October 26, 2012

Just when investor confidence in the newspaper industry was picking up, the New York Times Co. stopped the turnaround with a surprisingly dismal earnings report Thursday.

New York Times shares lost more than a fifth of their value in a single day and did not rally Friday morning. The markdown spilled over to Gannett and other newspaper stocks as well.

Furthering the gloom, Times’ executives said in a conference call that they expect similarly bad ad trends in the fourth quarter.

So the morning after question is whether the Times’ reversals portend trouble for the industry at large. One could argue (see below) that the Times’ operations and advertising base are so different from most other papers that it should be viewed as an outlier.

But for the last several years, it has been an industry leader, pioneering a successful digital and print subscription model, while wheeling out impressive digital editions on all platforms and expanding internationally.

If the top dog stumbles after a new round of advertising setbacks, the rest of the pack seems even more vulnerable.

The New York Times faces unique business challenges

Why the Times Co. recorded a quarterly print ad loss of almost 11 percent compared to the same period a year ago was captured in a sharp exchange during the conference call between veteran analyst Doug Arthur and Chief Advertising Officer Denise Warren:

Arthur: I get the fact that the economy is not perfect and people are highly uncertain and all that. But the ad number is really shockingly weak in the quarter. And it’s … way off-trend of what you’ve seen in the last 4 to 8 quarters, particularly at The Times. Were there any particular categories, I’m thinking particularly the luxury retail category, which is pretty important to you guys, that … went off the reservation here?

Warren: Let me dig into that a little bit for you, in terms of strong and weak categories. Actually, let me start with luxury, which was actually strong in the quarter not weak … In terms of the weakness by category, we saw many of our large categories were impacted. Financial was down overall … You can write off the economy, but we are hearing from business leaders that they aren’t extremely concerned. And the lack of business confidence is growing in many, many segments, financial being one of them. Entertainment was down due to a lack of major releases in the quarter. Department stores had weak retail sales performance, so that impacted us. And then real estate is down, mostly due to the lack of new development in the New York market and therefore, [a] very, very tight inventory situation. In addition to luxury being strong in the quarter, we had nice performance from automotive and we also saw increased spending in transportation from the airlines.

Even including its two New England papers, the Times has a radically different ad mix from the industry norm as this chart indicates:

Advertising Shares By Category
National Retail Classified Other
New York Times Co., print & digital (3rd quarter) 64% 16% 15% 4%
Newspaper industry, print only (2nd quarter) 19% 58% 24% NA
The second quarter numbers came from an NAA estimate. In our analysis, the figures would not be substantially different if they included digital as well as print.

Retail, including ads from local stores and inserts from national chains, is the most important category for most newspapers, while the New York Times Co. is reliant on national.

So a weak run of movie releases or an advertising pull back by brokerages is no big deal for the Milwaukee Journal Sentinel or Miami Herald, but it is for the Times. Those current troubles for the Times could reverse in another two or three quarters.

How The New York Times is like the industry

On a brighter note, the company’s digital-only subscription base grew again, up 11 percent from the end of the second quarter to 592,000. With its paywall in place for a year and a half and the allowance of free articles recently cut from 20 to 10 a month, management has minimized any loss of digital page views and ads served as a drag on digital ad results.

Nonetheless, digital was down too. Warren blamed the huge inventory and efficient real-time auctions, which drive down prices — a problem for the whole industry.

Despite some mystery about the extent of the company’s use of discounted trial subs to build the numbers, the digital circulation initiative looks to be a huge success. Other big companies like Gannett and McClatchy are just starting down that road and are that much more exposed than the Times to continued advertising reverses.

Throughout the industry, it has become apparent that the substantial portion of digital ad revenues still tied to “upsells” of print classifieds will continue to fall. So companies need strong digital-only gains and income from other digital ventures just to cover those losses and then show overall revenue progress.

What the market will tolerate

Publicly traded newspaper shares have shown robust improvement over the last year or so. Investors seem to have discounted the bankruptcy risk at companies with heavy debt loads like McClatchy and Lee. And the growth potential in both digital and circulation revenues looks much more attractive than it did.

The industry also gets credit for good expense control — though that often translates into new rounds of newsroom cuts and no pay raises, along with smaller papers and less newsprint consumption. The layoff action picks up this time of year as companies lock into 2013 planning.

The “less bad losses” storyline on ad revenues and total revenues has now dragged on and on since 2010 as other media sectors recover. Until the companies begin recording at least modest revenue gains, there is not much in the numbers to back claims of a full-throttle recovery.

We can now chalk up 2012 as one more year a turnaround for newspaper organizations didn’t happen.

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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…
Rick Edmonds

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