Wednesday, April 27, 2011

Why newspaper ad sales are not recovering

Nearly two years after the U.S. economy began climbing out of the worst recession since the 1930s, advertising sales at newspapers have yet to hit bottom.

Now, the question haunting every newspaper executive is: How low will they go? And the daunting question for them is: What can turn things around?

Clearly new ideas are in order, because economic recovery has not done the trick. And the accumulating evidence suggests that it is not going to do so.

Although television, online, radio and even magazine ad revenues all moved into
positive territory by the end of 2010, newspaper sales dropped 6.3%. At the end of last year, annual print and digital newspaper ad sales, which have skidded lower in every quarter since April, 2006, were 47% below the all-time high of $49.4 billion achieved as recently as 2005.

Things got no better in the early days of 2011.

Kicking off a unbroken series of dismal earnings reports for the first quarter of this year, Gannett last week reported that print ad sales fell 7.2% from the same period in 2010. The largest of the publicly held publishers, Gannett’s geographically diversified portfolio of small, medium and large newspapers is something of a barometer, inasmuch as its results have closely mirrored the industry’s over-all performance in the last five tumultuous years.

Gannett’s performance proved to be far from the worst.

McClatchy reported yesterday that its ad revenues fell 11.0% in the first quarter from the prior year. Ad sales fell 9.8% at the newspapers owned by Media General and 9.7% at the Regional Division of the New York Times Co., which includes papers in the Southeast and one paper in Northern California. (Sales were down 1.9% at the Times itself and off 5.1% at the Boston Globe and its sister papers in New England.) Publishing revenues at Journal Communications were 6.5% lower than in 2010.

As more earnings reports arrive in the coming days, few, if any, publishers are likely to report positive sales.

Continuously falling revenues this far into an economic recovery are unprecedented for the newspaper industry.

While newspaper sales typically softened during previous national economic slumps, they always rebounded when employers stepped up hiring and consumers resumed spending at department stores, began shopping for new cars and started buying houses.

The drop in newspaper advertising this time is different, because it started roughly 1½ years before the onset of the recession, accelerated precipitously during the downturn and has continued in spite of a recovery that technically began in June, 2009.

One reason things are different today is that the economic recovery has been hampered by stubborn unemployment and a nearly moribund housing market. Both categories, which historically generated handsome classified revenues for newspapers, have yet to bounce back.

But advertising in one traditionally significant newspaper vertical did rebound smartly in 2010: Automotive. As vigorous as the auto turnaround was, however, newspapers still were left behind.

Even though vehicle sales rallied by 11% in 2010 after three years of successive declines, auto advertising at newspapers fell by 19.5% in the year. Publishers, who collectively sold more than $5 billion in automotive classifieds as recently as 2004, booked a mere $1.1 billion in the category in 2010.

By contrast, auto advertising on local TV stations last year surged 53.7% to $2.6 billion while online auto advertising rose by 13.9% to $2.8 billion, according to, respectively, TVB, a broadcast trade group, and eMarketer, an independent market research firm.

The collapse of the auto category at newspapers is an excellent example of how the digital media are disintermediating all sorts of business channels and, thus, disrupting the flow of advertising dollars within them.

Aware that consumers spend someplace between eight and 10 hours researching cars before they contact a dealer, auto markers and dealers are vectoring ever-greater portions of their marketing budgets into intercepting consumers online.

As but one example, Ford is so keen about capturing online tire-kickers that its website gives side-by-side comparisons between its Fiesta and competing brands. While you are on the Ford site, you can price the car of your dreams, investigate financing options, estimate your payment, view local dealer inventories and request a quote from a dealer.

Because a growing number of well-informed consumers make their decisions before contacting dealers, the point of sale has moved to the web, not the showroom. Dealers don't need newspapers to remind consumers they are there, because empowered consumers know who the dealers are, know what models are in stock and know how much they should be paying for a car. Because consumers decide when to contact the dealer, spending money on online visibility is cheaper (and tidier) than taking out a half-page ad offering free pony rides for the kids on a Saturday afternoon. Thus, newspaper publishers (and pony wranglers) are pushed out of the buying process.

