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Drop-in ads raise questions for newspapers

For newspapers, February was the cruelest month. So far.

Revenue from advertising was in striking decline last month, compared with February a year ago, and was generally weaker than analysts had expected.

And while there was one piece of good news for the industry -- ad spending on newspaper Web sites rose -- many industry watchers were wondering whether last month's declines were part of a short-term slump or whether they signal a deepening systemic problem.

"I'm reluctant to say that a single data point is a trend," said Barry Parr, a media analyst at Jupiter Research. "But those are scary numbers, especially when we're not in a recession."

At USA Today, the nation's biggest newspaper, ad revenue was down 14 percent last month, compared with February last year. Gannett, which owns USA Today and is the nation's biggest newspaper company, reported that its overall ad revenue declined 3.8 percent last month from a year ago.

Ad revenue at the New York Times Co fell 6 percent overall, declining 7.5 percent at the New York Times; ad revenue at the company's New England Media Group, which includes the Boston Globe, was down 4 percent. At the Wall Street Journal, published by Dow Jones, ad revenue was down 10 percent.

The Tribune Co, whose papers include the Los Angeles Times, the Chicago Tribune and the Baltimore Sun, reported losses of more than 5 percent. So did McClatchy, whose papers include the Miami Herald, the Sacramento Bee and the Lexington Herald-Leader in Kentucky.

Even papers in smaller markets, which are shielded from some of the forces buffeting some of the bigger metro dailies, saw losses last month. Ad revenue for the publishing division of Media General, which owns the Tampa Tribune, the Richmond Times-Dispatch and the Winston-Salem Journal, were down 5.8 percent.

Most of the numbers were worse than January's and came after a difficult year in which many newspapers continued to pare costs by laying off employees, shrinking the physical size of their print publications and reducing benefits. Several newspapers also tried raising revenue by accepting advertising in prominent spaces that they had long reserved for news.

And still the numbers were bad. Collectively, last month's sales were "the worst group performance to date," Steven Barlow, an analyst at Prudential Equity Group, wrote to his clients.

The newspaper companies blamed the declines largely on the continuing shift of classified advertisers from print to online, especially to mostly free sites like Craig's List. In some cases, particularly in Florida and California, they traced the weaknesses to volatile real estate markets.

Tampa, Florida, which is also recovering from a series of hurricanes, was hit particularly hard, with revenue from real estate ads plunging 44 percent compared with February last year. Tampa's overall classified revenue was off 27 percent, with help wanted down 32 percent and automotive off 27 percent, Media General said.

Lauren Rich Fine, a media analyst for Merrill Lynch, cautioned in her analysis of McClatchy's numbers last month not to "overreact to just one month of poor performance."

Nonetheless, she said, McClatchy's problems were "just starting."

She cited the stark comparison between California's hot real estate market in February last year, when revenue from classified real estate ads was up 48 percent, and its weaker market last month, when that revenue was down 20 percent.

Mark Fratrik, an economist at BIA Financial Network, said last month's results were "not a blip on the screen."

"It's fundamental, what's going on with newspapers," he said. "The younger groups, the most desired demographics, are just not reading them. They aren't listening to traditional radio either, but I tell radio broadcasters that they're lucky not to be in newspapers."

Mirroring the slide in ad revenue is a long, slow decline in circulation.

Newspaper circulation nationally reached its peak in 1984, when there were 1,600 morning and afternoon paid dailies with a circulation of 63 million.

With the rise of cable television and, later, the Internet, newspaper circulation began to decline. Today there are 1,450 paid dailies with a circulation of 53 million. The losses have accelerated over the last two years.

While many newspapers still have healthy profit margins, their costs are up and ad revenue is down.

On the bright side, the Newspaper Association of America said that ad spending on newspaper Web sites jumped 31.5 percent last year compared with the year before, to US$2.7 billion.

The bad news is that online spending accounted for only 5.4 percent of all newspaper ad expenditures last year, the association reported. And print revenue fell 3.7 percent last year to US$13.2 billion, from the year before.

Online spending is projected to continue to grow, and many newspapers are investing more and more in their Web sites. But so far, the online revenue is too small to begin to compensate for the losses from print advertising.

Parr said that gap was going to force the industry to adapt to survive and that last month's results were just a symptom of this larger struggle.

"There is absolutely no question that the next 10 years are going to be really bad for the newspaper business," he said.

"This is a time of wrenching change and chaos. All of our assumptions about newspapers are going to be changed. The format, the business model, the organization of newspapers have outlived their usefulness," he said.
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