June 25, 2007

Last week’s NAA Mid-Year Media Review in New York City only got down to basic questions as it ended with a general round-table discussion on the industry’s future.

“Aren’t we dancing around the issue of whether we need to reset the bar on expectations of profit margins?” asked Peter Appert, a Goldman Sachs analyst.

Gary Pruitt, CEO of McClatchy, and Sue Clark Johnson, head of Gannett‘s newspaper division, were reluctant to agree. Pruitt argued that, over time, newspaper companies could have “highly profitable franchises” in both print and online, even after losing market share to other Internet competitors.

Scott Flanders, CEO of privately held Freedom Communications, publisher of The Orange County Register, was more blunt. Newspapers have the choice, he said, of becoming “a larger business with smaller margins,” or “a smaller business with high margins.” He added, “it is painful for me to see us ever under-invest in content and audience aggregation even if in the short run we have to accept lower margins.”

Flanders is a tell-it-like-it-is guy who once chatted with the Wall Street Journal about the benefits of his psychotherapy (it helped him stop being wildly competitive with business peers). He made waves earlier this year when he suggested that the Register‘s business section should be more like the New York Post‘s gossipy Page Six. He explained that when he was a New York executive, running the Columbia House direct marketing music business, he read Page Six in the morning before The New York Times because that was what people were talking about all day. Newspapers, he said, need to offer conversation starters and to get comfortable with “conjecture” as well as past-tense news.

Flanders, who took control of Freedom 18 months ago after serving five years on its board, was asked if he thought being private was a plus in the current climate.

“Yes, it’s a superior form [of ownership], he replied. “It is nice not to have to give quarterly guidance” these days and to be able to accept that the business is undergoing transition in which “the point of arrival is not known.” He added that few public companies would have the leeway to start a publication like the O.C. Post, a six-day-a-week, quick-read tabloid that he expects will need a three-year start-up phase before it turns a profit.

The on-the-other-hand is that Freedom has demanding owners of its own with a large stake held by the private equity Blackstone Group and Providence Equity Partners.

On classifieds, Flanders said, “the biggest problem is price compression,” brought on not only by competition from Craigslist but also from Google searches that lead the user, without charge, to a product or service. The industry needs to look more closely at free classifieds, he added, or risk losing the “critical mass” necessary to attract readers to print classified sections.

Retail advertising and video were mentioned as potential candidates to take up some of the slack from classifieds, but Flanders cautioned that ads that are a mandatory gateway to a video news report are not user-friendly.

One of the analysts asked the executives if newspaper “expense reductions [are] impairing quality?”

“There isn’t a choice but to reduce expenses,” Pruitt replied, “but not in a ham-handed way.” In his earlier company presentation, Pruitt said McClatchy’s strategy has been to aggressively explore savings from outsourcing while keeping newsrooms close to whole. “We have to get the business right,” he concluded, “because 80 to 90 percent of original reporting is done by newspapers.”

It also became clear at the event that a stalemate has developed between public newspaper company executives and their investor and analyst constituency. The analysts want solid evidence that brighter days are ahead. The companies can only offer a litany of new things they are trying online. For right now, though, print revenue is bleeding away to Internet competition faster than transfusions of new business are arriving.

With nine companies reporting and doing their best to sound proactive, the presentations were close to what I had forecast in a story previewing the event.

Companies talked with varying candor and specificity about weak results in 2007. Typically revenues are down 4 to 5 percent year to date, even including a boost from online. The Washington Post reported the print newspaper by itself was down 12 percent.

Most companies are making up about half the shortfall on the expense side with cuts and lower newsprint prices and usage.

Online results were uneven with some smaller companies still growing revenue at rates of 40 to 50 percent per year, but bigger, more mature operations are down in the teens. McClatchy, whose once high-flying shares have been especially battered lately, has grown online revenues only 2.1 percent so far this year. That was largely a result of losing some business as it renegotiated participation in the CareerBuilder employment classifieds network. The rest of their online advertising business grew only 15 percent, considerably lower than in recent years.

Excluding online employment classified revenue, though, growth has still slowed to a modest 15 percent.

McClatchy, along with Gannett and the New York Times Regional News Group, also suffered from a sharp drop in real estate classifieds as booms went bust in Florida and California.

Participants in the big newspaper consortium with Yahoo were talking up its revenue potential, especially in the second half of 2008 when a new ad-serving platform goes up. None would speculate, however, on how big a revenue boost the arrangement is likely to generate.

As at several recent editions of these twice-a-year meetings, Lee Communications was the fastest horse in a slow field. Advertising revenue is off only 2.2 percent so far in 2007. CEO Mary Junck said the economy, real estate included, has been strong in the Upper Northwest from South Dakota to Idaho where Lee owns many mid-sized papers.

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Rick Edmonds is media business analyst for the Poynter Institute where he has done research and writing for the last fifteen years. His commentary on…
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