Death Spiral Resumes in Newspapers

Where does one start in tracking the trends of the newspaper industry?  If you have been reading anything online over the last 3 years you will know that the industry has been under a significant challenge.  This went from a steady-eddie sector with predictable profits to one that looks like it is in a secular decline with no real end in sight.

This morning Goldman Sachs has a note specific to McClatchy (MNI-NYSE), but the sector itself was given a bit of a road rash if you read into their notes.  McClatchy AD REVENUE is dropping 5.2% in 2007 (according to report) and overall revenues falling 5/1% on a pro forma basis.  The classifieds are getting killed: down 12.4% in FEB and down 10.4% year to date (employment -11.3%, auto -12.5%, and real estate -15.4%).  You just have to assume that the poor housing environment is racking the paper industry that much harder.  Goldman Sachs notes that the pure-play McClatchy "ILLUSTRATES THE CHALLENGES OF THE INDUSTRY."  The few bright spots that helped in 2006 have turned south (help wanted, real estate); ad revenue declines have reached levels not seen in non-recession years.  Goldman Sachs’ research even says that "Despite Herculean efforts by publishers, virtually no amount of cost cutting or newsprint price decreases could yield earnings growth given this level of revenue decline.  We remain cautious on the newspaper industry."  Goldman trimmed this year earnings from $2.35 to $2.23 and next year estimates trimmed from $2.53 to $2.38.  We have also noted that McClatchy is one of the companies that management just might not be able to fix.

This is far from isolated.  Tribune (TRB-NYSE) posted a drop in February revenues of -3.4% from $398 million to $385 million: Publishing revenues $294M compared with $310M last year, down 5.1%; Advertising revenues decreased 5.1% to $233M from $245M; Circulation revenues were down 7.0% due to single-copy declines and continued selective discounting in home deliveries.  Tribune at least saw an increase in TV and radio broadcast and entertainment.  Does Sam Zell REALLY want to own this?

Last night the New York Times (NYT-NYSE) said revenue declined 3.6% in continuing operations fell to $246.5 million from $255.7 million in February 2006.  Advertising sales from continuing operations dropped 6 percent to $158.6 million from 168.7 million; Advertising sales for The New York Times Media Group fell 8% to $93.8M from $101.4M, due to weak sales in areas such as tech products, banking and corporate advertising; Classified Ad revenue dropped 15% to $40.9M from $47.9M as a result of soft real estate, auto and help-wanted advertising sales.  NYT at least has some of its print media hedges as it has been somewhat aggressive in its online media operations.  It owns About.com and was at least initially aggressive into new media.

Jim Cramer recently went over this last week as a sector where the advertisers were migrating away from newspapers to the web and elsewhere because they are having a hard time reaching the target audience in each ad.  This morning Cramer says in an article at TheStreet.com, "The Times is the best paper there is. I have no idea what the heck I’d do if I were running that place at this point." 

When I think of these areas that are posting drops I cannot help but think of how each area where the traffic is going.  Classifieds: losing to Craigslist.org and Yahoo!/Google.  Cars: losing to cars.com, Yahoo! Autos, Autobytel.  Jobs: Monster.com. 

Billionaires have been expressing more interest in the sector, but the papers each generally want a higher price than the billionaires are willing to pay.  That isn’t a 100% truth, but in general it holds.  The staffs on these companies are all ripe for job cuts and that really seems inevitable.  Many of these stocks had started a recovery last year after seeing a 3-year death spiral because of private equity and because these finally started looking cheap enough that value investors were starting to nibble.  Most of these are getting back close to their 52-week lows again and one would have to wonder just what the industry can do to save itself.  This should also be noted that this really pertains to Major Markets, because many of the indications are that smaller regionals and weeklies are actually holding their own so far.  Last night, Forbes even ran an article showing where the premiere newsletter covering the newspaper industry, the Morton-Groves Newspaper Newsletter, is closing down and noted painful forecasts and never seeming to be down enough.

The long and short of the matter is this: Newspapers are in a slow secular decline and that isn’t likely to change.  These companies are not going to go away with a whimper in the night, so what is the likely outcome?  They will scale down operations in print to a sleeker product and a much leaner staff.  The companies all have an online presence now, but they are going to have to do more and they are going to have to do more than all run the same syndicated pieces from the Associated Press on their sites.  There will be more and more syndicated or partnered content arrangements AND these newspapers will probably have to go out and buy more and more online media properties that have come up.  User-generated content and social networking is just too valuable even though the newspapers view them as a threat.  here is a reason that these are referred to as "OLD MEDIA."  They have no choice but to embrace this if they want to remain at the front of news and media.

Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.