Caught Between The Past And Future   

Papers have to strengthen their ad bases and prepare for the new electronic era.

The overall improvement in newspaper management, a subject covered in my November column, faces a severe test because of the future confluence of two major trends.

The first is the newspaper industry's weakening hold on local retail advertising, a longstanding problem. The second, still in its early stages, is the potential impact on newspapers of the emerging interactive electronic highway into American homes. In a sense, newspaper managers will be struggling at the same time with the past and the future.

The problem with local retail advertising has been masked over the last 10 years by newspapers' extraordinary success in attracting classified advertising. Classified grew from about 30 percent of advertising revenues more than a decade ago to, at its peak before the recent recession, more than 40 percent. The major reason the last economic recession had a more adverse impact on newspapers than previous ones was the sensitivity of classified to downturns. The bulk of classified comes from automotive, employment and real estate advertising, all of which tend to sink when times are bad.

The collapse of classified during the recession exposed newspapers' weakness in local retail advertising. Using the newspaper operations of the publicly owned media companies as a proxy for the industry (public company newspapers account for about 36 percent of total national daily circulation), gross newspaper revenues for these companies peaked in 1989 at about $15 billion. Operating profit (earnings before interest expense and taxes) also topped off in that year at about $2.6 billion. The operating profit margin, at 17.6 percent, was not a peak. That occurred back in 1985 at 20.3 percent – at a time when newspapers had less competition than in subsequent years.

After the 1989 peak, revenue and operating profits declined steadily, hitting bottom in 1991 at about $14 billion in revenue, $1.8 billion in operating profit and a profit margin of 12.7 percent. Revenue rose a little more than 1 percent in 1991, to about $14.1 billion, and operating profit jumped more than 10 percent due to employee layoffs and other recession-induced cost-cutting.

It appears that newspaper revenue for 1993 may come within $250 million of the 1989 peak, while operating profit may be only $500 million below that year. That may seem comforting, but it's not because these figures represent actual dollars, unadjusted for inflation. Had newspaper revenues grown at just the inflation rate – in reality, not growing at all – they would reach about $17.3 billion in 1993. In short, the newspaper industry has lost in real terms about 15 percent of its revenues over the last four years, at least according to the public company proxy.

Fortunately, the stronger managements of most newspaper companies have developed strategies to protect their newspaper revenue base from further erosion and, perhaps, to enlarge them. The gradual ending of the recession (it has been especially gradual for newspapers) will help a lot, of course, but more important will be strategies to recapture some of the local retail advertising lost to direct mail operators (see Free Press, December 1993).

A central part of most strategies is creation of special sections designed for ever-smaller zones throughout a newspaper's distribution area. These attract large advertisers wishing to target particular neighborhoods, and can attract small advertisers unable to afford space in larger zoned editions.

Developing strategies to capture local retail advertising is the most pressing problem for newspapers, because whatever happens in the electronic future, the bulk of revenues for years – and possibly decades – will be derived from printing and delivering newpapers on newsprint.

Yet newspaper managers still must devise strategies for prospering in the looming electronic era. The earliest and most obvious approach is developing special telephone services through which newspaper customers can obtain up-to-the-minute sports scores, stock quotes and information about a variety of other subjects.

Beyond that, and much more ambitious, is hooking up with Prodigy, America Online, CompuServe or some other service that feeds on the fact that 25 percent of American homes now have personal computers (see "The Age of Convergence," page 22). Indeed, personal computer services may prove important to conditioning newspaper readers both to read the paper and to rely on it for electronic information.

David Easterly, who heads the newspaper division of Cox Enterprises, envisions newspapers printing instructions daily on how to gather more information on specific subjects through a computer – in Cox's case via Prodigy – than the paper had room to print. Thus the traditional newspaper would offer its editors' selections as well as a way to access what wound up on the cutting-room floor.

How well the transition from the old ways to the new is managed will determine whether newspapers will remain stuck where they are or grow. My bet is on growth. l