Over the course of its 150 years of publication, The New York Times (NYSE:NYT) has earned itself a solid place in the pantheon of influential publications. It has earned this place through providing high quality, informative, and breaking news to its readership. However, over the past few years the New York Times has found itself in an increasingly precarious financial situation. Starting in 2006, and hitting in earnest during 2009, the New York Times has seen both its operating income, and net income drop significantly below its historical average. Also, in the more recent years it has also seen a significant drop in top line revenue.
These drops in revenue have coincided with both the difficult macro situation, and also the increased secular migration away from print media, to online media, thereby decreasing both The New York Times' circulation and advertising revenue. Additionally, the NYT's readership has begun to question the value of the NYT. In the past, because of the NYT's extensive communications network, which others didn't have, if you wanted to know the news in some faraway place, you had to go to the NYT, or some other publication, for the news. But, in the current climate, readers have many sources of information they can tap into for the news, and no longer find themselves beholden to the grey lady.
Therefore, the NYT finds itself under attack on two fronts:
1. Readers' migration to online
2. Readers decreasingly reliance on the NYT for breaking news stories.
These trends have also spooked investors. Since 1994 (when the internet really began gaining major traction - see this chart) NYT's stock has fallen 50%, and it has suspended their dividend, compared to a 184% increase (ex dividends) for the S&P 500.
In this article, I would like to argue, that despite the negative developments of recent years, the NYT has bright days ahead. I think the above perceived threats, will ultimately, prove positive developments for the NYT, and investors who get in now could find themselves with a nice long term investment.
Before I begin my analysis I would like to make the following point: The NYT has historically, and continues to have a diversified media business. In the past these investments have included radio stations, television stations, regional newspapers, and various online media properties. Recently, the NYT has started shedding away these assets, most recently selling off their stake (at a gain) of Fenway Sports Group -- owners of The Boston Red Sox, NESN (a regional sports network), and Fenway Racing (NASCAR Team), and their regional newspaper business. They still have 100% ownership in The About Group, The Boston Globe, and other smaller digital and print media properties.
I believe management has the right idea of shedding these non-core assets, as it has done in the past year, and hope it continues to do so. The remaining non-core assets do not generate substantial revenue, operate at a loss, and distract management from their core business -- The New York Times. Therefore, I will limit my comments only to a discussion of The New York Times and its long term growth prospects, leaving aside the other "noise" in NYT's media portfolio.
The Future of The Newspaper Industry
Before turning to the specifics of the NYT, I would like to take a moment to reflect on the newspaper industry in general, and use that discussion to inform my comments about the NYT's situation specifically.
The local newspaper cannot survive anymore. The simple reason that they don't offer news or information that users cannot generate themselves through publicly available means -- blogs, Twitter feeds, Facebook (NASDAQ:FB) walls etc. People can easily access this type of information.
In larger cities, newspapers like the NYT already have established bureaus that can report on the news locally. The NYT has bureaus in the following American cities:
- Dean Baquet, Washington, D.C.
- Abby Goodnough, Boston
- Shaila Dewan, Atlanta
- Monica Davey, Chicago
- Adam Nagourney, Los Angeles
- Mark Lacey, Phoenix
- Kirk Johnson, Denver
- A. G. Sulzberger, Kansas City
- James C. McKinley, Jr., Houston
- Damien Cave, Miami
- Campbell Robertson, New Orleans
- Jesse McKinley, San Francisco
- William Yardley, Seattle
Basically, any news story in these locations that requires journalistic expertise, the NYT can step in and report accordingly. They can follow the model, but not the style, of USA Today (a division of Gannett, (NYSE:GCI)), which casts a wide net over the USA, and reports in all major US cities, with no real local focus. This model has also found traction with the Wall St Journal (a division of News Corp, (NASDAQ:NWS)), which, despite its geographic title, has a circulation of close to 2mm with no real main local focus. Granted, the WSJ has a business focus, which makes it somewhat of a niche player, but the NYT surely has the journalistic weight to get behind a movement to make it a true national player.
