Fallout from the Great Newspaper Implosion

The recent word that Hearst is going to either sell (highly unlikely) or shutter (far more likely) the San Francisco Chronicle is only the latest but perhaps the most serious indicator that the entire sector is not beyond heroic revival measures. That one of the most vibrant metropolises in the world cannot even come close to supporting a daily metropolitan newspaper is proof enough that the segment is simple DOA.

True, the Chron has lost money for many years, faces high labor costs, and is in the most digitally-savvy (and least paper-centric) market in the country. All of that said, with the advertising dollars sloshing around the Bay Area one would think that if the business were viable, it would have a niche. Ditto for a city like Philadelphia, a capital of the insurance industry and big pharma and a place that is about to go dailyless. So let's take a look at what this unstoppable decline will mean.

For starters, this will mean further pressure on existing newspaper stocks. While a lot of newspaper advertising is local, a key portion is also national with large media buyers planning big campaigns that involve newspaper placements as a component. As more metros end up without dailies, that means its harder to plan national media campaigns that include newspapers as a component. Add to that the far greater accountability of online ads that buyers are growing accustomed to (and clients are insisting upon), the continued downward pressure on classifieds, and the brutal competition for online advertising dollars at both local and national levels and the papers look certain to face further revenue erosions even if the economy rebounds quickly.

We are seeing, not surprisingly, Piqqem Sentiment (the stock price predictions of our user base) is highly negative for newspaper companies such as Gannett (GCI) and New York Times (NYT). A host of other companies have seen their market caps decimated by the secular demise including McClatchy (MNI), Lee (LEE), Belo (BLC), and the former hedge fund darling Gatehouse Media (GHS). That Gatehouse has fallen so quickly is instructive as hyperlocal was supposed to be the lone bright spot for newspapers (small town and hyperlocal editions) but even that shows signs of cracking in the current environment.

A secondary impact will be a rapid dimunition of professional coverage of local topics by the major wire services, and the Associated Press, in particular. The AP relies heavily on payments from daily newspapers for its services and as these papers go away, the AP will be forced to focus more of its efforts on paying customers -- larger newspapers. It's possible that small fees from smaller papers will sustain local coverage but it's probably that the AP will go away, undermined by the demise of its largest customers, the mid-to-medium large sized metro dailies. Reuters and Bloomberg have not done much local coverage and probably will cut any efforts back in those areas (even in the larger cities) further.

The demise of the AP and pullbacks at Reuters and Bloomberg will be difficult for Yahoo, AOL and other large content portals as well as for Google News because the wire services, in reality, generate a huge amount of the news copy going into these sites. Blogs adding a second layer of coverage on top of these stories will likewise have to go elsewhere. Without the wireservices to create content, the business model of the content portals starts to look a lot more problematic. Yes, they can cobble together large numbers of smaller content providers but this will still leave large gaps and few of the smaller content providers create a steady enough stream of new stories to fill the yawning, constant demand for fresh, new online content.

On the physical world side of the equation, the demise of the dailies will have a deep impact on the newspaper insert businesses. These are primarly Valassis (VCI) and its chief competitor, NewsAmerica. Valassis is a standalone that has a heavy presence in coupons, inserts and direct mail products. NewsAmerica is a unit of News Corp (NWS). Both are obviously struggling right now but not as much as one would think because the coupon-heavy Sunday editions remain the last bastion of profits for newspapers. When the dissapearance of economies of scale once created by daily printing and delivery becomes terminal, then even these Sunday editions dip into the red and it's probably lights out for the insert guys.

Comments

[BB in KY:]

You don't have the guts to put your name/names as author on this obituary?

Feb 27 12:04 PM

[Alex Salkever:]

It's to the left of the story. Please read more closely. :)

Feb 27 03:01 PM

[Robert Osaz...:]

We will continue to see such painful changes as an industry built on local monopolies and 30% profit margins tries to reinvent itself for a future where news is a commodity. The focus will be on business models (perhaps) find paid content models for hand held devices, and more importantly deepen local content and go beyond local advertising to find new ways to ad value to local businesses. locoforlocal.blogspot....

Mar 01 03:54 PM

[Herman Paul:]

You missed the VCI strategy of buying ADVO to switch customers from declining newspaper penetration to targeting direct mail. This was an astute move by VCI CEO Alan Schultz but unfortunately the integration of the two companies and initial credit terms needed to buy ADVO have been dismal failures from the get go. Key sales people by the droves with long standing customer relationships have been unceremoniously let go - many without even severance packages. This week saw an unprecedented voluntarily movement by key VCI sales personnel to other companies. The whole organization is shaking. Top this with News America kicking their butts on the CPG front and you have a recipe for cash flow disaster that will lead to chapter 11 and/or a fire sale.

Mar 04 05:32 PM