Monday, May 28, 2007

$2B in newspaper print ads periled

Print advertising sales for newspapers appear to be on track to plunge by $2 billion this year, which would make for the worst performance in a decade other than the disastrous period following 9/11.

The difference between this projected decline and the one after September, 2001, is that it would occur in an era of economic well being characterized by low unemployment, respectable retail sales (until this nasty April) and record highs in the stock market. The setback, if it materializes, would be unprecedented for an industry that, until recently, has been masterful at increasing its revenues in good times and bad.

The potentially abrupt reversal of fortune would be caused not merely by competition from the Internet but also by profound changes in the way consumers buy and marketers sell. We’ll come back to that in a moment, but, first, the numbers.

Based on the industry’s dismal 6.4% drop in print ad sales in the first quarter of the year – including a staggering 13.2% decline in classified revenues – publishers will be lucky to break $44.5 billion in print advertising in 2007, according to projections based on statistics reported by the Newspaper Association of America. That’s 4.6% less than the $46.6 billion in print sales in 2006, when sales were 1.7% lower than those of the prior year.

My forecast is based on a model that follows the industry’s remarkably consistent pattern over the years of producing 23% of its annual revenues in the first quarter and generating 25%, 24% and 28% of yearly sales in each succeeding quarter. If any of these periods performs better or worse than the historic trends, then the forecast would be affected accordingly.

The second quarter, for example, got off to a rocky start when several publishers reported steep sales setbacks in April. The worst of them were ad revenue declines of 10.3% at Tribune Co., 7.6% at McClatchy, 7.6% at Journal Register and 7.2% at Media General. The best of them, Gannett and Lee, reported respective declines of 3.1% and 3.5%.

Assuming print ad sales indeed end this year in the neighborhood of $44.5 billion, they would be only marginally better than the results achieved during the traumatic period following the terror attacks in September, 2001. Total industry revenues were respectively $44.3 billion and $44.1 billion in 2001 and 2002.

Because the NAA did not begin reporting online revenues until 2004, there are no precise numbers for print-only sales for any earlier years. But standalone print sales would not have been appreciably lower than $44 billion in 2001-2, because publishers, who generally had little faith in the Internet back then, mostly gave away online ads to sweeten print contracts.

Until the shock to the global economy caused by 9/11, the last time newspaper revenues were below $44 billion was in 1998.

The big difference between 1998 and now, of course, is the emergence of the digital media as major new competitors for advertising dollars. Online advertising revenues among all players climbed from just $1.9 billion in 1998 to $16.7 billion in 2006, according to the annual survey conducted by PriceWaterhouseCoopers for the Internet Advertising Bureau, an industry-financed organization.

Assuming a 25% growth rate this year, online ad sales would total approximately $21 billion for all media in 2007, or nearly half the $44.5 billion in print sales that appear to be in prospect for newspapers. In addition to print ads, newspapers are lkely to sell approximately $3.3 billion in online advertising this year (vs. $2.7 billion in 2006), which would bring newspaper industry ad sales in both categories to a bit less than $48.8 billion, a 3.1% decline from 2006.

Before the Internet turned from being a minor nuisance to the disruptive market force it is today, newspaper sales climbed smoothly year after year in the 1990s, unfazed by the ebbs and flows in the economy. The phenomenon is illustrated in the chart below, where newspaper ad sales are shown in the dark blue line and annual changes of the gross domestic product are depicted in light blue.

When the Bubble burst after the banner advertising sales year of 2000, both the economy and newspaper revevnues plunged. But newspaper ad sales still remained more resilient than the economy through both the post-Bubble recession and the aftermath of 9/11.

The story changed abruptly in 2005, when newspaper ad sales – for the first time in modern history – began to fall in a period of robust economic expansion. The drop, of course, coincides with the stupendous growth of Internet advertising, which doubled from a post-Bubble low of $6 billion in 2002 to $12.5 billion in 2005.

Although publishers put considerable sums of cash into new media initiatives over the last 12 years, they did foolish things like putting the entire contents of their papers on line for free, instead of developing digitally savvy products. As publishers dithered, companies like Google solved the search problem, MarketWatch created a financial portal, MySpace comandeered social networking and YouTube perfected the fine art of viral video.

Even though newspapers got more serious – and slightly more sophisticated – about the digital media in the post-9/11 period, new media sales of $2. 7 billion still represented only 5% the industry’s total ad revenues in 2006. Starting with such a small base, even annual digital sales growth at the recent unsustainable levels of 25% to 35% cannot fill the gap that would be left by a continuing series of drops in print-ad revenues.

