Can Newspaper Ad Revenue Recover in 2010?

This is a short excerpt of a longer post I am preparing on newspaper print advertising trends, but a post today by Alan Mutter encouraged me to publish this small excerpt.

Mutter expresses skepticism about the rosy advertising scenario presented by U.S. newspaper executives in a survey conducted by Kubas Consultants. As this table from the Kubas report shows, newspaper executives are hoping for flat advertising revenue in 2010, with a 15% increase in online (approximately 10% of 2009 revenue) offsetting small declines in every print category.

I am particularly curious about the poll's findings regarding retail advertising, which after the steep declines in classified advertising over the past few years, will account for just over 50% of total print ad revenues in 2009, making it the biggest driver of the overall results.

The following graph (click to enlarge) plots retail ad revenue per subscriber against per capita personal consumption expenditures (PCE) for 1952 - 2009. Both the ad revenue and PCE data have been adjusted to constant 2008 dollars using the consumer price index (CPI-U).

Presumably there is a relationship between the amount of goods and services companies sell to consumers each year (represented by PCE) and the amount those companies are willing to spend to reach each consumer or household by advertising in newspapers.


And indeed there is a relationship, or more accurately, several relationships. From 1952 through 1990, newspapers sold retail advertising equal to about 1.76% of personal consumption expenditures on a predictable basis. Coming out of the 1990 recession, however, there was a clear downward shift in the relationship and for the next decade, retail ad sales ran at about 1.52% of personal consumption. (see note 1).

After the 2001 recession, there was another shift down in the relationship between ad spending and personal consumption; and for the next five years, retail ad spending in newspapers was basically flat in real terms. It's worth noting that in real terms, retail ad spend actually peaked in 2000.

Finally, since 2006, real retail ad revenue has plummeted as the recession took hold (in December 2007) and consumers abandoned their free-spending ways.

Recessions often act as antidotes to inertia by making households and companies (link added 04/15/10) reassess how and where they spend their money. Advertisers almost certainly used the past two recessions to reassess their spending in newspapers, and it's a fair bet they'll do the same as the current recovery unfolds.

A slavish reading of the most recent trend suggests that retail ad spending will simply continue to plummet like a rock falling off a cliff. This could happen, but I doubt it. Ad spending, even in newspapers, should respond to an eventual recovery. But making economic predictions around recessions and recoveries is notoriously difficult since prior recessions and recoveries provide limited relevant precedent. To paraphrase Tolstoy, if periods of prosperity are all alike, every recession unfolds in its own way.

But I'll take a stab at it. In a related analysis, I have compared changes in retail ad spending to changes in PCE on a quarterly basis. This analysis suggests that it will take real growth of 3.2% in per capita PCE just to keep retail ad spending per subscriber flat. It would take a sharp "V-shaped" recovery to reach that level of growth, but the WSJ has published a consensus estimate of 3.8% for GDP growth for 2010.

If GDP does grow at 3.8% and per capita PCE matches this growth, retail ad spend per subscriber could come in at +1.5% in real terms. Add 2.0% for inflation if you believe that newspapers will have any pricing power, then subtract 3% for subscriber attrition and you get 0.5% growth.

More pessimistically, if you assume GDP growth (and PCE) come in at 1.7% (the average from the 1992 and 2002 recoveries), retail ad spend per subscriber could come in at minus 4.0%. Assume no pricing power and subscriber attrition of 5% and overall retail ad spending would shrink by 9%

The precision of the numbers should not mislead about the confidence of the forecaster, but for my money, I think a range of flat to down 10% for newspaper print advertising feels about right.

note 1. A more precise, but likely less clear statement about the relationship would say, "From 1952 to 1990, for every $1,000 increase in real consumption expenditures per capita, spending on retail ads (per subscriber) in newspapers increased by 1.76% of this amount, or $17.60." For each of the regression lines, the intercept terms are small enough to make me comfortable with statement in the text.

note on data sources. Annual retail ad spend and paid circulation data comes from the Newspaper Association of America website. Personal Consumption Expenditure data, Consumer Price Index - All Urban and Population data are from the St Louis Federal Reserve Bank's FRED database.

