PROFITS, RECESSION, AND RECOVERY

New York Times Co., Gannett Co., Media General , and McClatchy Co. have all reported profits in the second quarter and the results have led to share prices doubling and tripling.

The developments must come as a surprise to those who saw the poor performance of recent quarters and convinced themselves that the newspaper industry is dead and gone.

Admittedly, the positive results in the past 3 months were achieved through restructuring, reducing news staffs to their 1970s levels, heavy cost cutting everywhere, and postponing reinvestments. But it shows there is still life in the industry and that the industry can be expected to recover in the coming year if economic conditions continue their current rate of improvement. As I have said many times, a industry with $50 billion in revenue is not going to ignore that revenue, close the doors, and disappear overnight.

Many have viewed the poor company performance in the past 2 years and then mistaken the steep concurrent drop in advertising as evidence of a general decline caused by long-term industry trends. In doing so, they have disregarded the impact of the economy on newspaper advertising and mistaken the dramatic drop in advertising as being an indicator of the industry's broader condition rather than the shorter-term results of 4 quarters of negative growth that have affected the economy as a whole. Some have also ignored the effects of corporate debt problems had on the industry's overall condition.

In multiple blogs and articles journalists and editors have pointed out that newspapers have fared worse than other media in the recession and used that the fact as evidence that the industry is a death's door. Two decades of research on newspapers during recessions, however, has shown newspapers typically fare worse because retail and classified advertising on which the industry relies are more affected by downturns than brand advertising (See post “The Credit Crisis, Volatile Markets, and Recession and Media” and the articles below). Obviously a lot of newspaper managers and journalists don't pay attention to research about their own business.

If one looks at the newspaper advertising expenditures over time (see Figure below), one sees that they fall with recessions and then recover. This pattern was especially evident from 1991 to 1993 and 2001-2003 when short downturns pushed newspapers into decline.

If one considers different category of advertising, it is clear that the classified advertising—which was a driver of growth in the 1990s—was significantly troubled after 2000, but recovered and spiked in 2005 (Figure 2). Its relative decline by comparison to retail and national advertising is probably the result of some substitution with the Internet, nevertheless newspaper classifieds produced $10 billion in 2008—3 times that of online classified.

U.S. newspapers are in a mature industry with low growth potential once recovery from the recession occurs. Most companies will performance reasonably well after the recovery, but certainly some companies will have difficulties because of imprudent strategies and choices. Nevertheless, the industry as a whole will still remain in place producing revenue for many years to come.

It will do so because more than 45 million people are still willing to purchase a paper daily and retail advertisers still gain better results from newspaper advertising than from broadcast, Internet, and other forms of advertising.

Related Articles of Interest

Picard, R.G. & Rimmer, T. (1999). Weathering a Recession: Effects of Size and Diversification on Newspaper Companies, Journal of Media Economics, 23(4):21-33.

Picard, R.G. (2001). Effects of Recessions on Advertising Expenditures: An Exploratory Study of Economic Downturns in Nine Developed Nations, Journal of Media Economics, 14(1): 1-14.

Picard, R.G. (2008). “Shifts in Newspaper Advertising Expenditures and their Implications for the Future of Newspapers,” Journalism Studies, 9(5):704-716.

van der Wurff, R., Bakker, P. & Picard, R.G. (2008). Economic Growth and Advertising Expenditures in Different Media in Different Countries, Journal of Media Economics, 21:28-52.

NEWSPAPER RESTRUCTURING IS PAINFUL, BUT NECESSARY

Financial pages are full of developments and changes at newspaper companies and these are being commented upon anxiously by those in the industry. Unpleasant conditions certainly abound, but these development are not indications that the industry is dead or dying in the near future. What they signal is that things which worked in the past are not working now, that newspaper companies are badly in need of restructuring, refocusing, and renewal, and that the boards of the companies and the company managers are taking badly needed action.

The techniques for restructuring are no mystery. First, you need some cash. This can be obtained by attracting new capital through investment or loans. New York Times Co. did this recently by borrowings $250 million from Carlos Slim. Other firms are looking for friendly investors with liquidity.

Another way of raising cash is by turning assets into cash. A classic move made by many types of firms is the sell their building and lease back any space that is needed. Media General and New York Times Co. are currently employing this tactic. Financially troubled companies can also be expected to shed some of their poorest or best performing holdings to raise cash, so it is likely that we will see a number of newspapers companies putting papers up for sale in the near future.

Reducing and restructuring existing debt lessens financial performance pressures on companies. To accomplish it, they use cash that is raised to pay obligations imminently due or to make early partial payments to debt holders in exchange for obtaining better interest rates or lengthening payment terms. Watch for such transactions in the coming months.

As part of restructuring, many newspaper-based companies will seek to refocus on core news and informational activities, divesting non-core activities to raise cash. Baseball teams, holdings in cable systems, advertising service firms, and other types of peripheral companies are being sold or considered for sale.

Few newspaper company executives have experience restructuring and reorganizing their firms to make them leaner and more efficient or strong financial management background. The current environment requires different managerial skills so many newspaper firms will be looking outside the industry for experience. GateHouse Media, for example, has now hired a chief financial officer with a financial management background at companies including PayCheck, NCR , and PriceWaterhouse.

Expect to see multiple actions throughout the industry that are parts of the restructuring of newspaper companies in the coming month. Some will be painful, but will have two effects. First, it will lessen the financial pressures of the debt many companies are carrying. Second, it will force them to rethink their newspapers and the value and quality they are or aren’t providing.