The most important fact to keep in mind is that newspapers are not affected by recession as much as other businesses are. While automobile manufacturers and a host of other industries suffer sharply reduced revenues, and often losses, newspapers' profitability merely drops to still-healthy levels.
Last year, publicly owned newspaper companies, which account for half the nation's daily circulation, achieved an average 20 percent operating profit. In the first six months of this year, the average margin was 21 percent; it's likely these companies will finish 1998 at the same 20-percent-plus level last achieved from 1983 through 1985.
Newspapering's worst recession since World War II came in 1991, when the industry as a whole (as measured by the results of publicly owned companies) still managed to earn operating profits of 13 cents on every dollar taken in. Some of this profit went to pay nonoperating expenses, notably interest on money borrowed to buy more newspapers. And, of course, there are taxes. But a 13 percent operating margin is better than many industries hope to achieve in the midst of a boom.
The principal reason for newspapers' comparably high profits even during recession is that advertising--which accounts for 75 to 80 percent of all revenue and for all the profit--tends not to plunge. In the 50 years since World War II, newspaper advertising revenue declined in only five years and by less than half a percent in two of them, according to data from the Newspaper Association of America.
The strength of newspaper advertising lies in the fact that most of it is local. Yes, recession affects local business, especially segments contributing to classified ads, but not nearly as much as it does the national economy. Local business, and the advertising that supports it, tends to go on.
The worst decline was the most recent, a 6 percent drop in 1991. Then, newspapers not only were affected by the recession but by the bankruptcies and financial weakening of major department store advertisers in the aftermath of the 1980s' leveraged buyout frenzy.
Newspapers' response to the decline in advertising revenue and lower profits in 1991 was much more aggressive than actions taken in earlier recessions. Newspapers previously had not laid off significant numbers of employees for economic reasons, but this time layoffs were common. Those newspapers that did not lay off personnel instituted hiring freezes, so staff vacancies went unfilled.
Efforts to strengthen the newspaper franchise with zoned and other special sections were put on hold and, in many cases, eliminated. Many newspapers cut back on news space to save newsprint.
Circulation prices were sharply raised to offset reduced advertising revenue, thus assuring declining circulation. Another round of circulation price increases in 1995, in response to higher newsprint costs, exacerbated the decline. By 1997, total national daily circulation had dropped to a level not seen since the 1950s.
All these actions amounted to a self-imposed downsizing that harmed the industry's stature and fed speculation about whether newspapers would really have much of a future in the new information age.
I thought then that newspapers overreacted in the last recession; I still do. It has taken years to regain circulation momentum, by minute amounts so far, and to reinforce newspapers' allure as advertising vehicles. The danger is that newspapers will overreact again.
In the next recession, newspapers are unlikely to suffer any more grievous financial damage than in previous ones--in fact, they'll probably suffer less. The industry is at a loftier level of profitability than existed before 1991. Profits began to decline in the last half of the 1980s, slipping to 17 percent by 1989, and then to 15 percent the following year. The declines in those years were caused mostly by factors other than the state of the economy: increased competition; the loss of advertising dollars to in-store promotions and catalogues; and the troubles of department store chains.
Since hitting bottom in 1991, newspaper profits have steadily increased (except in 1995 because of soaring newsprint costs), partly because a rising economy raises all boats and partly because of cost reductions. Maybe this time, newspapers will choose to forgo the severe cost-cutting that could bring on another lengthy period of malaise.
Some sanguine soothsayers think there will never be another recession because the national economy has miraculously reconfigured itself in a way to assure endless growth. But let us assume these rosy predictions are as wrongheaded as similar ones in the 1920s and ponder what might transpire. How might newspaper companies, and their heady profit levels, be affected by the next recession? And how will they respond?