If It were Not for the Non-Print Activities of Newspapers Their Very Poor 3rd Quarter Results Would Be A Whole Lot Worse

Philip M. Stone - October 24, 2005

The financial divide between traditional media revenues and new media continues to grow, and if it were not for traditional print’s new media activities their 3rd quarter financial results would resemble a bloodbath. For all the cost cutting thus far, it’s not enough. and it’s a race to see if their new media investments can save the day.

Google, meanwhile, without any traditional media ties, furthers its hold as the world’s largest capitalized media company, now valued at $95 billion!

The New York Times Company, market capitalization “only” $3.94 billion, reported third quarter earnings down 52% from a year earlier. Everyone knew the numbers would be bad, given the announcement of a second round of layoffs just a few weeks before, but these results were at the bottom of expectations. 

And the caution light really flashes when a study of the financials shows that those profits would actually have been a whole lot worse had it not been for the increasing revenue from the Times’ investment in new media. Ad revenues for its Internet sites were up 30.5% while its $410 million investment in About.com earlier this year drew an operating profit of $3.8 million on revenue of $14.2 million.

Ad revenue at About.com increased by 67% making it a major player within the Times stables.  The company’s overall revenues increased by 2.2%, but eliminate About.com and the increase was just 0.4%.  Ad sales were up 4.4% in September, but again eliminate About.com from the equation and the increase was just 1.6%.

And the Times’ overall balance sheet raises a few eyebrows with just $37 million in cash and equivalents compared to $1.3 billion in debt. No wonder it is on a savage cost-cutting exercise.  Google, on the other hand, has some $7.6 billion sitting in the bank.

Looking at the financials of many other top media print companies it soon becomes apparent that it is their activities outside of print that is their salvation.

At Dow Jones, market capitalization $2.75 billion, there is a two-prong attack on the bad tidings – investment in a new Saturday Wall Street Journal producing mixed results so far depending on whose spin you believe, plus long-term cost savings projects from switching their international editions to compacts, getting out of its money-losing international venture with CNBC, and announcing an investment to cut its page width by 20% in 2007 to save newsprint costs.

That all translate into a poor third quarter with profits dropping 16% and a projection that the fourth quarter won’t be too healthy either. Its chief operating officer describes the print advertising future as “choppy” whereas online continues to be robust.

“Choppy” means technology advertising has dropped 12% this year and financial advertising 15% and those two categories alone make up about one-third of the Journal’s total linage. Technology might improve in Q4 but consumer advertising – cars and travel – will stay poor.

But at DJ’s electronic publishing unit, when looked at by itself, it was a very different story.  Revenues increased 30% for the wsj.com and DJ newswires business, operating income increased 46.3% over last year due to the acquisition of MarketWatch and organic growth at Consumer Electronic Publishing, Indexes and Newswires and operating margin was up 25% from 22% a year earlier.  Paid subscribers to The Wall Street Journal Online grew to 764,000 up 9% from the prior year period. In all, the electronic unit now accounts for about 30% of the company’s total revenues.

Standard & Poors took a look at all that and issued a warning for DJ’s long-term credit rating, saying it might cut it from its current A-, which is its seventh highest rating. S&P says it is concerned by the company’s print publishing operations and that its overall financial numbers were not improving as quickly as previously envisioned.

And as a final example of a traditional media company reorganizing itself as a new media company, at E.W. Scripps Company, market capitalization $7.53 billion, management is harvesting good fortune from two cable TV networks and from its Shopzilla online site that it bought for $525 million. The cable business showed 20% top-line growth in the third quarter and Shopzilla more than doubled its revenue from last year. Even its shop at home business saw 25% growth. On the other hand, newspaper revenue was up just 5% and broadcast revenue dropped 10% meaning that traditional business combined saw negative growth.

And then you compare all of that to the new media companies that don’t have the chain of traditional media around their necks. Yahoo, market capitalization $49.72 billion, saw its third quarter revenues jump 47%, with gross profits up 41% over the same period a year ago.

But even that pales in comparison to Google. Its $95 billion market capitalization puts it $14 billion ahead of Time-Warner, its nearest media rival. Practically every penny Google earns comes from search advertising, and it is growing by the day. Most forecasters say search-advertising revenue will overtake display ad revenue within three years. Google’s 3rd quarter gross revenue reached $1.58 billion.

And as Google continues to roll out new products that really capture the attention of web users, and therefore even more pages on which to spread its search ads, there is no sign of any slowdown whatsoever. Google says that every day more and more big companies are coming on board the search advertising train, often at the expense of their newspapers and broadcast spend.

In the US, Google now handles 45% of web user queries, compared to 23% for Yahoo, according to Nielsen/NetRatings.

Its share price has jumped 340% from its public offering 14 months ago, closing at an all-time high on Friday of $339.90. Various forecasters are looking for it to shoot through $400 perhaps by the end of the year if there is a general NASDAQ tech rally.

On the other hand one would be hard-pressed to find a Wall Street analyst promoting a traditional media share. While many are very near their 52-week lows, the general feeling is there are further falls ahead.

Google and Yahoo between them are forecast to earn $6.7 billion in 2005, representing 52% of all US Online spending, according to eMarketeer.

Internet advertising is appealing because not only can specific types of customers be targeted, but also there are tracking services to check if people are actually viewing the ads. With newspapers there is circulation (mostly in decline) and some demographics on the newspaper’s readership, but apart from that there no real way of telling how many people actually see and, more importantly act on the ad. It make Internet advertising a hard act to beat.

Is there any solace at all for US print publishers looking solely at the print business? There might be if they notice that in Q3 the three free US Metro newspapers still operated at a loss. The bad news for paid-circulation newspapers, however, is that even Metro’s revenues leaped 32% to $2.6 million, the best quarterly performance in a year.

And for the New York Times Company that owns 49% of Metro Boston there is even better good news – that newspaper in September reported record monthly sales and operating profits.

In this environment, if you can’t beat them, join them!

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