 12% to $2.7 billion in 2009, after a 2% decline in 2008.
Online classified advertising revenue on washingtonpost.com fell 24%, whereas online newspaper advertising revenue at E. W. Scripps Company plummeted 20% in fiscal 2009.
However, online advertising revenue at McClatchy rose 2%, helped by retail and national advertising, but offset by classified advertising, including auto, real estate and employment as major categories.
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 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, has filed for bankruptcy. Newspaper companies such as McClatchy, Gannett and The New York Times Company (NYT) have trimmed their headcount.
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.
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.
Year 2010, Pay As You Access
Throughout 2009, newspaper companies have transformed their business models to better position themselves in a multiplatform media universe. Although the U.S. economy is witnessing signs of recovery with a sluggish improvement in the advertising environment, we believe 2010 will not mark the resurrection of the publishing industry. However, it is expected to fare better than 2009, as steps taken to curb the mayhem will start paying off.
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.
Newspaper companies’ strategic plans involve improving advertising pricing and rates structures. The companies are now even considering charging visitors for accessing articles online.
News Corporation (NWSA) has taken a leap towards an online subscription-based model for general news content. News International, a subsidiary of News Corporation, will soon begin 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, plans to introduce a ‘pay and read’ model for NYTimes.com in 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 obstruct Google Inc. (GOOG) from accessing News Corporation’s articles or content through its Internet search engine.
OPPORTUNITIES
Despite the economic downturn faced by the publishing industry, there are defensive stocks. Companies are radically changing their business models to fall in line with industry trends. McClatchy (MNI) is transiting to a hybrid format of print and online. Management has acknowledged that McClatchy’s ultimate business model will be nearly half Internet-based.
New York Times Company’s effective cost-cutting measures and increase in newspaper price has resulted in an improved financial position. The company also plans to introduce a paid model for NYTimes.com in 2011, which will bring the media conglomerate on par with The Wall Street Journal and Financial Times.
WEAKNESSES
Weakness persists across Washington Post Company (WPO). Online classified advertising revenue on washingtonpost.com fell 24% in fiscal 2009, whereas print advertising revenue tumbled 23%. Washington Post’s magazine publishing division, whose fortunes are tied to the advertising market, is also struggling due to lower advertising revenue at Newsweek.
The newspaper industry has long been grappling with plummeting advertising revenue due to economic headwinds. Although murmurs about advertisers returning to the market are gaining ground as the economy gradually braces itself, but the positive effects have yet to be realized. The picture will become clearer as the year progresses.Zacks Investment Research
