Hold Off On the Funeral Plans   

The newspaper business is thriving and will remain hugely profitable.

Mark Twain once cabled the Associated Press from Europe that "the report of my death was an exaggeration."

I think of that when recalling the dire predictions of the future of the newspaper business about three years ago. Things did look pretty bleak back then because of the effects of the recession--the worst for the newspaper industry since World War II.

Several trends had come together to deliver newspapers a triple blow. The leveraged buyout frenzy of the 1980s sank the advertising budgets of several major department store chains when softening business made it difficult and, in some bankruptcy cases, impossible to meet high interest and principal payments. Those retailers not deep in debt could then afford to trim their own advertising budgets because their troubled competitors were buying less advertising than usual.

Second, retailers shifted money from their advertising budgets to in-store promotions, mailed catalogs, prize contests and other means of reaching consumers outside the customary advertising vehicles.

And finally, when the recession first hit in 1990, newspapers had become far more dependent than ever before on classified advertising--a category especially vulnerable in a recession. Recessions sharply curtail automobile sales, real estate transactions and job opportunities, and these three categories are the major sources of classified advertising.

To give an idea of how important classified had become, in the dozen years before the most recent recession, classified rose from 29 percent of newspaper advertising revenue to about 42 percent--and to more than 50 percent at most big city newspapers. Thus a much higher proportion of advertising revenue was at risk than in earlier recessions.

The consequences of these negative developments included employee layoffs in a business that historically had not cut employment for economic reasons; the disappearance of several dailies, including such notable titles as the Dallas Times Herald, the Arkansas Gazette and the San Antonio Light; and the closings of numerous afternoon newspapers in markets where one company had previously published both morning and afternoon newspapers (see "Death in the Afternoon," April 1992). By my count, in the dozen years through 1992, more than 150 newspaper titles disappeared because of long-term trends and the ultimate blow of the recession.

So it is not surprising that relatively unsophisticated observers of the newspaper business might think that a real calamity was at hand, that there was a whole new electronic world out there growing rapidly and likely to make things even worse, and that newspapers had become the outmoded equivalents of buggywhip manufacturers.

What this dire view of newspapers overlooked was that the newspaper industry remained a huge business with inherent economic efficiency--efficiency that actually was increased by the recession because of costcutting and the closing of inefficient newspapers. Last year, in a recovery mode, newspapers collected nearly 50 percent of all local advertising revenue--more than television, radio, cable television and the yellow pages combined.

True, the percentage is lower than it had been 10 or 20 years ago, as the emergence of new forms of media and the growth of television and radio inevitably took away larger percentages of the advertising whole. But despite all the negatives, newspapers remain a powerful economic presence.

Just how powerful is becoming apparent this year. Newspaper revenue has come roaring back in almost all sections of the country (the Mid-Atlantic states are still sluggish). Fueled by this and cost-cutting, earnings have soared.

Through the first seven months of this year (the latest available data), newspaper advertising revenue was more than 6 percent ahead of the same period in 1993, with an upward trend throughout. In July, these revenues were up nearly 9 percent. (As a proxy for the industry, I rely on the performance of the publicly owned newspaper companies, which account for about 42 percent of total circulation.) Through the first six months, these companies' earnings rose more than 20 percent.

This strong performance is likely to continue throughout the rest of 1994, but it will probably slow next year. Because of an imbalance in supply and demand, for the last six years newsprint prices have been as low as they were 10 years ago. This helped boost newspaper earnings, although it also drove most newsprint manufacturers into unprofitability. Now, with newsprint demand up because of advertising growth, two newsprint price increases since June, and the likelihood of two more in coming months, soft newsprint prices may be coming to an end.

While higher newsprint costs may blunt earnings, newspapers will remain hugely profitable businesses. Any predictions to the contrary will be exaggerations.