(MNI) Publishing Industry Stock Review – January 2010 – Industry Outlook

The publishing industry has long been grappling with sinking advertising revenue, and the global economic meltdown has worsened the situation. This comes in the wake of a longer-term secular decline as more readers choose to get news free online, thereby making the print-advertising model increasingly irrelevant.

Circulation Falling Prey to Internet

Newspapers have fared far worse than magazines, as web-based news options have proliferated in recent years. The two-decade long erosion in newspaper circulation reinforced the decline in advertising revenue. Most media observers viewed 2009 as a watershed for the industry, but the picture remains gloomy.

The slide in newspaper circulation, which ran through the 1990s and into 2000, is accelerating. Earlier, the circulation of newspaper was falling by less than 1%, but the rate of decline accelerated to 2% in 2005, 3% in 2007 and 4% in 2008 with more and more readers migrating to the Internet. 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 higher revenue from circulation due to increase in prices for subscriptions and single copies. At The McClatchy Company (MNI), circulation revenue climbed 4% in the first nine months of 2009.

Newspaper Advertising Revenue Continues to Shrink

According to the data released by the Newspaper Association of America, newspaper-advertising revenue tumbled for the 13th straight quarter in the third quarter. Also, 2009 reflected the steepest fall in advertising sales since 1987. Total advertising revenue dropped 28% year-over-year to $6.4 billion in the third-quarter of 2009.

In the first nine months, advertising revenue also declined 28% to $19.9 billion. Print advertising revenue plunged 29% to $5.8 billion, with classified advertising revenue down 38% to $1.46 billion. Classified advertising revenue, however, actually improved after declining 40% and 42% in the second and first quarters, respectively.

Print advertising revenue tumbled 32% and 28% in third quarter 2009 at McClatchy and The Washington Post Company (WPO), respectively. Publishing revenue at Journal Communications, Inc. (JRN) and Gannett Co. Inc. (GCI) dropped 22% and 28%, respectively. Newspaper advertising revenue, excluding online advertising at The E. W. Scripps Company (SSP) fell 28%.

Internet Not Immune to Downturn

The Internet-based advertising model, which appeared to be a revenue driver, has also not remained immune to the economic crisis. The financial distress seen in the economy has impacted all business sectors Incorporatedluding auto, real estate and retail, and has hurt advertising demand. Adding fuel to the fire have been heavy job losses.

Consequently, online advertising Incorporatedluding auto, employment and real estate, fell. According to the data released by the Newspaper Association of America, online advertising revenue dropped 17% in third quarter 2009 to $623.1 million, marking the sixth consecutive quarter of decline.

Online advertising revenue at Washington Post Company and E. W. Scripps Company plummeted 18% and 20%, respectively, in the third-quarter of 2009.

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 trimming of headcount, pay cuts, furloughs, suspension of dividends and matching contribution to employee 401(k) funds, voluntary retirement program, and closure of printing facilities. Asset sales, even at trough valuations, have proven to be a less viable option in the midst of tight credit markets.

The Tribune Company, owner of the Los Angeles Times and Chicago Tribune, filed for bankruptcy. Newspaper companies such as McClatchy, Gannett and The New York Times Company (NYT) trimmed their headcount.

The companies are now even considering charging readers for online content. Newspaper companies have been remodeling and restructuring themselves to better align with growing needs of marketers targeting younger people, affluent households and other demographic groups with multiple web and print publications.

Publishers now do not concern themselves about the total number of copies distributed, but focus more on whether copies reach the target audience. This strategy helps newspaper companies attract advertisers and, in turn, generate more revenue for each copy sold.

Year Ahead

Throughout 2009, the newspaper companies have transformed their business models to better position themselves in a multiplatform media universe. However, 2010 still lacks visibility. We believe the year will not mark the true recovery of the publishing industry. Nevertheless, it is expected to fare better than 2009, as the steps taken to curb the carnage will start to bear fruit.

With steadying newspaper budgets, we could see fewer layoffs, more focus on web and local content, reduction in print pages dedicated to business or sports content Incorporatedrease in subscription and concentration on profitable circulation.

Newspaper companies’ strategic plans involve improving advertising pricing and rates structures. The companies are now even considering charging visitors to access a certain number of articles online. However, we believe, people will be reluctant to shell out if the content is available free of cost elsewhere.

OPPORTUNITIES

Despite the publishing industry facing the brunt of the economic downturn, there are defensive stocks. Companies are radically changing their business models to fall in line with industry trends. McClatchy (MNI) is transiting to a hybrid format of print and online. Management has acknowledged that McClatchy’s ultimate business model will be nearly half Internet-based.

New York Times Company’s (NYT) effective cost-cutting measures and increase in newspaper price has resulted in an improved financial position. Management now expects to save $475 million in operating costs in fiscal year 2009, up from $450 million previously anticipated. Moreover, the company’s series of steps has pulled out struggling daily newspaper The Boston Globe from the verge of collapse.

WEAKNESSES

Weakness persists across Washington Post Company (WPO) and E. W. Scripps Company (SSP), where online advertising revenue plummeted 18% and 20%, respectively in third quarter 2009. Print advertising revenue tumbled 28% at both the companies. The current economic depression has adversely affected all business sectors Incorporatedluding auto, real estate and retail, and has harmed advertising demand.

Washington Post’s magazine publishing division, whose fortunes are tied to the advertising market, is also struggling due to lower advertising revenue at Newsweek.

The newspaper industry has long been grappling with plummeting advertising revenue due to economic headwinds. Although murmurs about advertisers returning to the market are gaining ground, the positive effects are yet to be realized. The picture will become clearer as the year progresses.

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