Special Report: Newspapers

NEW YORK For newspapers suffering years of evaporating ad business and flagging circulation, the Web is giving them some glass-half-full confidence.

According to PricewaterhouseCoopers, the newspaper Web site audience grew more than 20 percent over the past year—and with circ poised to continue in freefall, the online operations of historically print publishers are set to become the main drivers of newspaper advertising, the firm predicts.

But first, the bad news. PwC estimates that spending on newspaper advertising next year will remain flat, at $48.68 billion, following slight declines in both 2007 and 2006.

Newspaper print advertising fell in 2006 for the first time in four years, and business going forward will continue to be impaired by the sagging fortunes and slashed marketing budgets of automakers and phone company consolidation.

Retail, newspapers’ largest ad category, continues to be under pressure, with local department stores—historically among the dailies’ biggest supporters—continuing to cut back as they lose sales to big-box retailers, which don’t tend to invest as much in print.

Retail spending will dip by half a percentage point in 2008 versus this year, which saw a 1 percent dip, per PwC.

Meanwhile, vulnerable classified advertising is projected to drop 1.6 percent to $16 billion in the coming year. While recruitment ads remain under pressure, continuing to lose share to the Internet, PwC projects real estate classifieds (which dipped an estimated 1.1 percent this year) to start coming back in the year to come.

The third major newspaper ad category, national, is expected to continue its years-long falloff in 2008, declining 3.5 percent to $6.85 billion. After years of growing their national ad base, newspapers continue to lose ground in the category, which has shouldered losses over the past three years following a growth spurt in the earlier part of the decade, culminating in 8.1 percent growth in 2003.

Last year “was the first year we saw declines in both total circulation, at negative 1.1 percent, and advertising, at negative 0.3 percent,” said Mila Petrova, PwC partner, entertainment and media practices. “Circulation has been eroding in the last three years, but this is the first time advertising has also seen a decline. However, we are seeing newspaper Web sites picking up where print is lacking.”

The contrast between print’s fading fortunes and online’s projected surge is stark. Ad spending on newspaper sites is predicted to rise by 18.8 percent over the next five years, Petrova said. But with lower ad rates than for the print editions, overall newspaper revenue will not see a boon—and will actually dip.

To offset weak ad sales, newspapers have forged alliances with major online players. In one such deal, Google sells print ads through an auction process to help attract small businesses and online retailers to newspapers. (Google pockets 20 percent of ad sales.) PwC expects such alliances to boost newspapers’ retail ad business.

Veronis Suhler Stevenson, likewise, is predicting a downturn in circ and ad results for newspapers in the immediate near term—and is bullish about the industry’s intense focus on interactive products and partnerships.

“The growth rate in digital is terrific,” said Jim Rutherford, VSS executive vp, managing director. “There’s a great future ahead.” Rutherford said VSS projects spending on newspaper sites to soar to $10 billion over the next decade, growing at a rate of 24 percent per year.

While competition for eyeballs on the Web is fiercer than ever, newspaper sites remain among the top sources for news online—and are growing.

Through this past June, Web sites from New York Times Co.’s New York Times and Boston Globe, Dow Jones & Co.’s Wall Street Journal and Washington Post Co.’s Washington Post all scored year-over-year growth in unique audience, per Nielsen//NetRatings.