(NYT) Publishing Industry Stock Outlook – January 2013 – Zacks Analyst Interviews

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.


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 digitization 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).


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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