The daunting reality facing newspapers

If chief executives get the big bucks for their ability to put the best face on bad situations, then newspaper bosses really earned their pay this week at the annual UBS media conference in New York.

With straight faces, the chiefs of McClatchy Co., the New York Times Co. and other major publishers told investors that things were looking up for the newspaper business because their sales would be down “only” 20% to 25% in the fourth quarter of the year after tumbling as low as 30% in prior periods.

While a slowdown in the industry’s sickening sales slide beats the accelerating revenue deceleration that has been eating away at newspapers for the last 42 months, it’s time for a reality check. So, here goes:

Newspapers are on track this year to produce their lowest advertising sales since 1986, representing a 43% drop from their all-time peak of $49.4 billion in 2005.

Based on the historic sales slide in the first nine months of the year, newspapers are likely to generate no more than $28 billion in advertising revenues in 2009, thus shedding more than $21 billion in sales since 2005.

In other words, newspapers appear to have gotten mighty close to losing almost half of their revenue base in a mere four years – a decline that began well before the economy began unraveling.

Advertising sales matter because they traditionally have generated 80% of the revenues at most newspapers, with circulation fees providing the balance. The profound contraction of the advertising market has caused some publishers to begin ratcheting up subscription and single-copy prices, but the industry at the moment will live, or not, by advertising.

While some demand for newspaper advertising undoubtedly will return when the economy recovers, a good deal of it will not, because many of the traditional advertisers have moved on.

An alarming number of the staunchest newspaper advertisers – including thousands of retailers and auto dealers – succumbed during the worst economic calamity since the 1930s, so there literally is no hope of regaining their business.

Many of the surviving advertisers – including retailers, employers, real estate agents and car dealers – are shifting ever-larger portions of their advertising spend away from newspapers to the web, where the costs are lower, audiences are highly targetable and response can be meticulously measured.

As illustrated in the chart below, the speed and severity of the sales plunge since 2005 is unprecedented in the heretofore remarkably charmed history of the newspaper business in the post-World War II era.

The collapse of the newspaper business most assuredly was aggravated by the downturn in the economy. But it is important to note that the sales decline was well under way before the economy cratered. It is a grave mistake to think, as some industry leaders apparently do, that the industry’s problems will be solved when the economy improves.

Here’s the perilous position newspapers are in – and how they got there:

From the end of World War II through 2005, newspaper sales climbed vigorously and almost continuously with only occasional minor setbacks during recessions. There was one frighteningly deep 9% sales plunge in 2001 caused by the tech wreck and the 9/11 terror attacks, but the industry quickly recovered when the economy rebounded in less than two years.

Thanks to the housing boom and the cheap-financing bubble in the middle years of this decade, newspaper ad sales reached an all-time record of $49.4 billion in 2005. The rapid recovery for newspapers after the 2001 scare evidently led publishers to believe they had dodged the competitive threat posed by the Internet, which began emerging as a commercial force in the mid-1990s.

In fact, as we know now, the interactive media in the last four years did more harm to publishers than they ever could have imagined, particularly by destroying their formerly lucrative classified advertising business.

The want-ad business, which until a few years ago produced 40% of publisher revenues and better than 40% of their profits, was picked clean by lower-priced, consumer friendly websites offering highly optimized environments for searching deep inventories of employment, automotive and real estate listings.

Based on projections derived from the industry’s actual performance in the first nine months of the year, classified advertising in 2009 is likely to total no more than $6 billion, or fully 65% less than the $17.3 billion in sales booked in 2005.

The financial crisis and recession that commenced last year carved deeply into national and retail revenues. Many heavy newspaper advertisers went out of business. Most of the remaining advertisers trimmed their spending to save money, while directing ever-greater percentages of their purchases into low-cost and highly targetable interactive media.

Based on the industry’s performance in the first nine months of 2009, national advertising appears to be on track to total some $4.3 billion for the full year, or 45% less than it was in 2005. Retail advertising, which is the meat and potatoes for almost every newspaper, is likely to drop this year to $14.8 billion, or 33% less than it was in 2005.

It is difficult to think of another industry that fell so far so fast and ever regained its former vigor. If someone knows of any examples, please let me know.