Slowing Online Growth Sends Chill Through News Industry
Important Details: It’s the kind of news news companies didn’t want to report: The growth in online revenue is slowing. That slowing was indicated in the flurry of quarterly earnings reports. Many headlines about overall performance pointed to a drop in net, or in the case of the Tribune Company, an actual loss for the quarter (though when a one-time charge was discounted, it eked out a $19M profit). The earnings announcements were paired with word of layoffs and buyouts in several cities, including Chicago and Los Angeles (the Tribune) and Tampa (Media General), with more than 300 jobs slated for elimination.
The worrisome numbers though are those digital growth percentages. Tribune reported a 17% increase, Gannett a 16% increase, and the New York Times a 22% increase. Yes, there have been some outliers as Media General reported a 34% increase and Lee Enterprise reported a whopping 53% increase. Still, the significant drop in online revenue at the biggest chains have sent a new chill through the industry.
Industry executives acknowledge that they are in the midst of a transformation from print to digital. So as they have reported declining circulation and advertising in the past couple of years, they have tempered those downturns by highlighting strong ad growth in online. That growth in 2006 was in the 30 percentile range. Now if that growth is plateauing, it plateaus on a relatively small base — digital revenues still make up no more than 10% for general news newspaper chains.
The other 90% – in the print business, largely – is getting hit harder and harder each quarter, with double-digit declines in classifieds revenue increasing in number. Here are the classified results for the quarter for the five general news companies reporting:
- New York Times: -11.6%
- Tribune: -14%
- Gannett: -3%
- Lee: 6.5%
- Media General: -31.2%
All classified segments are weak, as the double whammy of increasing non-newspaper, Internet-based ad choices and a slowing economy impact the numbers. In addition, the impact is exacerbated by the relationship of print to digital advertising. Since more than half of online revenue for a number of the chains (attribution of income varies from company to company) is based on digital upsells for print classifieds, as print classifieds decline, they take potential upsell revenue with them. For example, the inability of online growth to make up for print loss is seen clearly in Lee Enterprises’ numbers. While it reported a 55% increase in online revenue, overall ad revenue still declined 2.2%, and Lee’s overall net was down 18%.
Implications: It was a tall mountain to climb and now the peak is obscured in clouds. Outsell has demonstrated in our annual MarketView (October 16, 2006) report that news companies derived the smallest percentage of their revenues from digital sources of all information industry segments. While the information industry overall attained about 42% of revenues from digital sources, newspapers tracked at about 8%. Now those percentages are catching up with news providers. When the news industry was still growing revenues, its 30%+ online growth stood out well. Now, as print ads register significant declines, both the digital revenue base and its growth rate are insufficient to even keep the businesses on an even keel, much less provide an overall growth trajectory.
One takeaway from this spate of earnings reports is that news companies must redouble their efforts in a number of areas, with no time to spare:
- Expand the types of advertising they offer to customers. They need to get beyond their reliance on upsells and reach strongly into search-based and behavioral products.
- Expand the reach of their ad products. The Yahoo! consortium is one good step in that direction, and it needs to be as fully implemented – and tracked – as possible. Newspapers also need to reach beyond Yahoo! to other big audiences, on desktops, laptops and cell phones.
- Achieve effective cost reduction. It’s a matter of circling wagons around key value producers – increasingly multi-media producing editorial staffs and high-performing salespeople – and then trimming, off-shoring, and clustering financial, circulation, and production operations as possible.
In the Outsell report, Deadline with Destiny (August 6, 2006), we provided three possible scenarios for the news industry, based on revenue growth trajectories. The lowest-revenue scenario was “hit-the-wall” with online growth proceeding at a 20% clip. That’s close to the level we’re seeing in current earnings reports. Our “hit-the-wall” scenarios in print advertising – assuming a 2% growth rate in 2007 – appear on the high side at this point. If we put those numbers together, it looks like the industry is moving more quickly toward that wall, a wall Outsell forecast as a $20 billion shortfall in revenue through 2010.