In addition to autos, the primary ad categories for newspapers are employment, real estate and retailing. Even as business in each of those sectors improves, profound changes in consumer and advertiser behavior suggest that newspaper advertising will not return to its historically robust level. Here’s why:

:: Employers in ever-greater numbers are abandoning newspapers in favor of soliciting applications on their own websites, posting ads on sites aimed at particular professions like nurses or engineers, paying for ads on cheaper job boards like Monster or putting up free ads at places like Craig’s List. High-priced newspaper ads are not needed to connect employers and job candidates.

:: People buying and selling homes, to the degree there are any, increasingly are turning to highly optimized sites like Realtors.Com, Zillow and Trulia, which contain all the listings in a market and have maps, comparable home sales, school performance statistics, financing options and other tools that most newspaper websites can only dream about. With consumers shopping on the web, a growing number of real estate agents are putting their ad dollars there – and paying lower ad rates than those typically charged by newspapers. Best of all, it takes but a few keystrokes on the part of a consumer for an agent to gain a new client. High-priced newspaper ads (and sometimes real estate agents) are not needed to connect buyers and sellers.

:: With everything from groceries to shoes available on easy-to-use web and mobile sites, consumers increasingly are letting their fingers do the shopping. Because online merchants have lower overhead that bricks-and-mortar stores, they typically can charge lower prices – and in many cases throw in free shipping while skipping the sales tax. Meantime, the superior buying power of big-box merchants is siphoning away traffic and squeezing the profits of many of the Main Street businesses who long have been the most faithful newspaper advertisers. Unable to compete, many Main Street merchants, as well as such notable chains as Circuit City, Mervyn’s and many others, succumbed during the Great Recession. National brands increasingly believe high-priced newspapers ads are not needed to connect with customers. And no one needs an ad if he is out of business.

Intensified competition, combined with an ongoing undercurrent of economic uncertainty, puts considerable profit pressure on every advertiser, forcing each to seek cheaper means of connecting with customers than expensive print advertising.

The more advertisers of all types experiment with web, mobile and social advertising, the more they will come to appreciate the power of the digital media to tightly target qualified prospects while granularly measuring the costs and effectiveness of their campaigns. Because many digital solutions charge an advertiser only when someone clicks on an ad, the costs are a magnitude or better cheaper than the price of a print ad.

While advertisers are moving on, most newspapers concentrate the bulk of their attention on print sales – and rightfully so, given that they produce an average 88% of the industry’s ad revenues. But here’s the problem:

If print advertising tumbles again in the second quarter of 2011, then the industry will not have seen positive sales growth for a full five years. If newspaper sales could not rebound during the recovery that technically began in mid-2009, then what will happen in an economic reversal?

Thanks to aggressive expense management, the average operating profits at the major publicly held newspaper companies were 22% in 2010, surpassing even companies like Exxon and Walmart.

But no industry ever achieved long-term success by cutting its way to profitability as its sales continually withered.

Clearly, newspapers need new ideas. They need to develop a broad array of targeted content and advertising solutions to serve diverse audiences across the web, mobile and social media.

And they need them fast.

Wednesday, April 13, 2011

Ready for the mobile ad revolution?

The next revolution in advertising is buzzing in your pocket or purse. Are you ready?

Far surpassing the powers of print, broadcast and the web, a host of new technologies is converging on the opportunity to use smart phones to intercept – and influence – the consumer as she walks past a store, wheels through a supermarket or reaches toward a product on the shelf.

The technologies include not only the increasingly ubiquitous GPS-equipped smart phone but also window stickers that broadcast messages, interactive bar codes that instantly link to a website and increasingly sophisticated databases that track your individual activities so they can precisely target products or deals to you.

(GPS, of course, refers to global positioning systems that pinpoint the location of the user, and – after she moves a few feet – the direction in which she is traveling and whether she is walking, on a bicycle or in a moving vehicle.)

The mobile ad ecosystem admittedly is a work in progress. As the still-evolving infrastructure matures and coheres, however, more advertising is bound to migrate to mobile because the intimate, personalized and immediate quality of the platform makes it, by far, the most targetable and effective of all media.

The better the mobile ad infrastructure gets, the less advertisers are likely to spend on traditional media. So, publishers need to pay close attention to this futuristic marketing frontier, where a number of major competitors already are well ahead of them.

