The Newsonomics of the Next Recession
First published at the Nieman Journalism Lab
If the current events of the world are scary for all of us, they’re particularly horrifying for news publishers.
Another recession? Now?
Sure, anyone in business, especially the news business, knows another recession is inevitable. Recessions have always been with us and were, until the massive digitally driven downturn in the industry’s fortunes, the prime way we separated good years from mediocre ones. The next recession, though, we thought might come in 2014 or later — after the news industry had somehow gotten its digital transition act together and found some stable going-forward business model.
Now, it appears that hope may have been an illusion. Newspaper turnaround artists plan, and the gods of finance laugh.
Publishers have been running as fast as they can — and falling farther and farther behind. In the U.S., they’re down in ad revenue down for 22 consecutive quarters, and results aren’t much different in UK, Europe or Japan. Alongside, they’ve seen digital spending speed by, and its trophies going largely to non-news companies. They’ve seen cable TV, broadcast TV, radio and magazines — each of their own routines challenged by the Internet — also pass them. All those runners have been gaining a little — single-digit revenue growth mostly, but growing after the all-consuming downturn of what we thought was The Great Recession. The newspaper runners, falling farther and farther behind, have been down by middle-to-high single digits in year-over-year ad revenue so far in 2011.
That race, however torturous, has been run in the arena of slow economic growth. If, in fact, we do dip or tumble head over heels into another recession, all bets are off. The wheels may come off the wobbling industry.
We won’t know, of course, if we’re in or going into a recession until some time next year, with the standard definition being two or three quarters of economic contraction (or one of my favorite terms, negative growth). Talk to people in the industry, and especially those selling advertising, and they’ll tell you it’s been feeling like the beginnings of another recession for them.
If it does become a wider, real recession, what’s likely to happen to newspaper revenues, budgets and the companies themselves? Speculatively, let’s take a top-line look at the newsonomics of the next recession, an update on what I called in March “The Newsonomics of Oblivion.”
- The digital transition is still in its early stages. There’s a lot of transformation underway at newspaper companies. They’re moving away from just selling space to becoming regional digital agencies selling numerous products, to modeling digital subscriptions, to finding mobile revenue streams and more. Today’s conventional wisdom: It’s going to be a digital news world sooner rather than later, and we’ve got to move our businesses there fast as we can, holding on to as much print revenue as possible we transition. Problem: We’re still at the beginning of the transition. No major publisher is driving more than 20 percent of total revenue from digital. In fact, publishers are playing a straddle game — just as the earth underneath is cracking, a dangerous position.
- In another downturn, the movement of spending away from print to digital is most likely to accelerate. That’s what happened in the recent recession: Digital advertising hiccuped, then quickly outgrew all other forms of advertising. For 2007, when the recession began, it had 7.6 percent of all U.S. ad dollars. By 2010, it had 11.2 percent. That’s a 32-percent increase. Why is it likely that acceleration would continue? Geomentum’s Randy Novak, a major agency buying locally oriented ads, ticks off the reasons: “Digital offers more efficiency…lower CPMs, quicker turnaround/reaction time and precision targeting at scale.” While newspaper publishers are getting about 10 percent of digital ad spending, most of it is going elsewhere — witness the 67.7 percent of the projected $31 billion 2011 U.S. ad spend shared by just five companies, Google, Microsoft, Facebook, Yahoo, and AOL, according to eMarketer.
- Key categories that have shown some signs of life will cut back. Retail has been struggling back, as budgets had finally stabilized a bit, but if retrenchment is the order of the day, then retail ads — a lifeline as classifieds have disappeared — will take a hit.
- Classifieds may move to their third — and final — act. Chalk up most of the $20 billion-plus annual U.S. newspaper revenue hit to the cratering of classified. Yet, $5.6 billion remains in classifieds, according to NAA. Recruitment, of course, is gurgling in this employment market. Car sales are likely to slow, and continue to move purely digital. Real estate is still all bunged up, and researching/buying/selling will move increasingly to digital, mobile generally and tablet, the Trulia and Zillow apps early testimony to that.
- Transition to digital reading may accelerate. So if I take The New York Times seven days a week in print, I pay as much as $720 a year — and get “included” digital access. If I change to Sunday only, or one of several partial print subs, I pay $390 a year — and get “included” digital access. That’s a $330 a year or $27.50 a month in savings. Look for a recession to accelerate that movement. Or maybe, Philly’s Greg Osberg or Tribune’s Eddy Hartenstein will find traction in what seems on the face of it like an odd notion of discounting by half (Philly) or almost giving away (Tribune) a non-iPad tablet if you pay for a longer-term digital subscription. In good times, those plans don’t supplant iPad owner behavior, but maybe parts of younger, less-affluent populations will go for the deal. Of course, iPad sales —projected to hit 100 million worldwide by the end of 2012 — could slow significantly, if this is a deep downturn, leaving newspaper companies even more betweener and betwixter. Biggest question here for newspaper and magazine publishers: how will downturn affect reader psychology in the selling and buying of new digital subs?
