Red Ink Forecast For Newspapers Next Year

Retreating somewhat from earlier optimistic predictions, newspaper publishers and analysts now say next year will probably be just as tough for the troubled industry as 2007.

With shareholders staking their hopes on a turnaround in 2008, this is bad news for newspaper stocks--and may also torpedo major deals like the planned buyout of Tribune Co. by real estate billionaire Sam Zell.

McClatchy and E.W. Scripps both issued negative revenue and earnings forecasts on Wednesday. Although McClatchy didn't cite a specific number, it predicted a revenue decline in the single digits, which Wall Street analysts separately pegged at 5.4%.

Scripps issued a similar prediction. The company's plans to separate its newspaper and television businesses are due, at least in part, to poor performance on the newspaper side.

In the same vein, Media General said it expects newspaper publishing revenues to drop in 2008, although it didn't specify how much. The Washington Post Co. also predicted that revenues will slide at the flagship newspaper.

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Meanwhile, a recent survey of 15 executives at private newspaper companies by Deutsche Bank analyst Paul Ginocchio found little good news, echoing the forward-looking statements of publicly owned companies. Overall, executives believe revenue will slip by 1.5% in 2008, another disappointing return after a projected 5% drop in revenues this year.

Noting newspaper trends, Ken Doctor, an analyst with Outsell, Inc., said: "The decline in print advertising and print circulation, combined, have a kind of pinball effect, where print advertising and print circulation revenues are reinforcing each other's decline."

A survey of the last several years shows newspapers moving from essentially flat revenues in 2006 to negative growth in 2007, Doctor went on--and the 2008 forecasts confirm the trend. "It's a tipping point in the industry's history, where it is moving into an area of negative growth for the first time. You can't put too good a shine on that."

The one bright spot for newspaper publishers--online revenue--isn't nearly as bright as it should be, Doctor adds. "While substantial, it's insufficient to make up for the print and circulation revenue declines. The problem for the industry is that it hasn't grown out of its legacy print business quickly enough. It needed to move from print to digital much more quickly.

"Less than 10% of revenues are digital," he says, "and that is a tremendous burden on the industry." For comparison's sake, Doctor says that in the information industry in general (including health, education, and financial information publishers, all tracked by Outsell), 40% of revenues now come from digital operations.

The dire 2008 forecasts are especially ominous for the Tribune Co.'s planned sale to real-estate billionaire Sam Zell, which calls for the company to assume a large amount of debt. "As things are now, they barely have enough money to service the debt that they're going to be taking on through this deal," Doctor noted.

"The problem is as we look at 2008, the further decline that we expect in newspaper company revenues means the Tribune Co. will have little resort other than cutting expenses even more." Unfortunately, "now that means cutting personnel, including executives and newsroom staff."

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