Did You Notice That All Those Big Newspaper Deals This Year to Buy Internet Sites Were for Cash, Not Shares?

Philip Stone June 30, 2005

Could the average 15% drop In newspaper 2005 share prices have something to do with that?
Go To Follow Up & Comments

The big newspaper companies have made clear they have gotten the message. They have spent more than $1.6 billion cash in buying up Internet sites they believe will be their bridges as they continue to cross from being one-platform traditional media purveyors of news and information and instead offer multiple platforms of the Internet, mobiles and other digital technology.

And Internet companies have made clear that while they don’t mind selling out to newspapers they don’t think very much of the newspaper business these days. They wanted cash on the barrelhead; no one was interested in accepting company shares that they believed would only decline in the short to medium term. With newspaper shares down an average 15% thus far this year those Internet entrepreneurs seem to have gotten it right!

And now comes news on several fronts suggesting that the fortunes of the traditional newspaper business – beset by falling circulation, loss of young readers, higher newsprint costs, and reductions in advertising growth -- are not going to get better any time soon.

Two major forecasters have lowered their full year advertising growth estimates. TNS Media Intelligence told the annual AdWatch conference in New York that overall ad spending in the US this year will grow by just 3.4% compared to 9.8% in 2004. Newspapers could expect a growth of 3.8%. 

Universal McCann, which usually has more bullish estimates than TNS, has downgraded its 2005 forecast to a 5.7% increase in 2005 compared with its earlier forecast of 6.4%. Newspaper growth was forecasted up 5%.

But compare those growth numbers with the 26% increase in just Q1 Internet advertising revenues alone and is it any wonder that Standard & Poors has reduced the 2005 earnings estimates for the US’ top three newspaper groups – Gannett, Knight-Ridder, and the New York Times Company?.

And now newspapers are experiencing a serious increase in their cost structure.   Newsprint – where pricing had been in decline for about four years – is now experiencing a 10% increase.  The industry answer is to seriously experiment in switching to lighter-weight newsprint, downgrading from 48.8-gram to 45-gram paper. The New York Times has announced all of its company owned newspapers will make the switch, but the Washington Post, citing quality concerns, says it won’t, at least for now.

There are serious quality issues, but at the same time there are serious savings that can be made. Knight-Ridder has converted 29 of its 31 newspapers to the lighter weight, with two actually dropping to 43-gram weight -- and the annual newsprint savings is put at $4 million.

With circulation still declining, publishers attending the Mid-Year Media Review in New York were trying to persuade analysts that the print edition’s circulation numbers aren’t realty as important as the actual readership numbers (not declining so much).  And there were suggestions that newspapers should start adding to their circulation numbers the number of unique visitors to their web site to give a truer impression of the brand’s impact in the market. 

Which was perfect timing for Scarborough Research to announce that under its new Integrated Newspaper Audience measurement, it counts readers to a newspaper’s web site who have not read the print edition. And since many of those web readers are young, it’s another way of increasing the newspaper’s demographic pull with advertisers.

The company gave as an example the Atlanta Journal-Constitution that reaches 51% of adults in Atlanta.  But adding the number of visitors to the newspaper’s two web sites sites increased the reach to 56%. Scarborough said it also found that while only 28% of the print edition readers were between 18-34, more than 38% of the web audience was in that demographic. In all the web sites added 223,000 readers to the joint circulation figures.

The one question that no one still had an answer for was how to make real money on the Internet when news is given away for free? Obviously the advertising model works to an extent, but those Internet revenues are still far lower than the print advertising revenues, even in those cases where the number of people visiting the web site daily are more than the circulation of the print edition.

The strength of newspaper web sites indicates that while readers may have tired somewhat from print for a variety of reasons, they have not tired of that same brand that provides them news and information on the Internet. Harnessing the brand on all platforms is the key to the new multi-platform media world.

ftm Follow Up & Comments

Murdoch Pays $580 million – All Cash - for Intermix Media - July 19, 2005

Rupert Murdoch, who warned the newspaper industry back in April that newspapers needed to get involved in the Internet if it wanted to recapture the youth market, has now put his money where his mouth is, shelling out $580 million in cash for Intermix Media, Inc. that runs the web’s most popular social networking MySpace site.

The purchase price is the largest that a major US media corporation has paid so far this year to buy an Internet presence and means the large media companies have so far spent around $2.2 billion – all in cash – in 2005 for Internet sites.

Intermix will become part of Fox’s new Interactive Media unit, and with its 27 million users will single-handedly double Fox’ current interactive online audience.