Murdoch's Sun Encourages File-Sharing, Deep Linking

The theme's been done before, but News Corp's tabloid, The Sun is running an advert touting the paper as "The UK's Best Handheld for 40 Years."

The spot is cute, if a bit predictable; but what struck me was the message, "This is how easy it is to share content with friends" (at the 0:38 mark).

Newspaper Circulation

The Audit Bureau of Circulation's report last month showed daily newspaper circulation plunging 10.6% from year-ago levels, a dramatically steeper decline than the historical trend. Not surprisingly, many commentators see the accelerating decline as the end (or at least the terminal stage) of the newspaper format. And they'll be right in less than a decade if circulation continues to drop by the current pace of 4-5 million subscribers per year. On the other hand, Daniel Gross over at Slate is not so sure and he recommends that we all just "chillax". In Gross's view, the recent decline may be largely explained by general economic conditions.

"... there's nothing ipso facto shocking about a decline in patronage of 10 percent in six months... In case anybody has forgotten, we've had a deep, long recession, a huge spike in unemployment, and a credit crunch. Consumers have cut back sharply on all sorts of expenditures.... Many other components of consumer discretionary spending—hotels, restaurants, air travel—have fallen off significantly. Do we draw a line from trends over the last few years and declare that in 15 years there will be only a handful of hotels? I'm not sure why we would expect consumption of a purely discretionary item that costs a few hundred dollars per year not to fall in the type of macroeconomic climate we've had."

Gross also reminds us that many publishers took steps that predictably reduced circulation, including raising prices and discontinuing home delivery to outlying suburban areas that could no longer be served economically.

Extrapolating from two data points is a highly uncertain business so Gross is right to recommend caution, especially when current cyclical factors may greatly exaggerate secular trends. For his part, Gross declares, "At some point in the future, newspapers may disappear. But count me in the later rather than sooner camp." But a peek at longer-term trends suggests that difference between "sooner" and "later" may be shorter than one might think. The chart below plots total daily circulation from 1940 through 2009 (the shaded areas indicate recessions).

(click chart to enlarge)

These circulation numbers come from the Newspaper Association of America (spreadsheet available here). For 2009, I have reduced the NAA's 2008 statistic by the Audit Bureau of Circulation's estimate that April-September 2009 average circulation was down 10.6% from the prior year period, resulting in an average daily circulation estimate of 43.4 million for 2009. (Over at his Newsosaur blog, the estimable Alan Mutter extrapolates a 2009 estimate of 39.1 million, but without his underlying data, I cannot reconcile that number to the NAA historical estimates, which are probably counted differently from the ABC numbers anyway).

The long-run trend is unmistakable. Circulation peaked 36 years ago, in 1973 but remained relatively stable until the 1990's when it began a steady downward trend, which accelerated in 2003, and appears to have accelerated even more in 2009.

The data provide some support to Gross's thesis: in the 1974 slowdown and the 1980-82 "double-dip" recession, circulation declined temporarily, but rebounded with economic recovery. By my calculations, those recessions caused circulation to decline about 2.2% vs. the trend from the five years preceding the recession.

More recently, during the two relatively mild recessions of 1990 and 2001, if the recessions caused any decline in circulation, there was no subsequent recovery. In fact, the decline in circulation accelerated as the economy emerged from those two recessions. So I suspect Gross is right that the current recession has accounted for some of the circulation decline; but if past recessions are any guide, the measured 10.6% decline reported by the ABC might be only 8.0-8.5% in a healthy economy. This is hardly reassuring news for the industry and recent history argues against a significant post-recession rebound. Even ignoring the recent plunge, if the trend from the past five years (excluding 2009) were to continue, total daily newspaper circulation would fall to 33 million by 2020, which seems optimistic in light of the manifest challenges faced by the industry.

It's also useful to consider newspaper circulation per household. By this measure, newspaper circulation has been declining steadily since World War II with most of the decline coming from the near-extinction of the afternoon daily. Over half a century, circulation per household has declined by 1.4 percentage points per year with remarkable consistency.

