Are Newspapers a Dying Industry? ~ market folly

Tuesday, April 7, 2009

Are Newspapers a Dying Industry?

The recent news out of Sun-Times Media adds yet another name to the list of pre-bankruptcy/bankrupt newspaper chains. Not only are newspapers seeing decreased advertising revenue and decreased circulation, but many are trying to stave off crushing debt loads. Even newspapers who have relatively successfully navigated things thus far are showing some signs of weakness. The Wall Street Journal has benefited by providing focused, niche content and by recognizing the digital shift. As such, they began to provide digital content and immediately started monetizing it. But, although they've had relative success there, they are still fighting for readers as they offer a 75% discount. Undoubtedly, something will have to give and certain names in the industry will have to start selling off assets, go private, or morph/evolve into a non-profit or new media company.

If you have been following our twitter updates, you would have seen us shorting New York Times (NYT) back at $7.70 and covering down at $4. Currently, we are not involved and figured it would be prudent to survey the macro landscape as it relates to the industry. Then, in a future post, we'll survey the NYT in particular (which we've highlighted before due to the ownership presence of hedge fund Harbinger Capital Partners and Mexican billionaire Carlos Slim). We want to focus on them due to the fact that their current status is very representative of many other industry players. Their battle with monetization and various business plans is well documented so far. Undoubtedly, something will have to give and certain names in the industry will have to start selling off assets, go private, or morph/evolve into a non-profit or new media company.

The industry itself is facing a few key issues including crushing debtloads, decreasing revenues/circulation/readership, a secular shift, and a battle with their kryptonite: monetization. We want to start by pointing out the excellent article out of Slate last week on this very topic. Basically, Daniel Gross lays out the facts that the newspapers filing for bankruptcy are ones that have been stockpiled with debt and/or idiotic management decisions. He highlights great points that many have analysts have brushed aside. But, he also admits that some industry players (mainly smaller ones) are in trouble. The core of the problem here is the debtload many newspapers face. It doesn't help that they've been hit with the perfect storm of debt loads, decreasing revenues, decreasing circulation/readership, and the worst economic situation since the great depression. We're in the eye of the storm and this hurricane has simply taken their problems and magnified them tenfold.

The problem though, is what will they do when things stabilize and return to 'normal'? If the economy were to recover tomorrow, then advertising revenues would pick back up (which would help their cash cushion and delay their debt-duel a little bit longer). But, they still have the problem of decreasing circulation and/or readership. Readers are trading physical papers in favor of online media. And, if this truly is a secular trend, then newspapers have a much larger problem at hand. How can they monetize things besides advertising? The New York Times' struggle is the perfect example of this very problem. Do they charge for some content? All content? Who knows? It's a tough sell in an environment where information becomes freer by the day.

Newspapers are fighting three concurrent battles that are all a function of each other. They can't truly fix their business woes until they find a way to increase revenues and monetize their digital content. Cash infusions are merely a quick fix and most likely do not solve their long-term problems. Newspapers are like drug addicts because that quick ‘hit’ of cash feels good, but they are still left wanting and needing more. Assuming the trend plays out, more and more readers will shift to digital and they have to find a way to make money from that. This brings us to the second battle: monetization. This in and of itself will probably be the trickiest for them. They can shift with the trends and give readers what they want, but can they make money off of it? The answer thus far is: not really. We'll simply have to wait and watch this giant tug of war of trial and error before we can gain more insight. Lastly, you have the battle with readership and circulation. Circulation for the most part is down, and readers/subscribers of print versions are down. To compensate for this, they've ramped up their digital content, staying in line with the trend. But, this reverts back to their problem of truly monetizing the digital content through various (thus far ineffective) business models. Not to mention, they are trying to do so in an modern-day world where information is everywhere and more often than not, it is free.

The uphill battle they face is depicted (ironically enough) by the NYT. Below, you'll see their illustration of changes in circulation and revenues across the country:

(click to enlarge)

Go here if the graphic is still too small to read after enlarging. Obviously, the industry has a lot of headwinds and the fact that stubborn majority owners control many of them doesn't seem to be helping things (if you're a shareholder). While companies like the NYT have made strides in raising cash to fight off near term maturities, they are seemingly just drawing out the inevitable battle with their debt destiny.

Simply put, it is way too early to gauge if newspapers are a dying industry. And, those attempting to proclaim their death prematurely are oblivious to the daily evolution of all forms of media. We do not think that newspapers as an entire industry will succumb to this economic quicksand. Don't get us wrong though, we're bearish on the industry longer-term and feel they are battling a rising secular trend without a concrete gameplan. As many traders say, "The trend is your friend." Until it's not.

That's the wrench in this whole equation: trends and innovation. Newspaper companies could come out tomorrow and completely revolutionize and revitalize readership and their streams of income with some new amazing "thing" that no one could have ever predicted. It’s not likely, but stranger things have happened. We would be inclined to present an alternative outcome for the industry. While the physical newspaper itself may in turn slowly die, the industry as a whole will be forced to morph and evolve into a new means of distribution, a new medium/platform, and a new business model. If they don't, and the debt finally crushes them, then they'll die. That's the catch. Everyone is on the lookout for the death of the industry, when they instead should be focusing on who will morph and evolve, and who won't. There will be survivors, but they most likely won't be a 'newspaper' in the true sense of the word.

With this we arrive at no firm conclusions and a lot of "we'll wait and see." This is mainly because media in and of itself is constantly evolving and changing. The ball is in their court and we have to wait for their move before declaring death to their industry. We like to look at it as more of an evolution and metamorphosis with hints of Darwinism. The physical newspaper itself may die, but the industry players will be forced to morph into some new iteration of a media player. We've already begun to see the big push in terms of digital content. But, what's next? Those who figure it out will survive. In the end, it's all about the numbers: their debtload, the number of readers, and how much revenue they can generate. However, one cannot overlook the non-numerical input: secular shifts & trends. And, right now, the trend is most definitely not their friend.

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