In retrospect, it is clear that newspaper publishers were lulled into complacence in the early years of the Internet by their prior skill in achieving consistent sales growth in even negative economic conditions. But the growth was not achieved as much by recruiting new customers – or even selling more advertising to existing ones – as by using their monopoly-like positions to force hefty annual rate increases on advertisers who essentially had nowhere else to go.

That changed abruptly when the online interlopers showed up with not only cheaper ads, but also ones whose audience could be tightly targeted and whose performance could be empirically verified.

In but one example, help-wanted advertising, perhaps the most profitable of all lines for newspapers, fell 7.5% last year to $4.7 billion and then dropped 14.3% in the first quarter to less than $700 million. The category, which hit a peak of $8.7 billion in 2000, has been fair game ever since for everyone from Craig’s List to the recruiting section on the web site of almost any company of consequence. (A fuller discussion of this phenomenon here remains valid, even though some of the quoted revenue forecasts proved to be too generous.)

Automotive advertising is an example of dislocation caused not just by competing media but also by fundamental changes in behavior on the part of consumers and marketers alike. As forecast previously here, auto classified tumbled 12.8% to $3.99 billion last year, the first time since 1996 that this category fell below $4 billion.

Classified auto advertising in newspapers, which slid 20.1% in the first quarter to $751 million, has become less relevant now that more than two-thirds of auto buyers spend five or more hours shopping for cars on the Internet, including considerable time at specialized auto sites and those of car manufacturers.

Having failed to get ahead of the radical changes wrought by the new technologies, publishers today now face multiple, contradictory challenges as they attempt to reclaim something approximating their traditional levels of sales and profitability.

With print advertising volume falling and rates under pressure from lower-cost competitors, publishers are scrambling to cut creative deals to shore up the performance of the product that generates 90% to 95% of their sales.

At the same time, they must invest aggressively in new print and digital products to reinvigorate their eroding franchises and position them for future growth.

Also at the same time, they are under pressure to preserve their traditional profitability – an especially high priority for publicly held companies.

Most publishers have responded to these inherently incompatible demands by making drastic cuts in staff, coverage and news hole. Unfortunately, this degrades the product that generates the overwhelming proportion of their revenues.

Publishers may get away with short-changing loyal newspaper readers for a time, if they can successfully reposition their businesses, rapidly recover their profitability and use some of the new earnings to refurbish their tattered core products. Failure to do so, however, may irretreivably damage a business that once seemed so preternaturally invulnerable.


Blogger Paul Gillin said...

This is a terrific analysis of the challenges newspapers face to their core business model. The numbers you cite indicate that the industry is entering a spiral in which the declines in business get deeper every year. Once this cycle begins, it's very difficult to stop.

I've written an article on what I believe will be the consequences of all this. You might find it interesting.

4:29 AM  
Blogger Bruce Dobie said...

paul--i just read your piece. very fine. i'm a former print journalist myself and have been wondering where we're headed. i guess the one thing i might differ with you on is that before the whole enterprise goes to hell, the billions of dollars in shareholder value in these print corporations might ultimately demand change in course. in other words, a gannett (with billions in cash flow) will find itself buying a backfence or even something bigger. they buy themselves a new future, even if they're too stupid to create it themselves.

2:08 PM  
Anonymous Anonymous said...

Check out the weekly newspaper industry. It's where the action is today and could not be healthier.

3:06 PM  
Blogger Paul Gillin said...

I agree that the newspaper industry would do well to buy its way into new media, but that still won't solve the problem of the huge infrastructure it's saddled with. As Alan points out, the entire online advertising industry is less than half of newspaper ad revenues. While it's growing quickly, it'll be a long time before newspapers can transition to a largely online revenue stream, and a lot of jobs will be shed in the interm.

I address Larry's comments, I couldn't agree more. The future of media is all about small markets and community newspapers should actually thrive in that environment. The costs of publishing are coming down and community papers aren't saddled with the huge union contracts and expensive distribution networks that weigh down the metro dailies.

7:04 AM  
Anonymous Anonymous said...

I agree with your synopsis of the print industry. As a "Gen X" tech savvy print ad sales executive for a major daily in the biggest market of my country I have to input my 2 cents! The immediate market I operate in is realizing a decline percenatge similar to the % you outline... over the past few years readership has declined and that has forced us to re-strategize accross the board. In terms of readership Im happy to say we have increased 10% this year,while unfortunatly our immediate competition has declined in readership. This proves (to me) that a well thought out multi pronged attack on our distribuution of a better quality product can create upward trends...
In terms of ad sales, the % of decline has been supplimented by online sales; however, online sales is def behind where it should be... Íam reminded of a saying "Its hard to teach an old dog new tricks" That being said, as the current upper level dictators.. i mean directors/ceo's that have suffered this decline during their tenure are phased out by the next generations leaders: a new direction will be found! As another poster stated... theres billions to reinvest :)

4:29 PM  

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