(Click chart to enlarge)

No doubt the introduction of evening newscasts on television 50 years ago reduced the perceived value of the afternoon paper, but even in 1980, the year CNN was launched, afternoon circulation actually exceeded morning circulation. Since then, afternoon circulation has all but disappeared. Morning circulation, which trended up in the 1980's (presumably as afternoon subscribers switched) and was relatively flat during the 1990's, has been dropping steadily since 2000, around the time that household penetration of high-speed internet access began in earnest.

(Click chart to enlarge)

As with the raw data, extrapolating the current year's trend suggests that newspapers would cease to exist by 2017. This is the "breathless" conclusion Gross warns us against, and his caution is warranted because (if for no other reason) as marginal subscribers quit, the remaining subscriber base is, by definition, the most loyal to the medium.

Still, longer-term trendlines based on the full data set and the period since 1999 yield very similar predictions, namely that circulation will fall to about 20% of U.S. households by 2020 (I'm ignoring the fact that some households may take multiple papers). Against the backdrop of the long-term trend, and with the internet acting as an obvious catalyst for further declines, this prediction seems entirely plausible.

But even if a loyal subset of households want their morning newspaper, the bigger question is whether the business model will continue to work at decreasing scale. As I have argued elsewhere, the newspaper industry historically enjoyed enviable returns to scale. As the industry shrinks, it may fall through a threshold level of scale (call it the "Tripping Point") below which the model is irretrievably broken and the publishers themselves pull the plugs on the presses.

Where might this threshold be? The approximately 40% decline in advertising revenue over the past 18 months put many papers through a near-death experience. Even if ad spending returns to pre-recession levels, a 40% reduction in circulation from today's levels (which would occur in 2018 according to the long-term trend) might be unsustainable if it implies a corresponding 40% reduction in ad revenue.

Further, if only two out of ten households take the morning paper at some point in the next decade, can home delivery continue to be justified? At some point, route density starts to work against the industry and the paper-boy may go the way of the milkman.

Chicago Trib to AP: "Cancel my subscription"

The Chicago Tribune is testing whether it can live without Associated Press content.

Lost in Transition?

The WSJ website has a nice interactive on the anniversary of Lehman Brother's bankruptcy, which displays the WSJ front pages from that momentous week. For those of us who followed the markets and the story, the series of images captures the urgency and drama of the Lehman collapse and its aftershocks in the financial markets.

But for me, what is most striking about these headlines is that until yesterday, I had never seen them. I'm a regular reader and have been a WSJ subscriber for twenty-five years, but gave up the print edition several years ago. Consequently, I consume my WSJ one story at a time and unless I see the print edition at a newsstand or on someone's desk, I generally don't see the front page the way the editors pasted it up.

One thing that newspapers do well (that Google hasn't automated... yet) is to make editorial decisions about how the day's most important or interesting stories are laid out, with subtle emphasis conveyed by position, allocation of space and type size. So it's somewhat surprising that as newspapers wrestle with the transition from print to online, their websites (well at least the WSJ, New York Times and San Francisco Chronicle) don't feature the front page more prominently on their home page.

As readers inevitably gravitate to the web, it would be a shame if we lose the shared recognition of those iconic front pages that mark the major news events of our lives.

Steve Jobs' Health is None of My Business

Bloomberg today reports the non-news that, "...disclosures about Steve Jobs’s health remain under scrutiny by U.S. Securities and Exchange Commission investigators over how his condition went from 'relatively simple' to 'more complex' in nine days" according to an unnamed source.

It must be vacation season if Bloomberg is trotting out a "situation remains the same" news story, which then recycles lots of commentary from legal experts not involved in the situation and doctors not treating Jobs. Predictably, nobody actually involved in the situation provided any on-the-record comment.

For the ultimate phone-it-in vacation season news story, go read this parody by Andy Borowitz. Like Mike Royko's traditional New Year's Day column or the Wall Street Journal's annual Thanksgiving editorial, Borowitz piece deserves to be republished every July 4th and Labor Day weekend.

