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US Newspaper Web Sites Grew Their Advertising Revenues 22.3% in Q1 Over A Year Ago Which Is Great, But Their Print Editions Dipped 6.4% Which Is Terrible -- Add The Two Together and “Terrible” Wins

Philip M. Stone May 31, 2007

Newspapers are now accounting a record 7.1% of their profits from their Internet sites which is good news and bad news. Good news because they are growing their Internet revenue at a decent, if slowing, rate, but bad news because the print revenues are down so much that they make the Internet figures look better than they would otherwise be.

It’s when you add the gains from the Internet sites to the losses from print that one gets the true picture, and that continues to look bleak for the US newspaper industry.  All things are relative -- what that means is that there are still healthy profits being made, but print’s losses are growing to such an extent there is no telling how long it will take digital activities to make up for them, and so the only way to maintain those margins  is more cut, cut, cut.

The Newspaper Association of America seems to have given up the ghost of trying to promote print. In issuing the Q1 advertising figures the NAA’s news release headline dwelled in its first two paragraphs on newspaper web activities doing so well. It’s not until the third paragraph that one gets “the rest of the story” as Paul Harvey said.

“Advertising revenues at newspaper Web sites totaled $10.6 billion for the first quarter of 2007, a 4.8% decrease from the same period a year earlier. Spending for print ads in newspapers totaled $9.8 billion, down 6.4% versus the same period a year earlier,” the news release stated.

Its lead focused on “advertising revenues for newspaper Web sites increased by 22.3% to $750 million …the increase reflects the 12th consecutive quarter of double-digit growth” since the NAA started tracking online ad spending on newspaper web sites in 2004. ”

Study the two paragraphs and real facts of US newspaper life cry out. Newspaper print revenue is $9.85 billion, and online revenue is $800 million. A 10% increase in online revenues does not even make up a 1% drop for print.

And although the NAA release didn’t get into it, the bad news coming from many newspaper groups in their Q1 figures is that while their Internet revenues continue to grow in double digit percentages, the rate of that growth has slowed down considerably. In other words it is going to take longer for the web activities to make up those print losses than publishers may have previously estimated.

And this kind of bad news really does rattle the capital markets, as Tribune has just learned to its chagrin. In going forward with the Sam Zell bailout, Tribune needed to borrow some $8 billion in order to pay shareholders the promised $34 a share, and it will need to borrow another $4 billion later in the year to complete the deal.

But bond buyers had read Tribune’s dismal Q1 results and then its April results and apparently based on that they upped the cost of the money. Tribune had wanted seven years to pay back the $8 billion; instead the bond holders increased the interest rate on the loan by half a percentage point, said that applied to $6.5 billion of the loan that can be paid in seven years but the other $1.5 billion, at a slightly lower interest rate, had to be paid back within two years. Tribune had little choice but to accept.

In dollar terms the increased interest rate will cost the company an additional $40 million a year it had not counted on. And how does Tribune get the money to pay back those loans apart from continuing its cut, cut, cut campaign? (57 editorial staff at the Los Angeles Times are among the latest to go). It figures its cash flow at the current time is around $1 billion a year and paying the loans will probably take up at least 60% of that, if not more.

So to operate the business comfortably probably means more asset sales than originally envisaged. The Chicago Cubs will be sold at the end of this season and the company will be looking for that to provide around $750 million. But what else? Some of its online ventures such as its share in CareerBuilder or some of its cable TV business? On the other hand a deal it thought it could take to the bank with Gannett buying two Connecticut newspapers for $73 million has been called off.  A union at one of the newspapers got an arbitrator’s decision that the union contract had to be assumed by Gannett as part of the sale and Gannett’s response, “No deal”.

Tribune says it will look for new buyers, but Gannett’s decision not to buy because of that union Agreement gives a very good look into what newspaper buyers want to do these days – cut costs absolutely to the bone and assuming a union contract doesn’t allow that so it’s no deal, or a price reduction. A sign of the times.

Alan Mutter, a managing partner in Tapit Partners that advises information technology companies, has a great blog, Reflections of a Newsosaur, that is always an interesting read. He has done some math indicating that US newspapers will earn some $2 billion less this year than last year from their print activities.  He has taken as his working model that newspapers usually generate 23% of their annual revenues in Q1, and then 25%, 24% and 28% in each succeeding quarter.  Online, he believes will make up some $600 million of that shortfall, and he figures total revenue will hit near $48.8 billion, down 3.1% from last year.

Those figures will likely be worse if Q2 performance continues as Q1, and April numbers showed the big slide continuing. These NAA figures must be really frightening in the newspaper executive boardroom: “Among the major print components in the first quarter, real estate advertising fell 14.2% to $953 million. Recruitment dropped 14.3% to $975.3 million. Automotive was down 20.1% to $751.3 million. All other classifieds were down 0.5% to $699.3 million.”

Many newspapers are now making deals with those very online classified sites that have caused them so much grief – if you can’t beat them, join them – and the NAA believes that is absolutely the way forward, although others express caution on newspapers losing their branding power in such deals.

John F. Sturm, NAA President and CEO,  explained, “While the classified category demonstrates the impact of how consumers and advertisers use the various media options available today, newspapers continue to make aggressive moves to redefine classified advertising through new online partnerships and other approaches that will position them for the future.”

He might have added words to the effect that those deals with the likes of Monster.com and Yahoo Jobs need to start producing results very quickly. Or else it will be even more cut, cut, cut for print, and when will readers finally say enough is enough!

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