Numbers add up to papers' grim future

The time has come for the newspaper industry to recognize that its business model is failing.

The time has come for the newspaper industry to recognize that its business model is failing.

There does not seem to be any prospect for a miraculous turnaround. Print will not suddenly find itself re-emerging as a popular medium in a surge of throwback appeal. Craigslist is not going to fade away, forcing urban dwellers to flee back to papers to sell their bicycles and rent their apartments. The ink-stained wretch is a dying breed.

That is the general situation. The particular situation was brought into stark relief by the end-of-August publication of a report by Fitch Ratings, which goes a long way towards illustrating what's wrong. When 2007 began, Fitch posted a negative outlook for the newspaper industry; now, three quarters of the way through, the outlook is even worse.

Despite a few disparate success stories, the largest players in the industry are having a terrible year. To whit: At Gannett, USA Today's advertising pages are down 17%, and real-estate ads in its community papers are off 20%. At Tribune, classified ads are down 18%. At McClatchy, real-estate ads are down by more than 25%, and automotive and national ads are both down 20%.

Even at News Corp's $5 billion prize, Dow Jones, classifieds are down 14%, while overall ad volume has declined 20%, including a whopping 75% fall in technology ads. And at the mighty New York Times Company, earnings per share dropped by more than half in the second quarter, leading the company to announce more than $200 million in spending cuts over the next two years.

Finally, the Newspaper Industry of America reported that industry-wide ad revenue was down 8.6% in the second quarter. At that rate, papers will all be broke in three years.

Taken together, it's a breathtakingly bad picture. And it is not poised to improve. According to Fitch, the weak advertising market for newspapers is "more secular than cyclical" - words that should strike fear into any CEO who is listening.

Because large chunks of the ad declines have come from the real- estate sector, calling the declines "cyclical" has become a popular rhetorical parry for harassed industry executives. Real estate is currently on a roller coaster to the basement, but it will surely make a turn back upwards some time soon, so papers only need to wait out the rough times before the good days are back. Right?

Wrong, says Fitch. While the firm acknowledges that markets like Florida and California, where real-estate ads are a disproportionate revenue-generator, have been hardest hit, Fitch notes that using a single ailing sector as an excuse for poor performance does not add up.

After analyzing various advertising markets, the firm concludes that "it is not expected that more than 50% of an average newspaper's revenue stream... is currently enduring cyclical pressure."

Additionally, they point out, weak sales of ads for new homes should be offset by an increase in ads for other homes for sale.

But that offset does not appear to be showing up in the industry's revenue. The reason, Fitch says, is the increasing rate of broadband Web use in key newspaper markets, which appears to be stabbing the industry right through the wallet.

"As participants gain comfort with online media, they will be less likely to return to the print product in the future," the report grimly predicts. "Cyclical pressure is exacerbating secular issues, meaning that even if economic factors are causing much of this downturn, secular factors could make these declines permanent."

Simply put, this means that excuses will no longer cut it. Even five years ago, newspapers looked at, for example, plunging numbers of young readers, and immediately thought: "If we bring in a consultant on the youth, and redesign with snazzier graphics, we'll pull them right back in!"

Now, up-by-the-bootstraps strategies like that seem laughable. The newspaper industry, which has not yet come close to making its rising online ad revenues equal its falling print ad revenues, is the horse and buggy in the new media Daytona 500.

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