Back to Steve Jobs' health.

Here's a simple fact that seems to get overlooked by the breathless journalists on this story: Like every other CEO I've ever met, Steve Jobs is mortal. Presumably rational investors in Apple factored this into their investment decisions years ago. Bloomberg is especially aware of this fact, having already published an obituary for Jobs back on August 28, 2008.

Here's another simple and widely reported fact. Steve Jobs announced to Apple employees that he had been diagnosed with islet cell neuroendocrine cancer of the pancreas back in 2004. Investors in Apple who previously overlooked his mortality probably factored this into their investment decisions then.

Now here's a more complex fact. Cancer, in all its forms, remains a complex disease. Nobody, including Steve Jobs and his doctors, knows what tomorrow will bring. As anyone who's had a close friend or relative battling cancer knows, the prognosis can swing from high to low and back again in mere days. Any near-term prediction about the course of someone's cancer is inherently speculative and as likely to mislead as to inform. If this were any other risk factor and any other company, it would suffice to include boilerplate language in the 10-K along the lines of "We maintain key man life insurance on certain of our senior executives but there can be no assurance that recoveries under these policies would fully compensate the Company for the loss of the executive's services."

Surely the SEC staff has better things to investigate, journalists can find more newsworthy stories to report, and we can all just say a silent prayer for Mr. Jobs and his family and leave them alone in this difficult time.

Clueless in Chicago --Unraveling Newspaper Economics

Major newspaper publishers met last month in Chicago in a not-exactly-secret, but definitely closed-to-the-public meeting to discuss the future of the newspaper business. More specifically, it seems, the meeting was convened to share ideas about how to more effectively monetize newspaper content on the web as traditional print subscription and advertising revenue plummet.

(As an aside, since most newspaper content on the web today is free, "monetize" must mean a price increase. Imagine if any other industry convened a closed meeting to discuss a price increase. What would the press have to say about that?)

As an avid reader (and paying subscriber) of several newspapers, I'm hoping they'll figure out how to survive. Sadly, I think the meeting must've been terribly disappointing.

A copy of "Paid Content - Newspaper Economic Action Plan" produced for the meeting by the American Press Institute (API) has been published on the web in several place including here. A quick read of the document cannot inspire confidence. The action plan recommends that newspaper publishers experiment with micropayments, subscriptions, and more ominously, coordinated industry and maybe government pressure on companies like Google, Yahoo and Microsoft to share search-related ad revenue. This last bit is called the "Fair Share Doctrine" described as "Negotiate for money, a lot more, from Google and online news aggregators for a 'fairer' share of the profits from linking and ad sales."

These ideas are neither novel nor untested. And they haven't worked so far. One gets a vague and uncomfortable sense that when the API recommends, "... [using] technology, news-industry production protocols, influence and public policy to thwart piracy" what they really mean is "maybe some government intervention can help us survive in our current form."

The 31-page API report goes wrong in its second paragraph when it asserts, "The problem is that the online business model does not yet come close to compensating for the steep slide in the print business model that it is replacing."

Guess what, it never will.

For well over a century the newspaper industry has enjoyed handsome returns from the economics of bundling combined with enviably low marginal distribution costs. These returns became even more attractive as many cities (in the U.S. at least) became one-newspaper towns. Bundled pricing, low marginal costs and monopolistic (or at least oligopolistic) market structure is a wonderful way to make a living. It is, however, not a birthright. And the government has no role helping the newspaper industry compensate for its loosening grip on its historical monopoly.

Here's Warren Buffet, whose Berkshire Hathaway has owned the Buffalo Evening News since 1977 and is a major investor in the Washington Post Company, writing in his annual letter 25 years ago:

“The economics of a dominant newspaper are excellent, among the very best in the business world. Owners, naturally, would like to believe that their wonderful profitability is achieved only because they unfailingly turn out a wonderful product. That comfortable theory wilts before an uncomfortable fact. While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better - as long as either class of paper is dominant within its community.” [emphasis added]

Twenty-five years on, Mr. Buffet has changed his view of the newspaper business. During Berkshire Hathaway's latest annual meeting, he said, “For most newspapers in the United states, we would not buy them at any price...They have the possibility of going to just unending losses.”

