US Newspaper Online climbed 21% in Q3 While Print Declined 9% And That Tells You It was A Terrible Declining Quarter

Philip M. Stone November 22, 2007

The bad news coming out of Q3 newspaper revenues is that online revenue growth is still way behind making up for print’s losses, and the really bad news is that while print’s decline is accelerating, online’s growth is decelerating.

Print revenues were down 9% to $10.1 billion. Online grew 21% to $773 million. That means that online advertising is now about 7.1% of the industry’s revenue – up from 5.4% in Q3 – but a closer look at the numbers should have the alarm bells ringing for last year in Q3 online growth was 25.3%, so things are slowing down.  And since print’s advertising losses are getting bigger by the quarter that’s a recipe for even deeper gloom ahead.

And a look at October results from groups such as Gannett and McClatchy are showing it’s not getting any better. Gannett reported pro forma operating revenues for the month were down  7.9% with pro forma newspaper advertising declining 6.5% as classifieds were off an overall 11.8% -- real estate down 15.6%, employment down 12.5%, and automotive down 15%. McClatchy reported Q3 revenue was down 9.9% from a year ago, and perhaps even more disturbing, its online revenue fell by 4.1%.

So, while it is good that online’s share of a newspaper’s total revenue is increasing what the figures really tell us is that there is less money coming in from the print side, there is some extra money coming in from the online side but that combination still sees an overall revenue decline, and one of the reasons that online revenue has now grown to 7.1% is largely because of a large drop in print revenue. It’s is not by any means all online growth.

And with the real estate crisis in full bloom across the US there is just no way of knowing when things will get better. That’s reflected in the share prices for newspaper groups – Gannett at some $37, a 38% drop on the year, McClatchy at $14.53, a 65% drop on the year, even the New York Times Company down 28%.

There are newspaper companies, however, that are weathering the storm because they diversified. Take the Washington Post Company. Its newspaper is sharing the same suffering going on elsewhere, but the share price of Washington Post Company itself has grown 4% this year. The newspaper publishing division saw revenues down 7% in Q3, but the revenue from its education division grew by 22% meaning the Kaplan business is now bringing in 50.3% of the company’s total revenue and that figure is sure to grow as print, tv and magazines continue to decline.

There’s a similar case in the UK with the Daily Mail and General Trust (DMGT) best known for publishing The Daily Mail and The Mail on Sunday and for its Northcliffe regional newspapers. It announced Wednesday advertising increases for its print and digital operations, but the real income producers were the company’s Business to Business division, much of which is located in the US, which delves into such non-newspaper ventures as risk management., Lord Rothermere, chairman of DMGT explained why the group recorded record results. “Over the past decade our strategy has been to sustain and invest in our core UK newspaper business and to use the surplus cash flow and leverage of the group to acquire or develop high-growth media businesses unaffected by the UK’s advertising market and regulatory regimes. As a result of this strategy, over 50% of our operating profits are now derived other than from newspaper publishing.”

So, given the state of the US newspaper economy does that mean no one wants to buy a newspaper business these days? The answer is that size counts, small is best.

Newspaper broker Larry Grimes, who specializes in the weekly markets, says in his Newspaper Industry Report “If you are the owner of a market leading weekly newspaper we still believe this is an optimum time to sell.” He says buyer demand for strong weeklies remains strong with pricing going at around 7 -10 times cash flow. He says for larger weekly groups the pricing could be more than 11 times cash flow or put another way sellers can expect somewhere between .75 to 1.5% of annual revenue.

And he says the demand is not limited to weeklies. Smaller and mid-sized newspapers that own their market and have a successful print and online operation are still in demand although he accepts that prices are falling to around 10 times cash flow.

He warns not to be guided by recent high profile newspaper sales that were “driven by  nervous investors and financial backers”  in which seller eagerness resulted in lower prices – he says the recent Morris sale of 14 newspapers to GateHouse Media  for $115 million was at 8 times cash flow.   

But he does give this advice. “The most attractive papers (the papers that are attracting top dollar) are those which are taking a pro-active approach to their market. They continue to increase their household penetration. They are creating special sections, products and on-line resources that reach out to all major segments of their population (that includes the 21-35 demographic.) They are getting to better know their advertiser’s business and are working with them to create marketing campaigns that generate a strong ROI.

“That includes reaching out to and working closely with the realtors, auto dealers, and employment advertisers in the market. And these sellers have the cash flow and revenue growth to justify their asking price. There’s enough cash flow to cover debt service from day one.”

But Grimes has warned often that all bets are off if gasoline ever hits $4 a gallon. Back in May he told ftm, “We are all holding our breath that gasoline prices will hold steady.”  With oil now at all-time highs that has to be a renewed concern. US gasoline is averaging more than $3 a gallon this Thanksgiving weekend and if people are spending more on gasoline, and if heating oil hits $3 will all of that mean less for the retailer and, by trickle effect, less of a media spend? 

He told ftm on Thanksgiving eve, “Yes, a slow retail environment will lead to a slowdown in ad spending. The slump in the housing market has already caused a slump in the real estate advertising market. And it has affected auto sales in the same way. And soon unemployment as companies cut back on hiring.”

Is there any silver lining in any of this? He hopes so. “Local advertisers may really take a hard look at where they are getting the best value for their dollar. And they may well find newspapers are at the top of their list.”

Publishers are surely hoping he’s right.

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