Monday Note

For each dollar it gains in online advertising revenue, the New York Times looses six dollars in print ads. See the first quarter financial results released last week by the company Q1 2008 yielded a loss of $335,000 for the period compared with a net income of $23m for Q1 2007. Advertising revenue is down 9.2% for the group even though circulation revenue is up 1.9%.

A closer look is even more alarming. It shows a sharper decline in advertising on all regional markets (-26% for its New England operations and -19% for its other regional papers). This is actually a trend : a decline of 30% in advertising revenue versus 2007 is not uncommon in certain regional US markets affected by the complete collapse of both jobs and real estate classified ads. For the New York Times, the drop was 35% for jobs ads, 30% for real estate and 20% for cars. Needless to say, the entire US newspaper industry is bracing for the release of the first quarter results in the coming days.

The fundamentals of the sector are deteriorating much faster than anticipated. The advertising side is impacted by two factors: number one is the current recession that affects first the real-estate market, then job related ads, and now all sectors of the economy. The second factor is the structural migration of a large portion of ads towards Internet pure players — not only classified but display ads as well, since advertisers are now seeking a cheaper and measurable space on the internet. Both trends are irreversible. Revenue lost to the Internet won’t come back, even if the economy rebounds: every player will soon be addicted to a cheaper and more efficient internet. And circulation won’t help either. It is and will remain flat since newspapers are not keen to invest in major audience-boosting initiatives. In the meantime, newspapers are increasing their online audience (+12.3% for Q1 over a year ago according to the Newspaper Association of America).

What’s next then ? First, a major depreciation of assets. In an interesting piece published by Portfolio, Howell Raines, former executive editor of the New York Times, wonders if newspapers aren’t “The worst investment in America“, quoting the story of Brian Tierney who bought the Philadelphia Enquirer two years ago. Since then, Mr. Tierney has seen the value of his investment melting like the polar cap. The same applies to Sam Zell, the Chicago real-estate mogul who bought the Tribune Company last December for $8.2bn. As The New York Times reported recently Tribune Co. is dealing with a debt (now amounting to $12.8bn) that it is likely to default on, in the wake of a double-digit decline in advertising. The long-term part of this debt is now trading at 50 cents a dollar. And Mr. Zell is disappointed with the level of internet revenue (he actually coined the term “pennies for dollars”). As Howell Raines puts it in Portfolio, “[Publishers] have to find more revenue at a time when little, if any, elasticity is left in the old business model, even though newspaper profit margins still average a deceptively healthy-looking 17 percent. But those margins have been maintained by one-off fixes like radical slashes in payroll, trimming news holes and circulation, and a self-defeating stinginess in regard to innovation”.

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