What's Changed?
The structure of any market in equilibrium is determined by a complex and recursive interplay of technology, economics, inertia (in the form of pre-existing business relationships) and sometimes regulation. In the short term, the last three factors are paramount; in the long-term, technology dominates.

Traditional Newspaper Economics
The Virtuous Circle


Historically, the market structure of the newspaper business enjoyed a virtuous circle as depicted above. Once the sunk cost of the editorial staff is incurred, the printing press paid for, and the distribution system in place (collectively representing yesterday's technology), the incremental cost of including an additional classified ad -- or any other feature -- in the daily newspaper is negligible. Hence, newspapers had incentives to bundle many forms of content in addition to their own editorial content: TV listings, horoscopes, movie schedules, stock listings, comic strips, classified ads, etc. A reader paid for the bundled product even if he used the classified ads maybe once a year, or never read the horoscope or used the TV listings (note 1). The high fixed costs, offset by the surplus economics from bundling and low marginal distribution costs gave rise to something akin to a natural monopoly. And in most U.S. cities, the market leader has seen its competitors fade away in the post-war years (note 2).

Now imagine you're a newspaper subscriber (maybe you still are). If you could disaggregate the horoscopes from the weather from the sports from the local news from the international news from the business news from the TV listings from the almost non-existent stock price listings, how much would you pay for the parts of the paper you actually intend to read? Probably less than the $10-$15 per week it currently costs at the newsstand. Probably less than the $6-8 per week it costs to subscribe.

Probably a lot less.

This is the problem faced by the newspapers. Bundling is a pricing strategy that delivers surplus economics to the supplier by enticing customers to buy more than they would if the bundled products were sold separately. By weight, the majority of your local newspaper (and its website) is information sourced from third parties (ads, stock listings, classifieds, lightly edited excerpts of corporate news releases, etc.) readily available elsewhere on the internet (note 3). By allowing readers to disaggregate the newspaper's traditional bundle of content, the internet may be exposing the market value, or to use the API's term "true value" of the original editorial content produced by the publisher itself.

As publishers experiment with revamped online pricing models they may find that the true value of their original content will give horrifying meaning to the term micro-payment. No newspaper has a monopoly on "the news." It certainly has no monopoly on the third-party information it republishes. The newspaper industry suffers from a notion that it should enjoy monopoly economics on content ("Hey, that's copyrighted!") when in reality its historical monopoly was control of a distribution channel and much of the profit was based on aggregating and organizing other people's content. In the internet age, that distribution monopoly no longer exists and others, like Google, do a pretty good job of aggregating third-party content.

Copyright should be respected. But if a reader can get his daily dose of international news as readily from the Washington Post, the New York Times or a foreign newspaper, copyright on a particular rendition of the news will not give rise to monopoly economics.

Like the music industry before it, the API's view of the newspaper industry confuses the surplus economics arising from bundling and distribution monopolies for the natural economics of their copyrighted content. Copyright does indeed confer a monopoly right to a particular form of expression, but in no way guarantees that consumers will pay handsomely for it, if at all. The music industry has spent the past ten years battling piracy when the larger economic problem has been the unbundling of the album format. It turns out that customers prefer to pay $1.29 for one song they really want rather than $14.99 for the twelve songs the label bundled on a CD album. Losing the additional $13.70 per transaction really hits the music label's revenue line. A twelve-year old kid downloading thousands of songs he can't otherwise afford does not.

If newspapers no longer command a monopoly on distribution and can expect no surplus economics from bundling third-party content -- including ads -- they may find that the ratio of the "true value" of their editorial content to their historical revenue approximates the 20% of the average paper that is made up of original content.

When new technologies completely undermine an industry's market structure, that industry needs to be rebuilt from the ground up. The newspaper industry will fumble along (much like the music industry) if it starts from the premise that its historical economics represent some kind of natural order.


