• by Erik Sass , October 3, 2006

Leading analysts from two of the world's largest investment banks recently released gloomy forecasts for the newspaper industry as a whole, suggesting that newspapers' efforts to revitalize print ads and expand online operations may prove irrelevant in the face of shifting ad budgets and a possible economic downturn. Worst of all, the downbeat analyses from Merrill Lynch analyst Lauren Rich Fine and Deutsche Bank analyst Paul Ginocchio indicate that the most successful area of online monetization--classified ads--is also one of the most vulnerable.

Their analyses are based on poor third-quarter results from a range of newspaper companies, which both analysts say are part of larger, long-term trends. Print advertising is declining or stagnant across the board, according to Ginocchio, who forecasts essentially flat revenues in the third quarter--a disappointing performance after the industry's promising 2 percent growth rate in the first half of 2006. Meanwhile, online revenues are still growing, but they're not making up for lost print revenues--and what's more, online growth seems to be slowing.

Here, the New York Times' relatively successful online operations may be a bellwether for the industry at large. As in recent months, the paper's August Internet revenue was a bright spot on the ledger next to mediocre print ad sales--but the numbers weren't quite as buoyant as before, with a relatively modest increase of 17.3 percent over August 2005. By comparison, July online revenues were up 27.5 percent compared to last year, June was up 23 percent, and May was up 27 percent. Taking a longer view, the rate of increase is clearly slowing from year to year as well: overall, 2005 saw a 30 percent growth in online revenue over 2004.

In an overview of the current state of ad demand, Merrill Lynch's Lauren Rich Fine also noted that "newspaper ad revenues deteriorated throughout the summer," pointing to the continuing flight of auto ad dollars from print. Although GM and Toyota are contemplating more ad spending in the fourth quarter, Fine says, this is unlikely to benefit newspapers' print or online operations, as automakers spread "their ad dollars across more online platforms (e.g., search, mobile, gaming, local media Web sites)."

The most ominous development for newspapers' online revenue is the growing softness of the classified ad market. Indeed, Ginocchio writes: "The biggest drivers of the change in ad growth over the next 2-3 quarters will be real estate and help wanted classified, both of which are showing weakening trends." On this point, Ken Doctor--a newspaper industry analyst with Outsell, Inc.--warned that reliance on recruitment and real estate leaves online papers especially vulnerable to an economic downturn. "The greatest concern going forward is that the economy appears to be slowing, and publishers should be thinking about what will happen cyclically to those two areas," Doctor said. "It looks like hiring is softening, and that could have a serious impact on recruitment revenues." A slowdown in the housing market could have a similar impact.

Ginocchio acknowledged some possible spurs to new growth, including the Newspapers Next project, which encourages newspaper publishers to experiment with novel, eye-catching ad formats and campaign structures. But the Deutsche Bank analyst was sanguine at best about Newspapers Next--noting that the industry's "historically risk-adverse culture" may prevent it from embracing unusual layouts. In any event, he concluded, the project won't have an effect on newspaper revenues until later 2007 at the earliest.