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The U.S. publishing industry has long been grappling with sinking advertising revenue, and the global economic meltdown has only worsened the situation. The downturn in the publishing industry, which has been going on for the last few years now, came in the wake of declining print readership as more readers choose to get free online news, thereby making the print-advertising model increasingly irrelevant.

Changing consumer preferences and the advent of new and innovative technologies have been altering the way news is read and offered. Readers now have more choices to collect and read articles and news through devices such as netbooks, tablets or other hand-held devices.

These have been weighing upon the print newspaper industry, as advertisers now get low-cost avenues through which they can reach their target audience more effectively. We believe that an alternative and a stable source of revenue is the demand of time to salvage the dwindling print newspaper industry.

Let's have a look at what is happening in the publishing industry and how newspaper companies are adapting with the changing scenarios to keep themselves alive in the race for survival.

Circulation Falling Prey to Internet

Newspapers have fared far worse than magazines, as web-based news options have gotten the better hand in recent years. The two-decade-long erosion in newspaper circulation reinforced the decline in advertising revenue. Circulation has also fallen prey to budget cuts with newspaper companies reducing the number of print pages and newsroom staff to combat the downturn.

Despite the fall in newspaper circulation, some companies are reporting improved revenue from circulation due to the increase in subscription and newsstand prices. On the flip side, while the increase in prices for print editions is generating more circulation revenue, it is also resulting in subscriber losses due to the shift in preference for free online content.

Newspaper Advertising Revenue Still in Red

Advertising volumes are still under pressure as advertisers keep shying away from making any upfront commitments in an economy which is still not completely awoken from a state of hibernation.

According to the data released by the Newspaper Association of America, total advertising revenue for U.S. newspapers slipped 6.4% year over year in the second quarter of 2012 (April to June) to $5.61 billion, after falling 6.9% in the previous quarter, marking the 24th consecutive quarter of decline. The last time the Industry witnessed an increase in revenue was in the second quarter of 2006, when advertising revenue grew 1.1%.

Print advertising declined 7.9% to $4.78 billion in the second quarter 2012, after declining 8.2% in the first quarter of 2012, and 8.0%, 10.8%, 8.9% and 9.5% in the fourth, third, second and first quarters of 2011, respectively. National advertising sales declined 9.7% to $889.2 million, retail dropped 7.0% to $2.75 billion and classified plunged 8.4% to $1.14 billion during the second quarter.

Print advertising revenue at The New York Times Company (NYT) dropped 8% in the second quarter of 2012. At Gannett Co. Inc. (GCI), publishing advertising revenue fell 8.1% in the second quarter.

Print advertising revenue tumbled 8.4% at The McClatchy Company (MNI) and 15.0% at The Washington Post Company (WPO) during the second quarter of 2012. Publishing advertising revenue dropped approximately 12.6% at Journal Communications, Inc. (JRN) during the second quarter. Print advertising revenue at The E.W. Scripps Company (SSP) fell 7.2% in the second quarter.

Efforts to Mitigate Losses

In an effort to offset declining revenue and shrinking market share, publishers are scrambling to slash costs. This has compelled many newspaper companies to undertake cost-cutting measures, such as trimming of headcount, pay cuts, furloughs, suspension of dividends, voluntary retirement program and closure of printing facilities.

Newspaper companies have now been remodeling and restructuring themselves to better align with the growing need of marketers, targeting younger people, affluent households and other demographic groups with multiple web and print publications. The publishing companies are adapting to the changing face of the multi-platform media universe, which currently includes Internet, mobile, tablet, social media networks and outdoor video advertising in its portfolio.

Publishing companies have been offloading assets that bear no direct relation with the core operations. The New York Times Company recently divested its remaining stake (210 Class B units) in the Fenway Sports Group, the owner of the Boston Red Sox and the Liverpool Football Club, for $63 million.

Another example of shedding the assets by the company is the sale of Regional Media Group, which has long been grappling with shrinking advertising revenue.

Waning print advertising revenue, in an uncertain economy, compelled The New York Times Company to take this tough decision of divesting Regional Media Group, part of The New York Times Media Group. This would allow the company to re-focus on its core newspapers and pay more attention to its online activities. The decision to divest the division is also considered part of the cost containment efforts undertaken to stay afloat in this turbulent environment

Online Advertising Gaining Traction

Advertisers are migrating to the Internet driven by increasing online readership and lower online advertising prices compared to print. Consumers are now spending more time online, and are searching news articles in the Internet.

Newspaper companies, who gauged this trend, have been trying to revamp themselves by increasing their digital applications. Digital advertising revenue remains a sole performer in the newspaper industry. The McClatchy Company witnessed 4.9% rise in digital advertising revenue with retail and classified advertising categories jumping 8.5% and 4.4%, respectively.

Data released by the Newspaper Association of America suggested that online advertising revenue climbed marginally by 2.9% in the second quarter of 2012 to $826.7 million from $803.4 million in the prior-year quarter, reflecting a tenth consecutive quarter of growth. The rate of growth in online advertising improved over 1% witnessed in the first quarter of 2012 but remained lower than 3.1%, 6.2%, 8.0% and 10.6% increases registered in the fourth, third, second and first quarters of 2011, respectively.

According to the data provided by eMarketer in January 2012, U.S. online advertising spending is projected to soar an additional 23.3% to $39.5 billion in 2012, which is higher than the combined spending on print newspapers and magazines. Print advertising spending is forecasted to decline from $36 billion in 2011 to $33.8 billion in 2012.

The study done by eMarketer further reveals that U.S. digital advertising revenue for newspapers will increase 11.4% to $3.7 billion, following a rise of 8.3% to $3.3 billion in 2011. However, it cautioned that print advertising revenue may dip further by 6% to $19.4 billion in 2012, after dropping 9.3% to $20.7 billion in 2011.