The mobile ecosystem starts, of course, with the high-tech Swiss Army Knife known as the smart phone. About a third of the 240 million mobile handsets in the United States are smart phones and analysts believe the number will grow sharply in the next few years as cell-phone contracts roll over and carriers compete for new customers by deeply discounting upgraded devices.

At the moment, most mobile advertising consists of little more than banners that, when clicked, link to the sponsor’s site or mobile app. While immediate and interactive, the ads are not particularly targeted to the location or interests of the individuals. But that is about to change, big time.

Not the least of the change agents is Google, which at the first of the year began plastering seemingly low-tech stickers (left) in the windows of dozens of businesses in Portland, OR. But the stickers, which say the business has been “Recommended by Google” and are delivered in a package telling merchants how to advertise on the search engine, are anything but retro. They actually contain low-power radio transmitters that broadcast messages to owners of phones that happen to be equipped with the Android 2.3 Gingerbread operating system.

Thanks to the miracle of what is called Near Field Communications (NFC), the owner of a Gingerbread phone standing in front of a restaurant can read its reviews on Google, visit the establishment’s website, check out the daily specials, receive a coupon for half-off appetizers, make a reservation and book a limo. Using the other functions of the phone, she can invite friends to meet her after work and alert her Twitter followers to the discount pupus.

There are instant connections at the point of purchase for those of us who don’t happen to own a Gingerbread phone. The barcodes and quick-recognition (QR) codes that seem to be on everything can be scanned by anyone who adds any of several free apps to his smart phone.

Barcode readers make it possible to check the price of a product in the store – and rapidly search the web to see if a nearby competitor (or online merchant) is selling it cheaper. QR codes, which are square instead of oblong like barcodes, are turning up everywhere from print advertising to business cards – and could easily be printed on stickers placed in the windows of restaurants. Sites like BarCodesInc.Com instantly generate
free custom QR codes like the one shown at left. Scan it for a surprise.

For all the value of point-of-purchase promotion, the true power of mobile advertising is its ability to put the right ad in front of the right person in the right place at the right time.

A number of companies great and small are working on products that solicit user preferences, monitor user behavior and track the physical movement of users via mobile apps to develop breathtakingly rich targeting profiles.

In one example, Yahoo just rolled out a customized news reader for the iPad called Livestand. Although the stated mission of app is to help users pinpoint news that interests them, there are distinct and obvious ad-targeting possibilities for the data that will be accumulated on the platform.

While plenty of privacy, technology and commercial issues remain to be resolved as the mobile ad ecosystem evolves, there can be no doubt that the revolution is under way. And it probably will happen faster than you think.

Tuesday, April 12, 2011

Bid duel likely for Orange County Register

A bidding war appears to be shaping up for the Orange County Register, where the winner could emerge as the dominant player in a series of consolidations that eventually puts the major dailies in Southern California in the hands of a single owner.

The leading bidders in what is likely to be a small but vigorous duel for the Register are MediaNews Group, which operates the neighboring Los Angeles Newspaper Group (LANG), and the Tribune Co., the owner of the nearby Los Angeles Times.

Each of the neighboring publishers is widely known to covet the crown jewel of Freedom Communications, a sprawling media company put on the block by the distressed-debt investors who gained control of it in 2010 as it emerged from bankruptcy.

To be clear: The situation is fluid and either or both of the publishers might balk at buying the Register. It’s also conceivable than an unexpected third party will turn up as a spoiler or that Freedom will reject every bid as unacceptably low.

But the contest for the Orange County paper is likely to be keen because “neither of those guys wants to be the one who didn’t get the Register,” said one knowledgeable source.

MediaNews and Tribune both will stretch for this deal, said industry sources, because each company knows that the strategically located Register is the key to stepping up the scale – and, therefore, the profitability – of its existing operations in Southern California.

Enhanced scale boosts profits because it sharply raises revenues while reducing costs for administration, ad sales, production, content-gathering, marketing, circulation and almost everything else. Lower costs and higher profits are always desirable in business, but they are particularly crucial for the newspaper industry, where advertising sales have plummeted by nearly half since 2005 – and continued sliding in the first months of this year.

Bigger sales and sturdier profits would be extra-desirable for both publishers as they each seek to recover from bankruptcy. MediaNews emerged from Chapter 11 last year and Tribune is struggling to conclude a long-running reorganization snarled by feuding groups of creditors. Even though Tribune is operating under the supervision of a federal bankruptcy court, most observers believe an acquisition could gain approval from the judge, as it would strengthen the viability of the business when it is discharged from bankruptcy.

