What If Newspaper Executives Have It Wrong And What Ails The Industry Is Not Just Cyclical But A Sure Sign The Business Model Needs Changing

Philip M. Stone Novermber 19, 2008

A common thought among senior newspaper executives is that most of the financial problems affecting the newspaper industry today are cyclical – the economy gets better and most of what financially ails newspapers will get better, too. But what if they are wrong?

ftm put that question to a very senior US newspaper executive – unfortunately the conversation had to be off the record and the person cannot be named, but in exchange for the off-the-record there was a very frank discussion of what ails newspapers today and what, if anything can be done to fix them.

First of all, this executive does believe most of the financial ailments are cyclical. Once the economy gets better then many of the financial woes affecting newspapers will get better. But he really seemed taken aback when asked what if he was wrong, what if a renewed economy brings with it a different newspaper financial world?

And that brought forth a remarkable, “If it is not cyclical, then the business is not sustainable.”  And he went further, “Newspapers by themselves are not enough any more for newspaper companies to remain viable.” By that he meant that newspapers absolutely have to be real players in the digital world, wherever those platforms take them, and those revenues – at higher margin than print – are absolutely necessary for a newspaper company to survive in the new newspaper world order. “The trick is to transition without going broke,” he said.

And he warned that the current advertising downturn trend “is not sustainable”. In other words it had better not be permanent and there needs to be improvement soon although no one is really forecasting any such improvement for 2009.

He said that today Wall Street has valued newspaper companies as if they are all going broke, but in fact he believes newspapers do have some things going for them. The executive subscribes to the theory that 95% of newspaper advertising woes are purely because of the economy and only 5% of the decline is a permanent shift of revenues elsewhere. But he admits if he has that figure wrong then watch out!

He freely admitted that some newspaper companies out there won’t make it through this economic downturn, and there is a need for far greater consolidation.

But, he said, if a newspaper were to close down he would not be surprised to see a replacement newspaper within a couple of weeks and that replacement would be viable because it would not be lumbered with the legacy costs that the closing newspaper could no longer afford.

His basic message, “Don’t bury us, we’re not dead yet!”

So with that, it was interesting to see how Scripps Howard senior executives answered questions on-the-record during their conference call with analysts last week on the subject of cyclical woes. An analyst posed, “With the secular decline in classified and the economy getting weaker and weaker, can you explain how you can replace lost classified revenue going forward? I think everybody knows that for every dollar lost it's almost $0.80 on EBITDA and I don’t think this category is getting any better.”

Mark Contreras, senior vice president for newspapers,  replied, “The reality is that there is a combination of both secular and cyclical declines going on, but to the extent that they're secular, we are banking that we're going to build our presence in those three categories, auto, employment and real estate, interactively. And when you look at the direction of our interactive businesses in those categories, depending on the category, we're performing much better. One great example is the Yahoo consortium.

“In October, we were able to develop a brand new set of capabilities and services advertisers that we never have had and we're going to roll those out between now and February. But for the very first time our local sales forces, which are the largest in each of the markets that we operate in, are going to be able to offer an advertiser the ability not just to reach a mass audience but to target very specifically people who are interested in buying their products and services and that comes to us in a much higher CPM than we would necessarily get by producing a mass offering to an advertiser. So this is not going to be a one year fix.

“When you look at the underlying trajectory of our audiences, though, I'm frankly very encouraged. Our Internet audiences, our uniques were up in the quarter 60%. We're keeping our eyes focused on building out that audience because as we develop other products to offer and different business models to offer, we think we're going to be able to continue to create value for our shareholders by providing those services. But it's going to be in a much different package that we've been able to deliver previously and there is going to be decline and some breakage along the way, compared to our model three or four years ago.”

And is the future as the Christian Science Monitor sees it and that is to go all Web? The Scripps Howard people don’t seem to think so. Contreras, the newspaper SVP,  said he didn’t see going entirely online in the near-term although he did note that many of their newspapers are experimenting with shutting down paper delivery of  Newspaper In Education  products and that content is now being sent to schools electronically. “It's a very favorable economic relationship that we hope to expand to other areas,” Contreras said.

And Scripps has signed up with Kindle as yet another opportunity to deliver the newspaper product electronically “as we continue to face pressure on the printed delivery model.”

So, is it mostly cyclical or there is something else out there? The truth is no-one really knows but its best to prepare for the worst.