- Consolidation of newspaper properties may gain steam. Media concentration is a logical consequence of economic stress. Those screws just got tighter, and we’re going to see added pressures to consolidate, driven behind the scenes by private equity owners. (Those owners, of course, had hoped to force the digital transition — Exhibit A: Journal Register — and then sell the properties before the next recession.) If revenue growth is going to be harder to find, then the only alternative path to finding any black ink is to cut costs, and roll-up is one big way forward. Of course, we can expect still more operational cutting, including newsroom staff, as all companies once again deal with the specter of ongoing unprofitability. They know their value proposition — offering less deep and broad content is not what you want to do when you’re selling readers on a brand’s all-access reach — is already sorely tested by offering less at higher prices.
- Investment in digital-only news production will be tested. It’s not just newspaper publishers; anyone seeing new opportunity in new content production has got to be worried. Unless your name is Bloomberg, another recession sends a big chill down your spine. Let’s take Tim Armstrong’s various pushes, for example. AOL, its investor confidence re-shaken this week, is going to have a harder time staying the course with Patch — at best a longer-term investment. Instead, look for more aggregation models to emerge (like AOL’s new tablet “Editions”). Aggregating other people’s stuff is a whole lot cheaper than originating content, and everyone’s going to be busy re-applying that lesson of Web 101.
Overall, what a next recession would do is accelerate most the current trends. We’d see some impact in the fourth quarter, but most of it in 2012, as those budgets are now warily being planned.
We’ll beginning asking the question — again — of which companies can survive and under whose leadership, and ownership. In the U.S., most vulnerable are Lee Enterprises, publisher of 49 mostly smaller-community dailies, and McClatchy, publisher of 30 dailies and the fifth-largest newspaper company in the U.S.
Look at the balancing act at Lee, as CEO Mary Junck and CFO Carl Schmidt have walked tightrope after tightrope of restructuring, in an amazing attempt to avoid falling into the net of bankruptcy. Just last week, they got two major lenders, including Goldman Sachs, to agree to a restructuring of debt, but it’s not yet a done deal. How will overall debt downgrades and cascading economic uncertainly affect their latest high-wire act?
McClatchy CEO Gary Pruitt has been doing his own circus act for years now — paying off some debt, feeding the newsrooms increasingly meager diets, cutting costs, trying to eke out a tiny profit and maintaining some of the higher editorial standards in the industry. He’s done that in a slow-growth environment. Are they any rabbits left to pull out of the hat? In fact, where’s the hat?
Other companies are only in relatively better shape. Fourteen U.S. companies shed massive amounts (if not all) of their debt in bankruptcy, though they still face the same operating constraints. A.H. Belo, Scripps, and MediaNews are all largely free of debt but face all the issues noted.
At The New York Times, where some terra firma has started to appear below the sold-off Times building, future cash flow has got to be a big concern. It’s well and good to have recently paid off Carlos Slim’s near-usurious loan early, but how thick is that cushion now? (And guess which Times-hating magnate is sitting across town with $12 billion-plus in cash and equivalents, only about to be a little drawn down by investor clamoring?)
In the U.K., we believe the Telegraph is the only quality daily in London that has been profitable. Throughout Europe, the press — more family-owned than in the U.S. — now comes face to face with red ink, as meager profits have a good chance of turning to operating losses as dependable-if-slowing revenue streams further winnow. In fact, this next recession may could cause far greater change in U.K. and Europe than the last one did.
What caused most of those 14 bankruptcies and extreme cash-flow constraints in the U.S. was debt — debt taken on to buy other properties, which quickly lost value after purchase. In Europe, the market has been more stable, but now job classifieds, which had made up for downturns in real estate and auto, are stagnating.
Gregor Waller, a former top executive at Axel Springer, believes the remainder of the classified business — which still makes up 20 percent of revenues there — is going away. “Eighty-five to 90 percent of today’s classifieds will be gone till the end of 2014 and never come back because of the threshold of insignificance of classifieds marketplaces in newspapers,” he told me this week.
Waller notes how long a period of change we are moving into. “This is not a two-year-dip which will be ended by governmental, debt-financed economic stimulation programs.” In Europe, perhaps to a greater extent than U.S., we see the combined impacts of structural print-to-digital movement against a macro-economy itself in great — and long — upheaval. Waller sees five to 10 years of adjusting governmental budgets to GDP and adapted tax systems, all of which will change the rules of the game in Europe.
The long game of change has gotten progressively shorter. Maybe, we’ll dodge a second recession in the short-term, but the game is the game, and publishers are simply running out of good choices. They’ve been dealt a deck of wild cards, misplayed a few hands and now have fewer chips left to play.
