Street prediction

Sadly, the new optimism about dailies is built on false assumptions

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 drop 18 percent from the second quarter in 2008 to the second quarter in 2009, showed new earnings that more than doubled those from the first quarter of this year. The Gannett Company also reported very good second-quarter numbers. That’s not all.

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

The report was greeted as long-awaited good news for dailies and, especially, McClatchy. It suggested that the decrease in revenue was over, the cost cutting worked, and now maybe a daily newspaper chain could survive, even if they might be smaller and less profitable. No surprise, these announcements created a bump in McClatchy’s stock, 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 was reason for optimism, there really isn’t. Sadly, the recent earnings numbers are misleading and Borrell’s analysis fundamentally flawed.

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

Let me explain what is happening on the street.

First, classified revenues, which used to represent more than a third of daily newspaper’s revenues, are simply not coming back. Employers who were paying hundreds of dollars for small line ads are not going to switch from posting on Craigslist when they have job opportunities. Neither are retail companies, real-estate brokers or auto dealers. Classifieds revenue 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” dwindle.

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 even receive $4,500 per page. The price will continue to drop as contracts end and as more people find out what their competitors are paying.

The daily display rates resemble airline rates after Southwest Airlines entered the market. The rate drops are permanent, and display rates will continue to get even lower.

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 insert revenue. 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 impact circulation. While circulation has been dropping at daily newspapers for years, the rate of decline has been dramatically increasing.

Last year, for instance, the Bee’s weekly circulation dropped 7 percent. My guess in coming years is that the daily newspaper—with significantly less editorial content, less classified revenue, and with a higher delivery cost and newsstand price—will see a much greater decrease in circulation. And there is a direct correlation between decreases in circulation and insert 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.

First, 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. Secondly, much of the cost cuts were one-time opportunities, such as the removal of 401(k) plans, cutting down community involvement, no longer making charitable contributions. The other reductions come at a cost, such as decreasing the staffing expense of acquiring subscriptions, which reduces cost, but will also negatively impact circulation over the long haul.

So unfortunately, the new optimism is a facade. As far as the Bee is concerned, barring rescue from some billionaire who wishes to become closer to a millionaire before death, the paper will soon cease publishing a daily newsprint product distributed throughout the region.