• by Erik Sass  @eriksass1, August 10, 2007

The downturn in the newspaper business shifted into high gear in the second quarter of 2007, with declines in print revenue steepening as the real-estate market slowed and the economy wobbled. Worse, the one bright spot on newspaper companies' ledger books--strong online growth--seems to be hitting a plateau. The short version: in both print and online advertising, media-specific trends are now combining with structural economic factors to conspire against newspapers.

Newspapers' print problems are already common knowledge, but existing trends are getting worse, not better. Leading the pack are classifieds, in past decades--a mainstay of the newspaper business, accounting for about one-third of newspaper print revenues.

Over the last decade, classified listings have migrated to the Internet, where interactivity provides a superior platform for matching products and buyers on a large scale.

Until the first quarter of 2007, print classifieds still attracted robust spending in one category--real estate--thanks to the vitality of the housing market overall. Now, the slowdown caught up with newspapers, and the picture looks grim, as real estate joins the slump alongside automobile and job recruitment classifieds ads.

According to the Newspaper Association of America, classified revenues fell 13.2% in the first quarter. While second-quarter stats aren't available yet, the performance of individual companies suggests they will be just as depressing.

At the New York Times Company, classifieds fell 13.4%, Tribune Co. was down 18%, Gannett 7.5%, The Washington Post Company 22%, McClatchy 14.9%, Lee Enterprises 7.3%, E.W. Scripps 18%, and 9.5% at Journal Communications. Executives from national newspaper chains, in particular, cited weakness in real estate--particularly once-hot Sun Belt markets like California, Florida and Arizona as the main culprit in accelerating classified declines.

* Worse, the real-estate slump seems to be deepening, as homebuilders report steep declines in profit and issue gloomy forecasts for 2007-2008; in fact, one major company--Toll Bros.--announced it would no longer issue forecasts that essentially amount to an unrelenting drumbeat of bad news.

Newspapers are also confronting problems with falling local and retail advertising. As most newspapers are local media, catering to area businesses, this indicates an assault on their basic local ad proposition.

Consider: in the second quarter, Tribune's retail revenue fell 5%, Gannett's local fell 5%, McClatchy's retail 6.2%, and Lee's retail 4.6%. National advertising--a smaller but still important part of the business--is also dropping, with declines frequently in the double digits. Here, Tribune is down 11%, McClatchy 9.4%, Lee 13.6%, and Journal 29%. Even Gannett--well-positioned for national advertising because of USA Today--saw total national ad dollars slip 2.8%, with USA Today itself dipping 1%.

So where are local and national ad dollars going?

"Especially on the national level, the increasing sophistication of tools of interactive ad buyers means they're able to do big, very measurable campaigns on the Internet," explained Ken Doctor, a newspaper analyst with Outsell Inc., citing big financial advertisers like Citibank and Bank of America. On the consumer electronics front, he said, "Best Buy, for example, which buys and plans nationally, is putting a lot of money into its own Web site and buying leads on other sites," with money "that's largely coming out of print budgets."

At the same time, local dollars are migrating online, with Google AdSense and Yahoo "moving into a market that previously was part print and part direct mail," adds Doctor. Here, the promise of measurability is a critical draw for local advertisers with small ad budgets.

Yet online newspaper ads have a catch. While it's a key growth area, it isn't growing as fast as it was in the second quarter of last year. Like other ad trends, this isn't an anomaly, but a symptom of long-term structural changes.

In the second quarter of 2007, Tribune was up 17%--but that's down from 27% in the same period last year. McClatchy's online revenues grew 13%, less than half of last year's-second quarter growth rate of 27.9%. Likewise, Gannett's domestic newspapers grew 12% in the second quarter--down sharply from 27% last year--and The Washington Post Company's online revenues grew 11%, compared to last year's 36%. These percentage drops represent decreases in absolute dollar amounts.

To sustain online revenue growth, newspaper publishers have begun striking deals with each other, as well as established online players, to share content and Web traffic. Of course, classifieds are a major focus, as newspapers try to rebuild their old profit centers online. This category proves especially well-suited to economies of scale. (Simply put, the more listings, the better).

CareerBuilder, a joint venture between Tribune, Gannett, and McClatchy, is a good example of a newspaper-dominated network; meanwhile, strategic partnerships with Yahoo's HotJobs, or Monster.com, fall into the hybrid category.

However, the basic obstacle to growth in online newspaper classifieds is how they are sold--usually as "upsells" bundled with print classified listings for an extra fee. This strategy has worked to drive strong online growth until now, with online classifieds representing as much as 70% of newspapers' total online revenues. But the system is obviously vulnerable to the accelerating decline in print classifieds. As it falls, the number of opportunities for online "upsells" decreases, too.

One attractive area with potential for future growth is online display advertising, used as a branding tool by national advertisers, which has enjoyed a revenue boom over the last year. To capture more display ad dollars, companies like Centro have aggregated thousands of local newspapers in network-style exchanges, connected by a single software platform that allows national advertisers to run display ads with flexible distribution--ranging from a single newspaper's site, to all the sites in a state or region, to a run-of-network buy covering all 4,000 publishers.

Shawn Riegsecker, the founder and CEO of Centro, said that Centro now handles over half of all national display advertising served by local newspaper Web sites. And while the online classified category is stalling, display is booming, with Centro-affiliated properties enjoying 100% growth in national display ad revenue from 2006-2007. What's more, online newspapers are claiming a disproportionate share of national display ad spending, which grew just 20% overall in the same period.

Riegsecker attributed this success to the continuing appeal of newspaper brands as online news providers, especially at the local level--an assertion borne out by online ratings. For the first time this June, Centro appeared in ComScore's listing of the top 50 ad-serving Internet properties, ranked by audience--entering at No. 20 with 74.6 million unique visitors, or 42% of the American online population. That compares favorably with Yahoo News, which attracted 32.3 million visitors in June.

But Doctor points out that even with the promise of robust growth in online display ads, for most newspapers, online revenue "is still small potatoes compared to what they're losing in print." The result, is unavoidable: "Newspaper companies are going to get significantly smaller. The trend lines are only getting worse, with the decline of print advertising. The only solution for public companies that want to maintain profits is cost-cutting."

But Doctor warned that in the long run, any strategy that involves cutting newsroom staff will eventually create openings for new, online-only competitors. "They'd be local newspapers, but just drop the 'paper'--meaning they won't have the legacy costs of printing and distribution."

As an example, Doctor cites the plans of Joel Kramer, former publisher of the Minneapolis Star Tribune, to create an online-only local news site producing serious journalism about the Twin Cities. Kramer, who announced the project in June after years of planning, says his task will be made easier by the glut of newspaper journalists fleeing newsroom layoffs and buyouts.