Pessimism Pervades Newspaper Outlook

Three separate announcements of bad news from newspaper publishers this week have deepened pessimism among industry analysts, who are already predicting that the first quarter of 2001 will be one of the toughest in recent years for the newspaper business.

Dow Jones warned investors for the second time Wednesday that a steep decline in advertising volume at its flagship newspaper, The Wall Street Journal, would result in lower first quarter earnings.

The New York Times issued a similar warning on Monday, and Knight Ridder said two weeks ago it expected earnings to decline “modestly” in the first quarter. Also, Knight Ridder’s San Jose Mercury News told its staff on Monday that it would lay off a yet-to-be-determined number of workers.

The warnings and layoffs are a sign that an advertising slowdown, which publishers blame on the cooling economy, is worse than previously expected, said John Morton, an independent newspaper industry analyst. “They would have had difficulty for the first six months no matter what happened because of the tough comparisons with last year, but now there’s a danger that if things don’t improve the whole year will be poor,” Morton said.

Doug Arthur, a publishing industry analyst with Morgan Stanley, went even further. Calling himself a “pessimist” on the advertising outlook, Arthur disagreed with forecasts that advertising will pick up in the second half of the year.

“We’re certainly seeing the slowest ad environment in the past 10 years,” Arthur said. “I don’t see any of the catalysts for last year getting better this year.” Instead, he and other analysts expect publishers to continue cutting costs while looking to raise newsstand prices.

Analysts said it’s still unclear how slowly advertising will grow this year. Like many publishers, The New York Times Co. had been predicting advertising growth of about 5% this year, but on Monday the company said it now expects growth of only 1% to 3% for the entire year, with much of it coming in the second half.

Part of the problem is an embarrassment of riches from last year, when the Internet boom was still in full swing and many companies were spending freely on advertising, leading to banner profits at newspaper publishers.

“The advertising environment is weak now, and that’s partly because last year was fantastic,” Arthur said. “There was just a tidal wave last year, and if it had been a normal economy this year, you would have had flat numbers.”

In addition to cutting costs, publishers are also increasing newsstand prices to help make up for the shortfall in advertising revenues. The New York Times, The Wall Street Journal, and Tribune Co.’s Los Angeles Times have all announced price increases. Gannett Co. says it doesn’t plan to raise prices for USA Today.

But many industry watchers say it’s troubling that newspapers are raising prices even as they struggle to keep readership, which has been on a steady decline over the past 10 years amid increasing competition from the Internet and cable television.

“From a financial point of view, it may look like a smart thing to do, but from a long-term prospect it’s not good for the industry,” Morton said. “I fear the industry could be setting themselves up for further declines. It’s tougher to get readers back these days once you lose them.”
On the other hand, a slight trimming of circulation might not be such a bad thing at a time when prices for newsprint have been rising, says Goldman Sachs analyst Michael Beebe.
“I think publishers will do whatever they can to raise prices,” Beebe said. “I also think it will have an effect on volume, but I’m not sure that they care. The silver lining in all this is that it will also save them money on newsprint.”

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