The U.S. publishing industry has been grappling with sinking
advertising revenue for a long time, and global economic setbacks
have only worsened the situation. The downturn in the publishing
industry came in the wake of declining print readership as more
readers prefer free online news, thereby making the
print-advertising model increasingly irrelevant.
Changing consumer preferences and the advent of new and
innovative technologies have been altering the way news is read and
offered. Readers now have more choices to collect and read articles
and news through devices such as netbooks, tablets or other
hand-held devices.
These have been weighing upon the newspaper industry, as
advertisers now get low-cost avenues through which they can reach
their target audience more effectively. We believe that an
alternative and a stable source of revenue is the demand of time to
salvage the dwindling newspaper industry.
Let's have a look at what is happening in the publishing
industry and how newspaper companies are adapting to the changing
scenarios to keep themselves alive in the race for survival.
Circulation Falling Prey to Internet
Newspapers have fared far worse than magazines, as the online
medium has enjoyed an upper hand in recent years. The
two-decade-long erosion in newspaper circulation reinforced the
decline in advertising revenue. Circulation has also fallen prey to
budget cuts with newspaper companies reducing the number of print
pages and newsroom staff to combat the downturn.
Despite the fall in newspaper circulation, some companies are
reporting improved revenue from circulation due to the increase in
subscription and newsstand prices. On the flip side, while the
increase in prices for print editions is generating more
circulation revenue, it is also resulting in subscriber losses due
to the shift in preference for free online content.
Waning Newspaper Advertising Revenue
Advertising volumes are still under pressure as advertisers keep
shying away from making any upfront commitments in an economy which
has yet to recover.
According to the data released by the Newspaper Association of
America, total advertising revenue for U.S. newspapers slipped 5.1%
year over year in the third quarter of 2012 (July to September) to
$5.27 billion, after falling 6.4% in the previous quarter, marking
the 25th consecutive quarter of decline. The last time the industry
witnessed an increase in revenue was in the second quarter of 2006,
when advertising revenue grew 1.1%.
Data Source: Newspaper Association of America
According to eMarketer, U.S. newspaper print advertising
revenues are projected to decline to $16.4 billion in 2016 from
$19.14 billion in 2012. Print advertising revenues are expected to
be $17.97 billion in 2013, $17.25 billion in 2014 and $16.73
billion in 2015.
Data Source: eMarketer
Data compiled by the Newspaper Association of America suggested
print advertising declined 6.4% to $4.51 billion in the third
quarter of 2012, after declining 7.9% and 8.2% in the second and
first quarters of 2012, and 8.0%, 10.8%, 8.9% and 9.5% in the
fourth, third, second and first quarters of 2011, respectively.
National advertising sales declined 10.4% to $738 million, retail
dropped 6.0% to $2.64 billion and classified dipped 4.8% to $1.14
billion during the third quarter.
Data Source: Newspaper Association of America
Print advertising revenue at
The New York Times Company
(
NYT
) dropped 10.9% in the third quarter of 2012. At
Gannett Co. Inc.
(
GCI
), publishing advertising revenue fell 6.6% in the third
quarter.
Print advertising revenue tumbled 7.6% at The McClatchy Company
(
MNI
) and 11.0% at
The
Washington Post Company
(
WPO
) during the third quarter of 2012. Publishing advertising revenue
dropped approximately 8.5% at
Journal Communications, Inc.
(
JRN
) during the quarter. Print advertising revenue at
The E.W. Scripps Company
(
SSP
) fell 5.3% in the third quarter.
Efforts to Mitigate Losses
In an effort to offset declining revenue and shrinking market
share, publishers are scrambling to slash costs. This has compelled
many newspaper companies to undertake cost-cutting measures, such
as reducing headcount, implementing pay cuts, furloughs, suspension
of dividends, voluntary retirement program and closure of printing
facilities.
Newspaper companies have now been remodeling and restructuring
themselves to better align with the growing need of marketers,
targeting younger people, affluent households and other demographic
groups with multiple web and print publications. The publishing
companies are adapting to the changing face of the multi-platform
media universe, which currently includes Internet, mobile, tablet,
social media networks and outdoor video advertising in its
portfolio.