A major issue in any potential transaction would be whether the Register is purchased as a free-stranding entity or the buyer also takes ownership of Freedom’s eight television stations and its more than 100 daily and weekly newspapers. In the interests of minimizing taxes on the transaction, Freedom’s management is known to favor a sale of the entire company, as opposed to the piecemeal disposition of individual assets.

Here’s how the purchase of the Register would step up the scale of each of the neighboring publishers:

:: MediaNews – As illustrated in the table below, the combination of the 182,391-daily circulation of the Register with the 408,247-weekday readership of the nine LANG dailies would rival the 600,449 daily circ of the Los Angeles Times. On Sunday, the LAT would have the edge with 901,109 vs. 693,431 for the LANG-Register combo.

:: Tribune – If the Los Angeles Times acquired the Register, the combined weekday and Sunday readership of the publications respectively would rise to 782,840 and 1,166,452.

But the deal-making might not end with the sale of the Register.

The victor (and, perhaps, the loser, too) likely would turn its attention to buying the San Diego Union Tribune, which was purchased at a fire-sale price in 2009 by Platinum Equity, a Los Angeles investment firm that is believed to have bumped the paper’s operating profits via aggressive cost-cutting to some $20 million from next to nothing. Industry sources believe the property could fetch some $100 million, producing tens of millions in profit for Platinum.

Add San Diego to the LANG/Register combo and you get combined circulation of 815,339/daily and 979,949/Sunday. Add San Diego to LAT/Register and you get total readership of 1,007,601/daily and 1,452,970/Sunday.

But, wait, there’s more.

Once three of the four SoCal publishers are consolidated into one operation, it is not hard to imagine the fourth being rolled into the fold. In that event, a single entity would publish all the dailies from the Tehachapi Mountains at the north end of metro L.A. to the Mexican border, producing 1.4 million weekday papers and nearly 1.9 copies on Sunday.

How plausible is the eventual emergence of this publishing megaplex? Quite. Here’s why:

The controlling interest in each of the four major newspaper companies in SoCal is held by financially oriented investors whose business model is to buy distressed assets at low prices, improve the profitability of the holdings by increasing sales and/or cutting expenses and then exiting deals as rapidly as possible through either an IPO or by selling the assets to someone else.

One of the fastest and surest ways for the investors to hasten a profitable departure is by going for the operating synergies bound to result from putting their assets together.

Since some of the investors holding interests in the SoCal papers hold stakes in more than one of the subject companies, their financial interests and investment objectives appear to be well aligned. In that event, support for the biggest regional newspaper consolidation in history would seem relatively easy to muster.

Monday, April 11, 2011

Who needs newspapers? One couple’s answer

Two days after former news executive Paul Steinle retired last summer, he hitched a 31-foot mobile home to his champagne Silverado pickup to discover first-hand if newspapers have what it takes to succeed in the digital age.

Now that he has visited at least one paper in each of 37 states – with stops scheduled in the rest by July – the preliminary verdict is in.

“This is not an industry that is going to lay down and die,” said Steinle who is publishing his findings at a website called Who Needs Newspapers? “This is an articulate, smart, hard-working group of people. For at least the next decade, I see them going on.”

But not every paper will make the transition from the near-monopolistic print model to the vastly more competitive digital space, said Steinle, a broadcast journalist who led United Press International in its ebbing days and then became associate provost at Southern Oregon University, where he worked until he retired. Still, he is optimistic.

“I have been in a number of business turnarounds in my career and I don’t see newspapers as buggy whips,” said Steinle, whose partner on the quest to save the press is his wife, Sara Brown, a former human resources executive at the Los Angeles Times and The Columbian in Vancouver, WA.
Steinle reports his wife is as optimistic as he is.

“There’s an awful lot of energy going into trying new stuff,” said the 72-year-old Steinle in a telephone interview as he pulled into his home base in Ashland, OR, for a brief respite before commencing the final leg of the cross-country journey. “Some ideas will work and some won’t. Let’s hope they come up with enough ideas to make it.”

