Street prediction

When it comes to the fate of daily newspapers, the new optimism is a false optimism

The media and some newspaper analysts jumped to very optimistic conclusions about the future of daily newspapers based on recent positive second-quarter earnings from a few newspaper chains. The McClatchy Co., despite having revenues 18 percent lower in the second quarter 2009 than in the second quarter 2008, showed earnings that more than doubled those in the first quarter of this year. The Gannett Co. also reported very good second-quarter numbers.

Right around the same time came a buoyant announcement from newspaper analyst Borrell Associates predicting that daily-newspaper revenue would increase to $39 billion by 2010, even though annual daily-newspaper revenue has dropped from approximately $58 billion to $37 billion since 1995.

The report was greeted as good news for dailies and, especially, McClatchy. It suggested that the cost-cutting had worked, revenues were up, and now maybe daily newspaper chains would survive, even if they might be smaller and less profitable. No surprise, these announcements created a bump in McClatchy’s stock, now trading at more than $2 per share, up from as low as 35 cents per share. The previous high, in 2005, was $74 per share.

Though I wish there were reason for optimism, there really isn’t. The recent earnings numbers are misleading, and Borrell’s analysis is fundamentally flawed.

If the newspaper analyst in the skyscraper had spent a single day with a daily-newspaper ad salesperson, I doubt he’d have made such a frankly ridiculous prediction.

Let me explain what’s happening on the street.

First, classified revenues, which used to represent over a third of daily newspapers’ revenues, are not coming back. They will continue to drop as ad contracts expire, readership declines and the last of the customers who have “always run their ads in the daily paper” move elsewhere.

Next, display revenue—which comes from the boxed ads in the front of the paper—will also continue to decline. There has been a big drop in the amount charged per page. In Sacramento, the Bee used to charge $15,000 for a full-page ad. Now Bee ad salespeople struggle to get $4,500 per page. The price will continue to drop as contracts end and as more people find out what their competitors are paying.

Of the four main revenue sources for the daily newspaper—circulation, classifieds, display ads and inserts—the one area that has been stable has been inserts. And now even that will start to fall because of decreasing circulation.

The daily newspapers were able to maintain profits by slashing costs by an amount greater than decreasing revenues. But the cost cutting has started to hurt circulation. While circulation has been dropping at daily newspapers for years, the rate of decline has been increasing dramatically. And there is a direct correlation between decreases in circulation and inserts revenue, because retailers pay for these on a per-amount price.

So expect continuous decreases in revenue—a 25 percent fall for daily newspapers is my street prediction, as opposed to the skyscraper analysts’ forecast. Can newspapers continue cutting costs at a rate of 25 percent? No.

A large portion of last year’s expense reduction came because the cost of newsprint has dropped by more than 40 percent since November 2008. Second, many of the cost cuts were one-time opportunities, such as the removal of 401(k) plans and reducing charitable contributions.

So, unfortunately, the new optimism is a facade. As far as the Bee is concerned, my prediction is that the paper will soon cease publishing a daily newsprint product distributed throughout the region.