Sunday, October 12, 2008

$7.5B sales plunge forecast for newspapers

Unless the global economy miraculously turns around on a dime, newspaper advertising revenue may plunge some $7.5 billion in 2008, according to a new projection attempting to assess the impact of the meltdown on the industry.

Should this forecast prove to be correct, sales would tumble by 16.5% to $37.9 billion from last year’ s depressed level and the industry will have lost a staggering 23.4% of its revenues since producing a record $49.4 billion in sales in 2005.

Prior to the historic collapse of the worldwide financial markets, I projected on Sept. 5 that print and online sales would drop about $5.4 billion to $40 billion from the 2007 level, barring “unforeseen events.” Given the ferocity of the ensuing unforeseen events, my revised forecast now shows the industry this year could shed an additional $2.1 billion in sales, bringing the total estimated decline to $7.5 billion.

The true number could come out higher or lower, depending on further developments. But it will be difficult to undo much of the damage the credit crisis already has done.

Even if all the leaders of the all the world’s governments uncharacteristically adopted a well conceived and well orchestrated rescue plan to jump-start the credit markets, it would take a substantial amount of time and effort to mend the mangled finances and rattled psyches of millions of households and businesses.

The credit crunch will hit newspapers hard, because nearly three-quarters of their ad sales come from such vulnerable accounts as:

:: Retailers who are seeing consumer demand dry up at the same time they are struggling to borrow the money they need to make payroll and stock their shelves.

:: Auto dealers who can’t sell cars because many potential buyers are postponing purchases and the customers who try to buy cars often can’t get loans. Meanwhile, dealers are scrambling to finance the fleets of unsold vehicles clogging their lots.

:: Real estate agents who can’t find buyers because no one knows what anything is worth and, owing to a paucity of transactions, can’t afford to buy ads to sell homes that no one wants to buy. The few brave souls stepping forward to buy homes generally have found mortgages difficult or impossible to obtain.

:: Employers who aren’t buying help-wanted ads because their businesses are shrinking, not expanding. Many report difficulty borrowing the working capital they need to buy raw materials or make payroll while they await payments for goods and services they already have provided.

In an effort to translate the effects of these grim circumstances into a revised sales forecast, I assumed that third-quarter sales performance would be only slightly worse than it was in the in the first half of the year, because the credit markets didn't seize up until mid-September. But then it gets ugly.

As detailed in the table below, I trimmed classified revenues in the fourth quarter to half of the prior year’s level in the auto, realty and recruitment categories, because each would be affected most directly by the credit collapse.

I was more conservative in cutting the expectation for retail advertising for the fourth quarter, because I believe merchants will do everything possible to sustain their ad schedules during the holiday period that determines the profitability of their businesses for the year. If there is not a sharp turnaround in the economy after the first of the year, the sales in this category could collapse in 2009 in a tide of bankruptcies and desperate cost cutting as the surving merchants strive to remain viable.

In light of the 2.3% drop in online ad sales in the second quarter, I projected a modestly accelerating decline in that category for the balance of the year. Although most newspapers generate two-thirds or more of their online sales from the three major classified verticals, I am assuming publishers will push as much of the remaining classified revenue as possible to the online side of the ledger to preserve the impression – but not necessarily the reality – that the web remains a growth area.

While the publishing business (though not all individual newspapers) has survived every economic calamity in the nation’s history, this downturn could be uniquely catastrophic for an industry that has been struggling for the last three years to retain its relevance among readers and advertisers.

Even during the economically robust years of 2006 and 2007, newspaper advertising fell a total of $4 billion, or 8.2%, from the all-time peak of $49.4 billion achieved in 2005. A drop to $40 billion in sales this year would be equal to an 19.1% slide from the 2005 level. But the newly projected drop to $37.9 billion in sales this year would amount to a 23.4% decline from 2005.

Bleak as this immediate prospect is, the long-term outlook is not much better. It is not clear how the industry will recapture its former vigor when the economy rebounds, given that its revenue base was disintegrating well before the economy fell apart.

Macy’s has gobbled up many of the Main Street department stores that traditionally were among the best newspaper advertisers, substituting instead a national brand strategy relying more on television and magazines than newspapers. Between the economically expansive years of 2004 and 2007, Macy’s reduced its advertising spending at newspapers by $249.1 million, or 29%, according TNS Media Intelligence.

CompUSA, a major newspaper advertiser, absorbed the Good Guys, another major advertiser, and then went out of business at the beginning of this year. Circuit City is hanging on by a thread and manufacturers are being warned not to ship it merchandise because they might not get paid. If Circuit City, the penultimate national electronics retailer, goes away, will Best Buy keep buying Sunday inserts every week?

If General Motors merges with Ford or Chrysler, how many car dealers will shut their doors forever? Well before ordinary mortals ever heard of credit-default swaps and other financial weapons of mass destruction, auto classified advertising at newspapers fell by $1.8 billion, or 35%, between 2000 and 2007.

If the self-employed real estate agents and mortgage brokers who buy newspaper ads can’t make a living during the extended housing downturn, they will exit the business, as many already have. Real estate advertising at newspapers in 2007 fell by $1.2 billion, or 22.6%. In the first six months of 2008, the category slid another $681.9 million, or 35%. If consumers in the future can buy and sell homes on their own at Zillow – or use a cheaper fixed-price agent like Redfin – will real estate advertising as we knew it come back?

Craig’s List, Monster, Simply Hired and many others have eviscerated the one-time newspaper monopoly in recruitment advertising since the tech bubble burst, resulting in a loss of $4.9 billion, or 56.3%, of classified revenues between 2000 and 2007. Will the employers who were buying newspaper ads before the economy cratered still use them when the economy recovers? Will they be around to consider it?