Watching the horrifying tumble in publishing revenues and readership after 2005, Steinle and Brown decided in 2009 to do something more than hope newspapers would have a future.

As Steinle’s retirement approached, the couple founded a non-profit organization called Valid Sources to identify and share “models of excellence” in publishing, as well as to make the case that newspapers matter to the civic health of individual communities and the nation as a whole.

“What’s at stake here is the local news,” he explained. “Who is going to cover the news in Medford, OR? We know someone will cover the big news, but it’s the community papers that are at risk here. In the short term, they will be OK. But the idea that they might go away is alarming, because I don’t see anything else replacing them.”

Undaunted when they could not find philanthropic support for their mission, the couple decided to hit the road on their own nickel to identify best practices in newspapers across the land. Ten months, 23,000 miles, only 10 miles to the gallon and more than $30,000 in out-of-pocket expenses later, they have posted video interviews with key leaders at one newspaper in each of 25 states. Additional reports are scheduled for publication through the fall.

Steinle said he selected what he called
transformational publications that view themselves as multimedia, multi-platform news and information services.

The first stop was the Sequoyah County Times in Sallisaw, OK, a 5,000-circulation, family-owned weekly, that – like its big-city brethren – is leveraging technology to provide more and better coverage with less expense. Other stops included the Anchorage Daily News, the Baltimore Afro-American and the Charleston (SC) Post and Courier.

There is a new operating paradigm at the 37 newspapers we have visited to date, said Steinle. The newspapers we visited this year have altered their operating practices dramatically to deliver the news to more people through more channels. Their dilemma is whether they can draw sufficient revenue from Internet advertising, digital subscriptions or digital apps to fund the quality of journalism the print model has financed for decades.

Based on the enthusiasm and passion he found at every stop, Steinle says it would be a mistake to write off newspapers.

“Just because digital comes around doesn’t mean the usefulness of the newspaper ends,” he said, citing the portability, ease of access, low cost and serendipity that you get when reading the news in print.

Most important of all, said Steinle, is that newspapers are the No. 1 source for local coverage.

“If they fail, where will people in the United States get quality information?” he said. “The people in the newspaper business care about their communities and they aren’t going to concede. They are going to keep fighting. And I think that’s a good story.”

Monday, April 04, 2011

Newspapers get 3x too many ad dollars, says study

Even though newspapers have lost nearly half of their ad revenues in the last five years, some analysts believe they still are getting three times more advertising than their readership deserves.

This good news/bad news for publishers comes from eMarketer, a research firm specializing in digital marketing trends. I’ll tell you in a moment why this is both good and bad news. First, the story:

In a report released last week, eMarketer compared the amount of time consumers spend accessing various types of media with the percentage of advertising dollars spent on each format.

Television, for example, represents about 43% of the time Americans spend consuming media and broadcasters collect about 43% of the advertising dollars, according to the study. So, that sounds about right.

Newspapers, on the other hand, are pocketing three times more ad dollars than their mindshare would seem to justify. Even though consumers spend barely 5% of their time reading newspapers, eMarketer found that publishers are getting 17% of the ad spend. As you can see from the table below, the situation is the same for magazines.

Because the allocation of ad-market share is a zero-sum game, print has to be benefitting at someone's expense. And two notable victims, in this case, are Internet and mobile advertising.

In the most egregious mismatch discovered by the study, only 0.5% of advertising goes to mobile phones even though people spend more than 8% of their media time using them. With 25% of media mindshare devoted to the Internet and barely 19% of ad dollars going to the web, it is being shortchanged, too.

This is good news for newspaper publishers because it proves that they have done an excellent job to date of convincing marketers of the value of their medium. As such, they have been able to corner a disproportionate share of advertising in comparison to other media.

It also is bad news for publishers, because it represents a formidable threat: What would happen if advertisers began to wonder why they are spending so much on newspapers when they can use cheaper and more targetable advertising to reach the growing audiences on the web, mobile and social media?

In reality, of course, the answer is known. Newspaper sales fell from $49.4 billion in 2005 to $25.8 billion in 2010. Despite a modest economic recovery that has increased ad sales for most other media, publishers anecdotally report that sales in the first quarter of this year were softer than they were a year ago.

If publishers can’t catch up to their digital competitors, the staggering erosion in newspaper advertising in the last five years could be the prelude to something worse.