Don't Stop the Presses: Print Media Still Alive!

The newspaper industry has been written off for dead more than once. With multi-year declines in print circulation, newspapers have slashed jobs and costs while activist shareholders have demanded further bloodletting or mergers. This year, No. 2 newspaper publisher Knight Ridder (KRI) was bought out by McClatchy (MNI). Speculation about future mergers abounds.

Rather than a harbinger of doom, the current downturn is part of the normal business cycle, says James Peters, publishing analyst at Standard & Poor’s. Some newspaper stocks present buying opportunities, he believes, as their valuations have been hammered down. “When we start to see better revenue growth, these stocks might look like strong value plays,” he says. “With strong cash flow, these are stable companies — they’ve been around a long time.”

Peters doesn’t gloss over the industry’s problems. The biggest is that “major advertising clients are in a cyclical slump,” he says. Meanwhile, costs are rising for paper and energy; proliferating media compete for readers and advertisers; and the Internet forces new forms of production and distribution. This “confluence of factors has created a negative perception of the industry,” Peters observes.

Predicting just when advertising will rebound is “tough,” Peters says. Summer blockbuster movies should bring in promotional dollars — and more post-release ads if the films open well. Year-over-year comparisons should be easier to beat now. Further retail or telecom consolidation, which cuts ad budgets, is unlikely in the near term, although auto advertising may continue to struggle, along with the Big Three carmakers.

Peters projects that when newsprint industries rebound, newspapers, especially those that have cut costs and invested in new products, will enjoy improved operating leverage. “Investors will see that the industry isn’t on an unending, downward march, with low or negative revenue and EPS growth,” Peters says. He believes lasting prosperity can only come from an improvement in business fundamentals and not from share buybacks, which some publishers have been doing.

Measuring the industry’s success is another problem. “The newspaper industry needs to change the perception of the business being based on print circulation to one of readership,” Peters says. “How many eyeballs do you reach?” Because most newspapers serve a local audience with no competitor, they can achieve the high levels of penetration sought by many advertisers. And while circulation is going down, readership is increasing, he says. Still, advertisers have been willing to pay higher rates to reach the differentiated audiences that newspapers can provide, Peters says. “Advertisers put value in newspapers’ significant audience reach and their readers’ undivided attention, which gives newspapers pricing power.”

Operating margins for print newspapers are very high — “around 20%, comparable to oil companies,” Peters notes. Yet as print subscriptions fall, the Internet presents distribution and marketing opportunities that many publishers are just beginning to explore. Web ad sales are growing at an explosive 25% annual rate, and newspapers claim 17% of online ads, Peters says.

Still, most newspaper Web sites are not yet profitable. While incurring costs to build online capabilities, newspapers must also maintain print operations, whose revenues are declining. To compensate, they need to merge back-office operations and find a way to distribute their content across various media platforms, Peters says.

In terms of online franchises, the Wall Street Journal Online has taken an early lead. Launched in 1996, it had attracted 768,000 paid online subscribers by the end of 2005, reports parent company Dow Jones (DJ). “They’re the most successful in terms of augmenting and not cannibalizing their print subscription with online subscriptions,” Peters says. Yet Dow Jones is already one of the most expensive companies in the publishing group.

Another Internet success is ‘TimesSelect’ from the New York Times`A` (NYT). Introduced in 2005, this online service had attracted some 176,000 paid subscribers by April 2006, according to Editor & Publisher. Peters believes About.com, a consumer advice Web site acquired in 2005, is growing revenue rapidly and expanding the Times’s Internet presence. But he expects the significant capital expenditures to depress free cash flow at the company for several years, while a difficult local economy crimps its Boston Globe operations.