Borrell Associates, Inc

Back from the Brink—Newspapers Stop Their Slide

By Colby Atwood, President, Borrell Associates

August 4, 2009

Newspapers have been taking a well-documented beating for so long that we've begun seeing rough drafts of the entire industry's obituary. With news stories of bankruptcies, reduced distribution, and outright closures, it is easy to see why some observers think the newspaper is an endangered medium. But amateur pundits often make the error of forecasting with a ruler, extrapolating current trends straight into the ground.

Borrell Associates sees the future a bit differently. We expect that the decline in newspaper revenues will end this year, and that 2010 will show a 2.4 percent rebound. We are forecasting that by 2014, newspaper income will be up a total of 8.7 percent over the 2009 figures, to slightly more than $39 billion.1 That will be short of its 2008 level, but a long way from extinction—and good enough to increase newspapers' share of total ad revenue 1.5 points, from 14.4 percent to 15.9 percent. (Not all markets will see equal change in newspaper advertising; to access our market-by-market projections, see instructions at the end of this memo.)

1 These figures do not include newspaper companies' online revenues. We count online adverting buys as "online advertising," regardless of the type of media company selling it. In 2009, newspaper companies saw an average of 7.5% of their total gross income coming from online advertising.

Borrell Associates has been an outlier in its projections before. At the industry's peak in 2001, our forecasts began showing an imminent collapse of newspaper advertising. We projected that those ad dollars would never rebound, while other industry analysts believed they were cyclical and would bounce back at least partially in a few years. But the Internet's functionality and business model proved to be compelling to classified buyers and sellers alike; print automotive advertising fell, and then recruitment hit the skids. Retail ads plummeted as department stores consolidated and cut back. Real estate soon followed. Newspaper revenues have fallen 33 percent since then, from $53.4 billion in 2001 to $35.9 billion in 2009—a strategic blow by any standard, and clearly beyond tactical rhythms.

There is a historical reference point worth noting. In the early 1950s, headlines were proclaiming the death of radio – once a prime-time medium, but greatly diminished as people became glued to the "new medium" of the day, television. Radio lost half its market share in less than 10 years. Using a ruler, it certainly looked inevitable that radio would become obsolete, hitting the ground by the mid 1960s. But by the late 1950s, radio bounced back, redefining itself as a drive-time medium and maintaining a smaller but consistent share of all advertising throughout the next several decades.

So, we too see newspapers redefining their products and maintaining a strong marketplace niche. No longer mass, but niche -- playing to a greatly distilled audience of higher-educated,higher-income readers. Many have already morphed into a magazine-like product as front pages now more closely resemble a magazine cover with large, colorful graphics or photos, smaller page width and, in some cases, less frequent publication.

Newspapers aren't the only medium facing major changes. In fact, as newspapers' siege ends, we foresee other legacy media—all print-based—headed for downward spirals. A year ago we predicted that yellow pages would drop 38 percent in five years, when yellow pages executives and their traditional consultants were predicting declines below 10 percent. Six months later— last February—Idearc announced that a 40 percent drop in its revenues was likely in that period. A few months ago we predicted that direct mail would lose 39 percent of its annual revenue by 2014. We have been anticipating a flattening in online advertising for three years, as marketers move their budgets to online promotions.

So why are we seemingly going against the tide again with our newspaper outlook? How could such a strong trend reverse itself? We see five factors combining to give newspapers a new lease on life.

1. First In, First Out. The Internet's effect on advertising has been profound but uneven. Newspapers were the first medium that the Internet forced into a "period of adjustment," and newspapers are the first medium to emerge from it—while TV, direct mail, magazines, radio and yellow page directories are still adjusting.

    

   When the Internet arrived in the 1990s it was all about text and still pictures—the realm of newspapers since the founding of the Republic. The threat to The Fourth Estate was obvious; the opportunity was less evident but at least as large. Publishers began experimenting with both offensive and defensive Web strategies, working their way up the inevitable learning curve. Television and radio managers watched their progress with detached interest; broadband penetration and video player technology would have to develop for several more years before broadcasters had to face up to their own online Armageddon. Now they are scrambling to cope with fundamental changes in their business models, hoping to take some lessons from newspapers.