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Note 1. It should be noted that subscribers to print newspapers generally pay less than the actual cost of writing, editing, printing and delivering the newspaper... often a lot less. What drove newspaper profitability in the past was advertising sales, but that requires the aggregation of a large audience, which requires aggregation of diverse content to appeal to a large, diverse audience to attract the advertisers.  Another virtuous circle... or vicious cycle if it starts running in the wrong direction.

Note 2. Noam, Eli M., "Media Ownership and Concentration in America"

Note 3. This morning's complimentary San Francisco Examiner landed on my front porch despite my wife's repeated attempts to discourage them from delivering it; I guess they need the circulation numbers to support their advertising rate base. The paper, including ad inserts, totals 54 pages. A quick inspection shows the content is allocated as follows:

Third-party content
Ads: 34.5 pages
Classifieds 4.0 pages
Movie listings 2.0 pages
Weather 1.0 pages
Games 1.0 pages
subtotal 42.5 pages

This leaves 11.5 pages of news content, but of course the "World", "Nation" and "California" sections (one page apiece) appear to be entirely made up of syndicated pieces by the Associated Press or others. So the actual original content produced by the Examiner comes to about eight pages, or about 15% of the total newspaper.

Working in Media is Its Own Reward...

In December, the Tribune Co,, publisher of the Chicago Tribune, Los Angeles Times and Baltimore Sun, filed for bankruptcy protection.

In January, the Star-Tribune, publisher of Minneapolis' largest newspaper also filed for Chapter 11 protection.

This week, the Rocky Mountain News announced it was shutting down a few weeks shy of its 150th birthday, the Philadelphia Inquirer filed for Chapter 11 in its 180th year and the Journal-Register, publisher of 20 daily newspapers, also filed for bankruptcy.

Hearst Corp. has threatened to shut down the Chronicle in San Francisco if it cannot get concessions from its employees and has said it will shut down the print edition of the Seattle Post-Intelligencer if it cannot find a buyer within 60 days.

Meanwhile, the New York Times Company, publisher of the New York Times and the Boston Globe, is trying to sell off assets and has suspended its dividend to conserve cash.

So, in the last three months, the publishers of leading newspapers in eight of the biggest 23 markets have entered bankruptcy proceedings or threatened to shut down. I sense a trend.

To be fair, a number of the bankruptcy filings are related to bad capital structures (too much debt) rather than loss-making businesses. (See related article at Ad Age) But the businesses are surely weakening as websites cut into classified advertising and the slow economy reduces ad spending generally. And newspapers have historically relied on local ad spending from the automotive, real estate and retail sectors, all of which struggle with their well-documented challenges.

Today, Ad Age reports that local ad spending may continue to decline through 2013, according to BIA Advisory Services. Could ad spending be declining on a long-term trend beyond the current recession?

It could.

I remember - during the Web 1.0 era as it's now called -- listening politely as budding internet entrepreneurs quoted the line attributed to John Wanamaker, the Philadelphia-based merchandiser who founded the eponymous department store chain. Wanamaker is reputed to have said, "Half the money I spend on advertising is wasted; the trouble is I don't know which half."

The marketing pitch from the internet entrepreneurs was that the targetability and interactivity of internet advertising would make advertising so much more efficient by allowing advertisers to reach their target audience with a high degree of precision.

The question I always posed was, "If interactive capabilities can make advertising twice as effective, won't advertisers be able to cut their budgets in half to eliminate the "wasted" half? The usual answer was... silence.

Nobody's predicting a 50% reduction in local advertising spend just yet, and BIA's forecast does predict continued double-digit annual growth in online spending. But this just makes the picture worse for "traditional" media like newspapers and cable TV as they are expected to bear more than 100% of the overall decline in local ad spending.

The current recession, especially if it is prolonged, may be the catalyst for the profound change in media economics that those internet entrepreneurs predicted a decade ago.

Working in Media is its Own Reward...

Spotted on the WSJ Tech page (click image to enlarge)