Pay As You Access

"To read further please subscribe" is the new mantra that newspaper companies are fast adopting. To curb shrinking advertising revenue and improve market shares battered by the recent economic downturn, some of the publishing companies are now considering charging readers for online content. We believe that this would mark an end to the free usage of online contents. Despite hiccups in the economy, the online subscription-based model still promises guaranteed revenue generation.

Rupert Murdoch, the Chief Executive Officer of News Corporation (NWSA), has long been pushing for the online subscription model for all general news websites. But newspaper companies have been reluctant in doing so, as they feared losing readership and, in turn, advertisers.

News Corporation has taken a leap towards an online subscription-based model for general news content. News International, a subsidiary of News Corporation, began charging readers for online content for The Times of London and Sunday Times of London, effective June 2010.

Business newspapers such as The Financial Times and The Wall Street Journal (owned by News Corporation) have long been following an online pay model. But levying access charges on readers for online access to general news content was a first for any news publication.

The New York Times Company on March 28, 2011 launched a pricing system for NYTimes.com similar to that of the Financial Times' metered system, whereby after browsing a certain number of free articles, readers will be asked to subscribe for complete access to its articles on phones, tablet computers and the Internet.

The New York Times Company fixed monthly charges of $15 for access to more than the restricted number of articles on its website and on a smartphone application; $20 for unlimited access online and on Apple Inc.'s (AAPL) iPad tablet computer application; and $35 for online, smartphone and iPad application. Moreover, in order to woo subscribers, the company introduced a plan of 99 cents under which one will be able to enjoy all digital offerings for one month.

The company also indicated that the users of NYTimes.com will be able to read 10 articles per month without spending a penny. However, readers visiting The New York Times Company's website via blog links or social-media sites such as Facebook, Inc. (FB) or Twitter will be able to access an unlimited number of articles.

But traffic reaching the company's website through search engines such as Google Inc. (GOOG), Microsoft Corporation's (MSFT) Bing and Yahoo Inc. (YHOO) will be able to view five articles per day before being asked for a subscription.

We believe the success of the pay model depends on the accessibility of new articles across the web. Potential customers will be reluctant to shell out a penny if content is available free of cost elsewhere. However, The New York Times Company notified that the number of paid digital subscribers for The Times and the International Herald Tribune reached 509,000 at the end of the second quarter of 2012, reflecting a jump of about 12% since March 18, 2012.

The company also launched a pay-and-read model for BostonGlobe.com for a weekly subscription of $3.99. The number of paid digital subscribers reached 23,000 at the end of the quarter, representing an increase of 28% since March 18, 2012.

Gannett Co. Inc. also initiated a subscription based model, commenced Digital Marketing Services, and is expanding USA TODAY Sports Media Group to generate new advertising and marketing revenue sources. Management expects to generate revenue of $75 million to $100 million for the year from Digital Marketing Services. Gannett announced the acquisition of BLiNQ Media LLC, provider of social media marketing solutions for companies.

OPPORTUNITIES                

Despite the tough times faced by the publishing industry, there are a number of defensive names in the group that can hold their ground. Companies are radically changing their business models to get in line with industry trends.

The New York Times Company is diversifying its business by adding new revenue streams to make it less susceptible to economic uncertainties. The company is also streamlining its cost structure, strengthening its balance sheet and rebalancing its portfolio.

The company's second-quarter 2012 earnings of 14 cents a share beat the Zacks Consensus Estimate by a penny, and rose 27.3% from 11 cents earned in the prior-year quarter.

The quarter reflects favorable response to the digital subscription packages, increase in circulation revenue and fall in attrition rate as subscribers to the New York Times' print version are able to access content or articles online as well as on all applications of The Times for no additional charge.

The New York Times Company currently holds Zacks #3 Rank that translates into short-term Hold rating. Journal Communications (JRN) and The McClatchy Company (MNI) hold Zacks #2 Rank that translates into short-term Buy rating.

WEAKNESSES

The newspaper industry continues its struggle with plummeting advertising revenue amidst the economic headwinds. Although murmurs about advertisers returning to the market are gaining ground as the economy recovers, the positive effects have yet to be realized.

The current economic upheaval is taking a toll on publishing companies, and Gannett Co. Inc.  is no exception. Publishing advertising revenue during the second quarter of 2012 fell 8.1% to $594.3 million from the year-ago quarter, following a decline of 8.4% in the first quarter of 2012.

Tepid recovery in the economy along with weakness in advertising demand in the U.S. and U.K. impacted the results. In constant currency, advertising revenue dipped 11.6% in April, 1.9% in May and 8.8% in June. The company's high dependence on advertising revenue, a derivative of the health of the economy, remains a potential threat.

However, the company is repositioning itself for improvement in print and digital media through a new subscription based model, whereby subscribers will be able to access the paid content through websites, mobile and tablet, and will have the preference of choosing the frequency of home delivery of print editions. On the other hand, the company will limit the number of free articles that a non-subscriber can access. The company's long-term objective is to return $1.3 billion to investors and attain annual revenue growth of 2% to 4% by fiscal 2015.

Gannett currently holds Zacks #3 Ranks that translates into short-term Hold rating. The Washington Post Company (WPO) holds Zacks #5 Rank, which translates into short-term Strong Sell rating.

Let's Conclude

The newspaper companies are transforming their business models to better position themselves in a multi-platform media universe. Although the U.S. economy is witnessing a sluggish improvement in the advertising environment, we believe 2012 will not likely mark the resurrection of the publishing industry. However, it is expected to fare better than 2011.

With a strategic and steady newspaper budget, we could see fewer layoffs, increased focus on web and local content, improved subscription and concentration on profitable circulation. We currently have a Neutral outlook on publishing industry.

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