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.


Blogger mgjr said...

Your gonna make me cry.

8:24 AM  
Anonymous Anonymous said...

These figures you cite include newspaper digital ad sales, too?

I know they don't account for a big piece of the pie, but if those sale are included here -- even if that's the piece that is growing a little -- it's clearly not helping much.

It seems to me newspapers might try to find wholly new enterprises that can employ the talent they do have -- for instance, using ad salespeople to not only sell ads for the paper's website and smartphone app, but also to sell ads as third parties, for other online enterprises, taking commissions from those sales. I dunno. Just a thought. Maybe there's just much money there either.

But I wonder if there are more business-to-business services like this that newspapers can start delivering.

11:33 AM  
Blogger I Lamont said...

A discussion of incentives at publishers' sales organizations would be helpful.

Also, take eMarketer data with a grain of salt. Methodology seems weak.

4:01 PM  
Anonymous Anonymous said...

Great post. It lays out all the reasons why newspaper advertising won't rebound. To understand why this is just a natural part of the product lifecycle, take a look at a piece I wrote several years ago - back when newspapers were still cash cows

At the time, I ended the piece with a question mark as to whether newspapers were cash cows or dogs,
Sadly, newspapers have moved to dog state and there will be no rebound because the traditional advertising portion of the product itself is now hopelessly outmoded - kind of like typewriters.

News organizations will have to find new sources of advertising and revenue that align much closer to its core news function, e.g. political advertising, as opposed to components like employment classifieds which have no relevance to journalism.

8:55 PM  
Blogger Robert H. Heath said...

It's really pretty simple.

If 88% of your sales (print) are declining at 10% per year, and 12% of your sales (online) are increasing at 15% per year, the overall decline will bottom out in seven years.

So, unless they do something different, newspapers shouldn't expect a recovery until sometime in 2018. If the current trends continue, this will wipe out about 25% of revenue, almost exactly equal to current operating profit.

This of course, assumes that declining revenue and circulation don't compound each other, leading to even faster declines.

Print is still above water and is nearly an order of magnitude bigger than online. But that was true of the Titanic -- as compared to its lifeboats -- just before it slipped below the frigid Atlantic.

10:30 PM  
Blogger 21stCenturyinformation said...

Newspapers have a great product for which there is an insatiable demand - news and information. So a significant part of their problem may be that they are continuing to market themselves and sell advertising as they have traditionally done in the past.

Doing the same old thing in the same old way in a changing world is a certain recipe for disastor.
We looked at real estate classifieds, for example, and concluded the relative decline in newspaper revenues in this area was almost totally a self inflicted wound and potentially reversable.

9:05 AM  
Blogger 21stCenturyinformation said...

One reason newspaper sales are not recovering is that the world is changing and the legacy papers are still attempting to operate and market themselves and sell their products as they have in the past.

While searching for major market newspaper opportunities the founders of what is now staffed an office and studied each potential newspaper revenue source in detail. They found, for example, that the loss of real estate classifieds was primarily a self-inflicted wound which could be reversed with appropriate activities. They found, for example, that most newspapers were not leveraging their power positions to generate a positive must-buy image of themselves in the eyes of potential readers and advertisers. They found, for example, that the websites of local and regional newspapers would never be very profitable without the economies of scale that a traditional newspaper website can never deliver.

Importantly, they found the larger the paper, the more likely its declining revenues and profits were the result of management rigidities and unimaginative responses to very overcomeable impediments.

So it is not just declining revenues and profits that the owners of today's major market newspapers should fear. They should fear even more that newspaper financing will return such that efficient new major market competitors with superior products will arrive and replace them.

In other words, today's newspapers, and particularly the larger newspapers, need to get their acts together or they will not just fail, they will be replaced and their owners and executive embarrassed. Think of them as Studebakers and Chryslers whose managers did not adequately respond to their company’s rigidities and inefficiencies and changing markets.

The current batch of major market dailies are like Chrysler, failing, and main reason their replacement (think Toyota) has not started is not the Internet, its that the economic decline that dried up financing for their efficient replacements just as a number of major market newspapers were about to get print competitors who would have made much more money with their seriously lower prices.

The public's newspaper-management-fed erroneous impression that large newspapers can't make money despite the insatiable demand for news and information has temporarily discouraged investors but that will change when the economy begins to recover.

The Studebaker and Chrysler equivalent papers have been given a fortunate reprieve by the collapse of financing. If they don’t use it to mend their ways new and highly profitable Toyota equivalent papers and news organizations will be upon them and they will be lost.

6:11 PM  
Blogger Unknown said...

Two major points were not mentioned. By not investing in and innovating on the Internet this past decade, newspapers have lost the mind share of the young - now in their 30s. Their brands with the young are forever diminished while their older audience passes on. Another missed point is liberal bias. Most papers write left leaning stories and that has turned off about half the audience right from the start.

12:27 PM  

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