Sales slide quickens at newspapers

"To get anywhere, or even live a long time, a man has to guess, and guess right, over and over again, without enough data for a logical answer."
Robert Heinlein (American science-fiction writer,1907-1988)



Sales slide quickens at newspapers
The queasy plunge in newspaper advertising sales in May suggests the revenue deterioration that began in the middle of last year is accelerating at a dangerously increasing rate.

If the decay continues quickening at an unchecked pace, it is difficult to imagine how some newspapers, particularly the marginally profitable ones, can continue to exist indefinitely as we know them.

May was the worst month - so far - in what is shaping up to be a dismal year for newspaper ad sales.

The year-to-year sales declines of the publicly traded publishers last month were 14.9% for Media General, 11.8% for Tribune Co., 11.5% for Journal Register Co., 11.5% for McClatchy, 9.9% for New York Times Co., 6.8% for Journal Communications, 6.8% for Gannett, 5.7% for the Ottaway division of Dow Jones and 1.7% for Lee. The table below shows the same-store, print and online ad sales of the respective publishers since the beginning of the year.

These declines are hardly blips related to weather, the date of Easter or any of the other reasons that publishers invoke when trying to position their sales shortfalls as isolated, aberrant events.

They are part of a steady deterioration that began in the second half of 2006 and has accelerated ever since. Advertising sales (including print and new media) fell 1.5% in the third quarter of last year, 2.2% in the fourth quarter of last year and 4.8% in the first quarter of this year, according to the Newspaper Association of America.

In the first five months of this year, none of the publicly held newspaper companies reported positive sales performance, except for Gannett's meager gain of 0.3% in January. The newspaper ad declines came during a period that over-all retail sales grew comfortably in the United States, as illustrated in the graph below.

Some public companies, like Dow Jones, tend to obfuscate monthly sales reports, so it might have had higher year-to-year sales in January; I can't tell. Others, like Gatehouse, don't report monthly revenues, which they are not required to do. Still others, like Belo, have stopped discussing monthly sales, saying "a single month's revenue performance is not a reliable indicator of quarterly advertising trends."

With sales and, therefore profits, falling at seemingly accelerating rates, some newspapers, particularly metros, appear to have entered a period of exponential decay that eventually could impair the viability of their existing business models.

In that event, papers will have to eliminate things like television guides, book sections, op-ed pages or Sunday magazines - which some already have done. Or, they will quit publishing seven days a week, skipping perhaps such ad-weak days as Monday. Or, they will stop printing papers and move to strictly digital publishing formats. Or, they will stop publishing altogether.

Because many internally controllable and externally uncontrollable variables affect the sales, expenses and profitability of an enterprise as complex as a newspaper company, it is not possible to say when a given newspaper might pass the point of no return. But the accumulating evidence suggests that some are getting closer.

For starters, as discussed in this previous post, the print revenues that generate more than 90% of the sales of most newspapers may be $2 billion lower this year than they were in 2006. Coming at a time of general economic well being, the collapse, if it materializes, would establish beyond question that the industry has lost its once-magical ability to achieve consistent sales growth in both good times and bad.

You need look no further than recent news reports to see how the industry's deteriorating resilience is affecting the delicate economics of such highly leveraged ventures as the Minneapolis Star-Tribune, Tribune Co. and Philadelphia Media Holdings, which each have been loaded with debt to finance the recent changes in their ownership. They are, in short, the canaries in the coalmine.

Barely three months after the Minneapolis Star-Tribune was sold in February, its operating profits were 20% lower than what had been projected by the investors who acquired the paper from McClatchy. If the newspaper - which already has reduced its staff by 145 people, or 7% - can't find a way to improve its sales, it would have to cut still more expenses to avoid default on its loans.

Tribune Co. has been forced to agree to pay tens of millions of dollars a year in additional interest, because lenders are nervous about the company's ability to generate sufficient profits to pay the interest on the $13.4 billion in debt it is borrowing to go private. "Tribune, which last year generated cash flow of $1.3 billion, will initially have to meet annual interest costs of around $1 billion when the buyout is complete," reports the Wall Street Journal. If Tribune's sales fall short of expectations, the only way to service the debt will be by cutting expenses or selling assets - or both.

Only months after Philadelphia Media Holdings bought the Inquirer and Daily News, the Inky reported last year that the papers would have barely "$10 million" left in 2006 after paying interest of $40 million on the money borrowed to finance the transaction. The paper's profits, noted the Inky, had fallen from $100 million in 2004 to $76 million in 2005 to roughly $50 million in 2006. There's not much margin for error in this deal. A spokesman for PMH did not respond to requests today for an update on the company's financial health.

While everyone in the newspaper business acknowledges that the good old days are gone, few people viscerally understand how rapidly the industry is coming to the point that it cannot sustain itself without farther-reaching - and likley more wrenching - structural changes than such relatively modest efforts to date as scrapping stock tables, outsourcing telephone ad-takers or even down-sizing newsrooms by 50%.

Absent plans to pare entrenched bureaucracy, eliminate archaic work rules and speedily implement bold strategic initiatives to build significant and sustainable new revenue streams, the industry could find itself on a hopelessly irreversible trajectory. If it isn't there already.