The newspaper industry’s unwillingness or inability to diversify its revenue base since the start of this century has hitched it to the fates of the retailers, car dealers, real estate brokers and employers who are struggling to keep their heads above water in the worst business conditions since the Depression.

If those accounts succumb, who will replace them?

9 Comments:

Anonymous Dave D. said...

...I'll bet a large number of newspaper readers are computer illiterate. They are probably computer haters, as I was, and they can't know what is realy available on the net because they won't try it. The loss of they're favorite newspaper, or every local newspaper, will drive them, finally, to computers, if anything will.
..Once they see the depth and breadth available on the net, it's inevitable that they will abandon newspapers for the web. I know, the russle of newsprint is comforting and you can't take your desktop to the can, but once abandoned, the cost of a newspaper subscription will only be seen as a new and additional expense, not as the necessity it used to be.
..We don't go backwards in transportation, energy or communications. It's over.

10:10 PM  
Anonymous Anonymous said...

You let the editors and publishers off the hook by blaming outside forces for the plight of newspapers. But what about the legion of editors who failed _ and are still failing _ to give readers compelling newspapers they would want to read. The complacency of the industry as newspaper readership steadily declined in the last 20 years must certainly be included in the litany of causes for the lack of readership. If newspapers had something that would sell, perhaps the situation would not be as bleak. Instead, advertisers see the mindless decisions cutting off outlying circulation areas and reducing news sections as reasons to take their ads elsewhere. Topping the list of really silly decisions are those reducting or even eliminating business sections in a time when the nation is facing its worst economic crisis since the Depression. With long-time business reporters bought our or laid off, who will tell the community what this means to them?

11:27 PM  
Blogger John C Abell said...

I'm not sure there are enough advertising dollars anywhere to support the newspaper form as it generally practiced.

Newspapers are correct that cost is their major problem. They are wrong that it is cost of their content creators that is at the heart of it.

What we need to do is figure out how the vital guardianship role of newspapers can be preserved without the newspapers themselves, because it is clear they cannot survive. Someone will get the business. But the real risk is an assault on journalism by its enemies during a prolonged weakness exacerbated by well-intentioned artificial life support. Resisting pressure by the business side was always difficult in the best of times and at the best of shops. In the worst of times we will see columnists admonished and reporters reassigned on a routine basis, emboldening more and more attempts to muzzle the press.

It is long past time to have a transition (exit) strategy; how to do that is where the brainpower should be focused, not figuring out who in their right mind would take out a newspaper ad to pay for an archaic infrastructure.

7:24 AM  
Anonymous Anonymous said...

If ever there was clear evidence of the failure of bureaucratic journalism, this is it. We have created newspapers groaning with executive editors, editors, managing editors, assistant managing editors, city editors, desk editors, copy editors and wire editors. What is needed is to clean out the bureaucracy that is has either blocked or slowed down necessary change. The recent redesign of the Chicago Tribune was overseen by a committee of 37 of these editors. No wonder it was so dull. With their six-figure salaries and prized glassed-in offices, the bureaucracy is choking off the oxygen newspapers need to survive.

11:13 AM  
Anonymous bevo said...

If this economy forces large number of newspapers and even television stations to get out of the business, then hooray for us. Most newspapers decided long ago to give up writing about zoning boards and school boards and focus on delivering paper.

Guess what? Most people don't want paper delivered to their house. Now, some folks will accept a paper delivery if, in return, they get a quality product. Unless you work for the New York Times or the Wall Street Journal or maybe the Washington Post, your newspaper publisher remains content with delivering paper. Get your resumes ready.

As to the folks in television, your day of reckoning is now arriving. Your local television with its fat margins are in the same position today as newspapers were in 1980.

YouTube and Facebook are not your problems. You are too happy to deliver images. Seeing some bottle blonde stand outside a building for a live, local, action report or a rip and read from the satellite feed is not interesting nor does it deliver a good product.

Television executives, you have seen how the newspaper industry slowly killed itself. Do you want to continue walking down the same path that only leads to irrelevancy and financial ruin?

1:06 PM  
Blogger Banjo Jones said...

how much would you say the daily in Austin, TX would fetch in light of your forecast?

Cox has said it would hold on to the paper if it doesn't receive a fair price, but what would a fair price be in this climate?

3 x cash flow?

2?

4:08 PM  
Anonymous Evil Pundit said...

This is good news, exposing a major vulnerability of the biased mainstream media.

Now would be a good time for angry Republicans to start a boycott campaign against companies that continue to advertise in newspapers. It is these companies that support the misreporting and propaganda which is so harmful to democracy.

Once the newspapers are gone, the field will be open for more honest types of reporting.

4:14 PM  
Blogger blackrain said...

Smart companies that want to stay afloat will most likely maintain advertising sales while looking for the next big wave of advertising venues, Such as online social networks. The sales force will likely be retrained to sale ads online.

1:08 AM  
Anonymous Anonymous said...

Since we are now half pregnant with the nationalization of America's largest and most profitable banks, how about European-style subsidies to bail out the failing newspaper industry? I have looked at the lavish subsidies going to newspapers in Holland and France, which are justified on the grounds they are necessary to save the language and culture in face of the American cultural onslaught. So how about a U.S. subsidy for American newspapers to protect U.S. culture from the cruel economic storm they face? Otherwise, the picture you paint here signals the end of newspapers, which have played a historic role in providing information for the electorate.

8:24 AM  

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