Publishing companies have been offloading assets that bear no
direct relation with the core operations. The New York Times
Company divested its remaining stake (210 Class B units) in the
Fenway Sports Group, the owner of the Boston Red Sox and the
Liverpool Football Club, for $63 million.
Another example of shedding the assets by the company is the
sale of Regional Media Group, which has long been grappling with
shrinking advertising revenue.
Waning print advertising revenue, in an uncertain economy,
compelled The New York Times Company to take this tough decision of
divesting Regional Media Group, part of The New York Times Media
Group. This would allow the company to re-focus on its core
newspapers and pay more attention to its online activities. The
decision to divest the division is also considered part of the cost
containment efforts undertaken to stay afloat in this turbulent
environment.
The New York Times Company on September 24, 2012, completed the
sale of About Group, which it acquired in 2005, to InterActiveCorp
for a consideration of $300 million. In October, the company sold
its stake in Indeed.com, a job portal, for approximately $167
million.
Online Advertising Gaining Traction
Advertisers are migrating to the Internet driven by increasing
online readership and lower online advertising prices compared to
print. Consumers are now spending more time online, and are
searching news articles on the Internet.
Newspaper companies, who gauged this trend, have been trying to
revamp themselves by increasing their digital applications. Digital
advertising revenue remains a sole performer in the newspaper
industry. McClatchy witnessed 2.7% rise in digital advertising
revenue with retail, national and classified advertising categories
jumping 0.6%, 9.9% and 3.0%, respectively.
Data released by the Newspaper Association of America suggested
that online advertising revenue climbed 3.6% in the third quarter
of 2012 to $758.9 million from $732.6 million in the prior-year
quarter, reflecting eleventh consecutive quarter of growth.
The rate of growth in online advertising improved from 2.9%, 1.0%
and 3.1% witnessed in the second and first quarters of 2012 and the
fourth quarter of 2011, respectively, but remained lower than 6.2%,
8.0% and 10.6% increases registered in the third, second and first
quarters of 2011, respectively.
Data Source: Newspaper Association of America
The study done by eMarketer reveals that U.S. digital
advertising revenue for newspapers will increase to $4 billion in
2016 from $3.4 billion in 2012. Digital advertising revenues are
expected to be $3.59 billion in 2013, $3.75 billion in 2014 and
$3.89 billion in 2015.
Data Source: eMarketer
Pay As You Access
"To read further please subscribe" is the new trend that
newspaper companies are fast adopting. To curb shrinking
advertising revenue and improve market share battered by the recent
economic downturn, some of the publishing companies are now
considering charging readers for their online content. We believe
that this would mark an end to the free usage of online contents.
Despite hiccups in the economy, the online subscription-based model
still promises guaranteed revenue generation.
Rupert Murdoch, the Chief Executive Officer of
News Corporation
(
NWSA
), has long been pushing for the online subscription model for all
general news websites. But newspaper companies have been reluctant
in doing so, as they feared losing readership and, in turn,
advertisers.
News Corporation has taken a leap toward an online
subscription-based model for general news content. News
International, a subsidiary of News Corporation, began charging
readers for online content for
The Times of London
and
Sunday Times of London
, effective June 2010.
Business newspapers such as
The Financial Times
and
The Wall Street Journal
(owned by News Corporation) have long been following an online pay
model. But levying access charges on readers for online access to
general news content was a first for any news publication.
Another media giant, The New York Times Company, on March 28,
2011, launched a pricing system for NYTimes.com similar to that of
The
Financial Times'
metered system, whereby after browsing a certain number of free
articles, readers will be asked to subscribe for complete access to
its articles on phones, tablet computers and the Internet.
The New York Times Company fixed monthly charges of $15 for
access to more than the restricted number of articles on its
website and on a smartphone application; $20 for unlimited access
online and on
Apple Inc.'s
(
AAPL
) iPad tablet computer application; and $35 for online, smartphone
and iPad application. Moreover, in order to woo subscribers, the
company introduced a plan of 99 cents, under which one can enjoy
all digital offerings for one month.