   Direct mail peaked in 2006, but more e-mail use has meant less first class postage revenue, which means less money for bulk rate subsidies; as a result, advertisers are deserting direct mail in droves. Yellow page directories are still in some denial about the permanent impact the Web is having on their business and are suffering from their preoccupation 5 to 10 years ago with mergers and acquisitions, when they should have been focused on extending their businesses online.

2. The Big Guys Took the Hit. Much of the income that newspapers have spilled during the past ten years has come out of classified ads and major retail, and most of that revenue was controlled by the country's largest 150 or 200 metro dailies. So when the Internet decimated print classifieds and the department stores pulled back, it was the largest papers that felt the most pain—and they were large enough to take the whole industry's revenues down with them.

    

   For the majority of the nation's other newspapers, though, the revenue decline has been much less severe than it has been for their big brothers. We expect much of the upcoming growth in newspaper revenue to come from these community and suburban papers, which provide de-facto geographical targeting to a wide base of non-classified, non-department-store local advertisers.

   Larger papers will continue to experience layoffs, abbreviated publication schedules and outright closures as that segment of the industry absorbs the full impact of its new revenue levels and "right-sizes" itself.

3. Newspapers are Selling Smarter. There is nothing like a lethal threat to open the mind to new ways of doing things. Decades of unrivaled dominance in their corner of the advertising world let newspaper sales and marketing teams slip into something of a comfort zone that left them flat-footed when that zone evaporated. But newspapers aren't dinosaurs; as the shock has worn off, they have started evolving with purpose.

    

   Today's leading newspapers are much more proactive about discovering and meeting customer needs, selling against the competition, and taking no client for granted. Newspapers still have more salespeople contacting more local advertisers more often than any other medium; incremental improvements in the effectiveness of these salespeople can have a significant effect on the top line.

4. A Rising Tide Lifts Some Boats More Than Others. The current recession has compounded newspapers' woes, to be sure. But as the general economy begins to improve in the latter part of this year, newspapers will capture a bit more of the resulting growth in ad spending than their current share. This will come in part from growth in pre-print and free-standing insert revenue captured from advertisers migrating out of direct mail.

    

   The automotive and real estate sectors—and even recruitment—will see some resurgence as the economy improves, and a fraction of that will accrue to newspapers, although they won't get back to where they were in those verticals.

   Decreased competition from television and radio will bring some local broadcast advertisers to their local newspapers.

5. The opportunity side of the Internet is contributing. Beyond simply enduring the blow landed by the Internet, newspapers are using the Web to generate a significant portion of their revenues—and profits. Although Borrell Associates counts newspaper online revenues as online rather than newspaper revenue, that side of the business will begin to provide more support to the print side. The good news here is tempered by the fact that the growth in newspapers' online revenues is not keeping pace with the market's growth. Part of this is due to the increase in competition that newspapers face in this area, but part is also due to the focus newspapers have placed on up-selling online ads to their existing customers: that pond is getting fished out.

    

Final Thoughts:

1. Our forecast of increased newspaper revenue does not mean that all papers will be posting bigger numbers five years hence. There is more pain to be endured, especially by larger papers.
2. The papers that will do the best are the ones that can reinvent themselves to serve smaller advertisers on the marketing side. This means actively pursuing customers that have never done business with newspapers before
3. On the editorial side, successful papers will do a better job of focusing on unique local content and less on wire service feeds. You can predict a newspaper's future by tracking the percentage of its news hole that is filled by commodity content -- these papers will suffer.
4. If the newspaper industry can figure out a way to let national advertisers make a single newspaper buy, it will make an important contribution to its own well being. Agencies do not seem to be filling the void, but the need is there and it is something we consistently hear about from advertisers.

Colby Atwood's e-mail is -- This e-mail address is being protected from spambots. You need JavaScript enabled to view it . His telephone number is -- 206.463.3181.