In short, I think in the coming years we will see a huge consolidation in the newspaper industry. Small, local players will not have the ability to generate enough ad or circulation revenue to stay afloat, and the mid-tier players will either get pushed out by the larger national players, or remain shadows of their current selves. This will make room for the major national papers -- NYT, WSJ, and USA Today, to gain a vast majority of market share.
Circulation in the USA hit 46mm last year, and I think going forward the bulk of this figure will get divided amongst the big three players listed above.
In the next section, I will explore how much of that pie the NYT can get, and its future revenue growth.
Historically, the NYT has generated the majority of their revenue from advertising -- advertising revenue averaged around 65% of total NYT revenue. This changed dramatically in 2007 when revenue from advertising dropped to around 50% of total NYT revenue. The Great Recession caused advertisers to strongly rethink their ad dollars, and they clearly voted with their feet by diverging a lot of their ad dollars away from traditional print media such as the NYT.
In order for the NYT to get back on track financially they will need to right the ship both in terms of ad and circulation revenue. They have already made a major step forward in their circulation revenue online. In the previous quarter, the NYT reported a 9.7% increase in circulation revenue, and a total of 454,000 subs on the NYT digital platform. Management said in the most recent 10-Q that they expected circulation revenue to continue its increase going forward, showing the success in this strategy.
Advertising, on the other hand, has yet to see strong growth in the digital area. In the most recent 10-Q, management reported at 2.3% decrease in digital ad revenue from the previous quarter, and they expect this decrease to repeat in the upcoming quarter. I would like to further examine this issue in more detail, and give two possible options the NYT has to make a vibrant ad market on their digital platform.
Option One: NY Times Print Goes To The Web
The basic gist of this option runs as follows: The NYT will essentially take the exact print edition, and publish it digitally on the web. The online and print editions would look identical, except that the print edition would take a physical form, and the digital one, well a digital one. Using this model, the NYT could significantly broaden their readership, making for a significant increase both in subscription and ad dollars. Furthermore, as mentioned above, considering that many local newspapers have experienced extreme financial hardship, this could open the door for the NYT to capture those readers. True, the NYT cannot provide the hyper-local coverage that regional papers provide, but as the national newspaper they can find themselves adopted by abandoned readers from around the country and around the globe.
Assuming the NYT adopts this option, they could dramatically increase their readership, which in turn could increase their ad revenue. Using the historical average of 65% of revenue from ads, the NYT could see significant revenue growth from that part of the business as well. Even though digital ads do not command the same prices as their print cousins, with the NYT increasing their readership through this medium, they could start to command higher prices from buyers.
As I mentioned above, total national circulation reached 46mm last year, currently, the NYT ranks far behind their competitors in circulation, with the WSJ and USA Today each having nearly 2mm daily circulation, compared to The NYT 1.3mm. However, considering the clout the NYT carries on a national level for high quality journalism I believe they will find themselves firmly in place to take advantage of the continuing shifting trends in journalism. Assuming the NYT can get 10% of the market, they will have 4.6mm subscribers, which at current prices would give them circulation revenue of $1.2b going forward, or nearly double their current numbers. This assumption does not account for non-subscriber payments, which last year totaled 25% of their total circulation, which would increase circulation revenue to $1.5b. On the ad front, if the NYT could match their ad revenue to their circulation revenue, they could see another $1.5b of top line revenue growth, for a total of $3b in top line revenue -- only from the NYT, or more than double their current top line revenue from this line.
In short, because of the shifting landscape in the newspaper industry, which will open up the NYT to a lot more readers, and the NYT's growth of their digital platform that allows them to easily reach those readers, they will see substantial long term growth.
However, using this model does not allow the NYT to harness any of the capabilities of the web. The web can tell the NYT the reader's location, which could allow it to target specific articles and ads to specific readers. In the next part of this article, I will look at this element of more depth, and raise some other operational and financial issues the NYT needs to deal with in order to ensure successful future growth.