New York--The belated sale of the New York tabloid, the Daily News, and an extended run-up for newspaper stocks beginning last October would appear to suggest better times for the industry, but the fulminations beneath the headlines are hardly so cheery.
The perilous conditions of critical major retail companies and the depressed market for real estate and employment have damaged the profitability of every major newspaper company, including Times Mirror, the Los Angeles-based owner of this newspaper, and the two based near Baltimore, the Washington Post Co. and Gannett.
Whether the current problems are merely cyclical or reflect a more profound shifts in the economics of the industry is a matter of debate. Historically, newspaper stocks have been considered bellwether issues on Wall Street, since they have turned up sharply toward the end of recessions. Much of a newspaper's cost structure remains the same regardless of business conditions, but its primary source of revenue -- advertising -- can soar with a resumption of growth. Therefore, investors tend to leap into the stocks when sniffing an imminent upturn on the hope (so far justified) that much of the proceeds will fall to the bottom line.
But the link between the economy and newspaper prosperity has taken some blows. Karen Firestone, an analyst at Fidelity Investments, the large Boston-based mutual fund company, notes that a relatively strong overall expansion in the economy during 1988 and 1989 was not matched by advertising growth. She expects 1991 earnings for Times Mirror, the New York Times Co. and Affiliated Publications to be less than 60 percent of their 1988 peak.
Yearly comparisons have been poor but this quarter should be truly awful, at least by the stellar standards of an industry whose returns tend to vacillate (with only very few exceptions) from profitable to highly profitable. Salomon Bros. reckons every major newspaper company will show year-to-year declines in the first quarter, some by half.
The harsh results won't be a surprise to the stock market. An index of the 14 largest public newspaper companies compiled by Donaldson, Lufkin & Jenrette turned downward in July of 1989, losing about 44 percent by last October.
Since then, they have turned upward and, despite losing a little recently, the index has recovered a third of its loss. More prescience? There's yet to be any proof. Advertising continues to deteriorate around the country, Ms. Firestone says. Still, she suspects that can't continue. The number of total advertising lines currently carried in newspapers is at about the same level as it was during the 1982 recession. "I can't see it getting much worse," she said, "if only because the general economy would have to deteriorate significantly for it to move to a deeper abyss."
That assumes, however, that papers will continue to hold their traditional franchise -- an uncertain prospect. Throughout the post-Word War II era, the hold newspapers had on distributing news and collecting ads has been eroding, first by radio, then television (broadcast and cable) and, more recently, by various forms of junk mail. Further damage has come from demographic changes in where subscribers live, and when (and what) they read.
Ironically, what has hurt the industry may have helped survivors, at least until recently. The tougher environment has pruned the competition, and few cities in the United States now have more than one paper. Afternoon papers have died in Baltimore (the News American), Washington (the Washington Star) and Los Angeles (the Herald-Examiner) where Times Mirror's flagship, the Los Angeles Times, is based.
To at least a limited extent, that gives publishers access to what approaches monopoly profits, even if it is a monopoly that is not complete because of competition from other types of media. During the past decade profits (and share prices) for almost all the major newspaper companies rose significantly with no intervening losses, a claim few other industry groups can make.
There is fear, however, that the contraction may continue, and that may begin choking yesterday's winners. "If things don't change, we may look back 10 years from now as the 1980s being the golden era for newspaper sales and profits," contends Kenneth Berents, an analyst at Alex.Brown & Sons and a former reporter for The Evening Sun.
He perceives the current downturn as a cyclical twist in a secular slide and presents a grim statistical portrait to back it. The percent of the population reading newspapers, he notes, has dropped from 77 to 67 during the 1980s, as 24 million "baby boomers" entered prime newspaper reading age and a mere 500,000 became newspaper subscribers. "That is a lost generation," he said. There are real fears that in the current decade the so-called penetration rate could fall within the 40 percent range.
Advertisers have taken note, with newspapers' hold on the total pie shrinking from 27.6 percent to 26 percent. And the type of advertising has shifted, with newspapers increasingly reliant on classified ads, an area more tightly tied to economic cycles than others. At some point, Mr. Berents contends, the losses in audience and market become critical -- witness the three major broadcast networks, which have seen their capacity to generate vast profits evaporate as cable and videotapes undermined their hold on viewers.
To continue to thrive, Mr. Berents contends, daily newspapers must evolve. Some publishing companies are already attempting to improve their marketing and graphics, retrenching from expensive-to-serve fringe subscribers, exploiting data newspapers collect anyway (by publishing compilations of real estate transactions, local business directories and other salable information), and more readily tailoring strategies to reflect shifts in readers interest and advertiser composition. Other publishers, Mr. Berents said, must now do likewise: "When things start falling down, people start changing."
His sense of impending danger, however, is not universally shared. In an optimistic report on the industry, Eric Philo, an analyst at Goldman Sachs, contends that even if penetration is decreasing, the rate of the decline has slowed, from 2.8 percent per year in the 1970s to 1.2 percent in the 1980s. He attributes the recent crunch in newspaper share prices to an unusually long approach to the recession, aggravated by retail consolidation that has now passed its peak. "An economic recovery would likely overwhelm" the negative impact of these trends "completely," he said.
And for all the current problems, the industry retains adherents. "A newspaper boils down to a distribution system for advertising, and even though it's not as good as it once was, in a local area it reaches the consumer better than anything else around or on the horizon," said Alan Snyder, a San Francisco-based money manager who invests heavily in newspaper stocks.