The company also indicated that the users of NYTimes.com will be
able to read 10 articles per month without spending a penny.
However, readers visiting The New York Times Company's website via
blog links or social-media sites such as
Facebook, Inc.
(
FB
) or Twitter will be able to access an unlimited number of
articles.
But traffic reaching the company's website through search
engines such as
Google Inc.
(
GOOG
),
Microsoft Corporation's
(
MSFT
) Bing and
Yahoo Inc.
(
YHOO
) will be able to view five articles per day before being asked for
a subscription.
We believe the success of the pay model depends on the
accessibility of new articles across the web. Potential customers
will be reluctant to shell out a penny if content is available free
of cost elsewhere. However, The New York Times Company notified
that the number of paid digital subscribers for
The Times
and the
International Herald Tribune
reached 566,000 at the end of the third quarter of 2012, reflecting
a jump of about 11% since the end of the second quarter.
The company also launched a pay-and-read model for
BostonGlobe.com for a weekly subscription of $3.99. The number of
paid digital subscribers reached 26,000 at the end of the quarter,
representing an increase of 13% since the end of the previous
quarter.
Gannett is focusing on its subscription-based model and Digital
Marketing Services products. Management expects the U.S. Community
Publishing division's subscription revenue to increase 25% by the
end of 2013, which would translate into a contribution of
approximately $100 million to operating profit. It has successfully
deployed subscription-based model in 78 local publishing markets.
For 2012, company-wide digital revenue is projected to come in at
$1.3 billion, up 19% from 2011.
OPPORTUNITIES
Despite the tough times faced by the publishing industry, there
are a number of defensive names in the group that can hold their
ground. Companies are radically changing their business models to
get in line with industry trends.
Gannett Co. Inc.
(
GCI
) is diversifying its business by adding new revenue streams to
make it less susceptible to economic uncertainties. The company is
also streamlining its cost structure, strengthening its balance
sheet and rebalancing its portfolio. Gannett remains well
positioned to harness the opportunities of rapidly changing
business model that includes digitalization in order to keep itself
on the growth path. The company recently provided update of its
growth initiatives and stated that its long-term objective is to
attain annual revenue growth of 2% to 4%.
The company posted better-than-expected third-quarter 2012
results. The quarterly earnings of 56 cents a share beat the Zacks
Consensus Estimate by a couple of cents, and rose 27.3% from last
year's 44 cents. Gannett's total revenue climbed 3.4% year over
year to $1,309.3 million during the quarter, and came ahead of the
Zacks Consensus Estimate of $1,293 million.
Gannett currently holds Zacks Rank #3 that translates into
short-term Hold rating. Other stocks in the publishing sector that
look promising are
Lee Enterprises Inc.
(
LEE
), which holds a Zacks Rank #1 (Strong Buy) and
The McClatchy Company
(
MNI
), which holds a Zacks Rank #2 (Buy).
WEAKNESSES
The newspaper industry continues its struggle with plummeting
advertising revenue amid the economic headwinds. Although murmurs
about advertisers returning to the market are gaining ground as the
economy recovers, the positive effects are yet to be realized.
The current economic upheaval is taking a toll on publishing
companies, and
The New York Times Company
(
NYT
) is no exception. Total advertising revenue slid 8.9% to $182.6
million in the third-quarter of 2012, reflecting declines of 4% in
July and 11% in both August and September. Print advertising
declined 10.9% during the quarter.
Both national and retail advertising dipped 9.5% during the
quarter. Total classified advertising dropped 7.9%. The company's
high dependence on advertising revenue, a derivative of the health
of the economy, remains a potential threat. However, the company is
repositioning itself for improvement in print and digital media
through a new subscription based model. The New York Times Company
currently holds Zacks Rank #3 (Hold).
Let's Conclude
The newspaper companies are transforming their business models
to better position themselves in a multi-platform media universe.
Although the U.S. economy is witnessing a sluggish improvement in
the advertising environment, we believe 2013 will not likely mark
the resurrection of the publishing industry.
With a strategic and steady newspaper budget, we could see fewer
layoffs, increased focus on web and local content, improved
subscription and concentration on profitable circulation.
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