Experts: Newspapers Won't Be as Profitable

Newspapers will never be as profitable as they once were, experts say, but can still do well
The writing on the screen

BY THOMAS MAIER
thomas.maier@newsday.com

April 10, 2007

They don't feel like part of the traditional newspaper thrown on your doorstep - online chats, podcasts, video and audio feeds, plus searchable databases to aid in the hunt for a new home, used wheels or the best pizza on Long Island.

But increasingly they are important parts of the modern newspaper, an ever-evolving format for news and information that is making a not-so-subtle, sometimes wrenching, shift from ink-stained newsprint to computer screens in the Internet age.

Last week's decision by Newsday's parent, Tribune Co., to become a private enterprise, away from the financial demands of Wall Street, will provide only a little breathing room for a media company in the throes of change, experts say.

"It's too early to tell, but there's a sense that companies looking at quarterly reports are more afraid to experiment and innovate," explains Randy Bennett, vice president of audience and business development for the Newspaper Association of America, a trade group based in Arlington, Va.

In a sense, the move by Tribune to go private is a throwback to an earlier time, when newspapers were owned by families such as the Hearsts and the Pulitzers. In recent decades, most major media have been publicly traded, yielding rich profits for investors until recently, when Wall Street began punishing newspaper stocks because of declining circulation.

No longer the only 'road'

But whether they are publicly held, controlled by private owners or even operated through a nonprofit foundation, America's newspapers face unprecedented challenges for advertising dollars and the public's attention.

"Newspapers will never go back to their historical level of profitability," said Philip Meyer, a journalism professor at the University of North Carolina at Chapel Hill. Newspapers, he notes, used to have "a near-monopoly in the market, and the newspaper owner owned the road on which information flowed."

Meyer's 2004 book on the industry, "The Vanishing Newspaper," explained how perhaps the strongest mass medium the United States has ever seen for presenting vast amounts of information has steadily lost readers during the past few decades because of technological changes, particularly competition from the Internet.

Despite a host of worries, including substantial recent drops in national and classified advertising, Meyer said, "You can still make an investment case for newspapers." He said the strength of traditional newspapers to break news and "influence" society won't go away soon if their owners learn to adapt.

Meyer said that by moving steadily onto the Internet, newspapers can make a substantial dent in the costs of newsprint and transporting papers, costs that now account for as much as 17 percent of a newspaper's total expenditures. "The new model can be built on information, as the leading trustworthy provider of information," Meyer said. "But now is the time to do it."

While taking a newspaper company private might seem a good idea, it means little in the long run if no investment is made in a long-term strategic plan to improve its financial picture, said former newspaper editor Alan D. Mutter, now managing partner of Tapit Partners, a Silicon Valley investment firm specializing in new media.

Slow to adapt

Mutter, who writes a blog, or Web log, about the newspaper industry, pointed to the Philadelphia Inquirer, which went into private hands last year after the break-up of the publicly held Knight-Ridder chain, as an example of the difficulties facing newly privatized papers. Layoffs began in January, and 71 newsroom employees - about 17 percent of the editorial staff - departed. Mutter notes that, after taking on sizeable debt to fund the purchase, "There was little extra cash to put into the product."

Overall, he said, newspapers have been slow to adapt to technological change, often publishing stories based upon the "personal predilections" of editors and reporters - articles that may win journalism prizes but fall outside the interests and needs of most readers. "In a market that has changed dramatically," he said, "it's a huge problem."

Despite these challenges, Mutter said newspapers remain a "unique and powerful brand with a high degree of credibility," provided by staff who usually know more about local government, schools and social activities than any competing medium, including television, cable and radio.

Online ads surge

Bennett, the trade association executive, said newspaper companies are making substantial inroads with online advertising, which has been growing at a brisk 30 percent annual rate, though last year it still accounted for only $2.7 billion of the $49.3 billion total spent on newspaper advertising. Local retail and classified ads accounted for almost 80 percent of last year's spending on newspaper advertising, the association's records show.

Print-ad revenues have been flat or declining in the past year for "cyclical" reasons, Bennett said, reflecting the slowdown in real estate. Revenue from online ads, meanwhile, is still far short of replacing what print ads generate, he said.

To grab more of the hard-to-reach younger-than-35 audience, Bennett said, newspapers are investing in numerous online ventures. As an example, he pointed to newspaper companies joining with Internet search engines such as Yahoo in an effort to maximize advertising potential.

Hearst, MediaNews and other companies representing a total of 150 newspapers recently announced a deal with Yahoo for online classified advertising, aimed initially at job recruitment. "In an age of many media platforms, newspapers have to think of what is the right way to reach a certain audience," Bennett said.

More modest margins

Even veteran industry observers like Meyer said they've changed their expectations for newspapers. No longer will publishers enjoy 20 percent to 40 percent profits. Today, large urban newspapers often produce profit margins in the teens - considered very good for most industries - though Wall Street investors have not been satisfied.

Meyer said newspapers will have to learn anew how to compete, as they did after World War II amid growth in television, FM radio and direct-mail advertising.

Meyer said he's surprised what the advent of Internet competition has meant for his own life. Rather than buy a newspaper ad to rent a property he owns, Meyer said, he used craigslist, a mostly free online service that has sapped considerable paid classified advertising from newspapers in recent years.

"I felt so guilty," he said, "but it was faster and cheaper."

Increase in newspaper ad spending from 2003 to 2006:

Print

4%

Online

119%

Amount spent last year:

Print

$46.6 billion

Online

$2.7 billion

SOURCE: NEWSPAPER ASSOCIATING OF AMERICA
Copyright 2007 Newsday Inc.