Newspapers' Post-Recession Bounceback is a Definite Maybe

By Rick Edmonds

The pessimists think that 25 percent year-to-year ad losses will extend indefinitely and that all but the strongest, debt-free newspaper companies are in trouble. The optimists (I'm one) argue that at least half the current losses are cyclical and that in an improved economy a leaner news industry will recover, at least for now.

 

But my recent conversation with digital advertising insider Mike Leo has me wondering whether a deeper and different kind of recession will be followed by a different kind of recovery. It may turn out to be cold comfort that digital ad volume, as Leo says, declined itself at the end of last year and the beginning of 2009.

 

He and some others I've talked to say digital is already mounting a modest comeback even as traditional print revenue keeps falling. That could mean newspapers had a respite from losing share to new digital formats, a respite that is already over.

 

So one indicator to watch over coming quarters, since newspapers are themselves in the digital game, is how their online advertising growth compares to all digital. Newspapers used to be keeping pace in growing their online business, but according to analyst Gordon Borrell, they began trailing the pack about four years ago. In the local markets Borrell tracks, he sees newspapers pulling even again this year with other digital media in local advertising; more broadly, though, they are losing Web share in digital advertising.

 

The bigger numbers and potentially bigger trouble is on the print side. I wish a clear sense of when the recession hit could be gleaned from the quarter-by-quarter sequence of estimated total newspaper advertising revenues provided by the Newspaper Association of America. But it is not clear at all:

Year	Quarter	Percent change year-to-year
2007	1stQ	-4.80 percent
	2ndQ	-8.60 percent
	3rdQ	-7.40 percent
	4thQ	-10.30 percent
2008	1stQ	-12.85 percent
	2ndQ	-15.11 percent
	3rdQ	-18.11 percent
	4thQ	-19.74 percent
2009	1stQ	-25.00 percent (est.)

I don't see a spike there, though traditionalists might argue that newspaper advertising falls first (and recovers first) in a downturn. So maybe advertisers were pulling back well before the worst of it.

 

The industry has a history of trying to sort out secular from cyclical losses -- and it's not a pretty one. After the 2001-2002 recession, the NAA commissioned a McKinsey Co. study of the dynamics driving down classified revenues. Reporting in April 2005, McKinsey found a larger than expected loss of share to online competitors like Monster, Auto Trader and Craigslist and argued that there was another hidden loss because, in the face of competition, newspapers could not raise rates as they had been accustomed to doing. Tony Ridder, NAA chairman when the report was commissioned, denounced the study as "a very shallow and superficial effort."

 

If one reads the public company first quarter earnings reports, several say that auto and job classifieds are off 40 to 50 percent -- clearly a double dose of secular and cyclical troubles. But I was curious to see recently that McClatchy papers would be pursuing a Web-first strategy on jobs listings, relegating print to a "complement," and thus turning the typical print-to-online upsell on its head.

 

That may be an indicator that certain kinds of print classifieds will be allowed to wind down as searchability and the absence of any limitation on word count make electronic the superior format for most users.

 

A final set of questions concerns likely advertiser and consumer behavior as the economy improves. Take cars. I can go with the conventional wisdom that with more consumer confidence buyers will be back and we may even see our old friend, "pent-up demand." On the other hand, if the American companies eliminate half their dealerships, will the survivors advertise twice as much in newspapers? I doubt it.

 

Even harder to predict is whether some of the adjustments to a tough economy -- not eating out at expensive restaurants, cooling it on second home purchases -- will become semi-permanent. Perhaps the rich and their conspicuous consumption will always be with us. If not, those luxury living supplements in The New York Times and your home-town metro will be thinner.

 

I do see a bit of good news in the current cost-cutting travails of the industry. As conditions improve, reinvestment in newsrooms and a bigger kitty for new media experimentation would both be welcome, but some of the current savings (pooled editorial coverage among formerly competing papers to take an example) are here to stay. That won't pay off Sam Zell's debts as revenues pick back up, but it can help heal the bottom line at many papers.