November 07, 2005

Circulation Down, Advertising Sure to Follow

Nobody expected good news from the latest tranche of newspaper circulation numbers that came out today - and there wasn't any.

Some might take solace in the fractional gains posted by the New York Times, but even the most sanguine in the industry must be pushed closed to pessimism about the future when seeing year-over-year circulation losses like 8.5 percent (Baltimore Sun), 11 percent (Orlando Sentinel) and 16.5 percent (San Francisco Chronicle).

(Hearst's decision to buy the Chronicle has to seem like the company's worst strategic move since the Spanish-American War. The paper's circulation has fallen 13.7 percent since Hearst paid $660 million for it in 2000 - and another $66 million to offload without further legal entanglements the faltering afternoon Examiner. Last year, the Chronicle lost $62 million and is in the process of cutting 120 Guild jobs, many in the newsroom.)

Thus far, despite the steady circulation drop, newspapers have managed to hang onto their share of national advertising and post small percentage gains in print revenue (online advertising is rising rapidly, but still represents a small fraction of incoming dollars).

That appears about to change - meaning the current circulation nightmare newspapers find themselves in is about to be accompanied by its evil stepsister: The loss of advertising nightmare.

Driving this specter are twin forces - the raw numbers, that is, the loss of circulation; and the ineffectiveness of newspaper advertising in reaching heavy spending younger people, who live their lives online. [Read: Young Readers Users Producers Minds.]

Let's start with the second reason first.

A story in the New York Times on Sunday about the challenges faces Warner Brothers points out that "the average cost to market a film domestically in 2004 was $34 million, roughly half the $64 million average price tag to make one." Much of that money is spent on newspaper advertising, ads that are not reaching the highly coveted young audience.

Here are the demographics, courtesy of the Motion Picture Association and Scarborough Research via L.A. Weekly:

 Movie attendance: 12- to 39-year-olds, 57 percent 40- to 59-year-olds, 31 percent; 60-plus-year-olds, 12 percent.

 Newspaper readership: "35- to 54-year-olds are the biggest readers of daily newspapers, followed by those 55 and older. A much smaller portion of readers came from 25- to 34-year-olds, followed by the barely there 18- to 24-year-olds."

In other words, the people movie-makers most want to attract aren't reading newspapers, so why advertise in them?

In its story, the Times cites a Warner Brothers survey about the movie "Charlie and the Chocolate Factory" that found that "30 percent of teenagers said they learned about" the movie online. "It is conceivable," says the Times, "that studios could forsake newspapers altogether someday." Replies Warner Brothers exec Dawn Taubin:

"It's a possibility, but it depends on whether there are other forms of advertising to replace it."

Nikki Finke, in her L.A. Weekly piece, quotes an unnamed studio marketing executive expressing frustration about the cost vs. circulation ratio of newspaper advertising:

"You'd think it would get cheaper because it doesn't reach as many people as it used to."

Eventually, advertising rates must follow circulation - downward. Rick Edmonds, writing for Poynter, explains (my emphasis):

" the circulation losses of 2005 could easily translate into a loss of pricing power in 2006. In the worst case, it could shift the industry into a mode in which ad revenues, as well as circulation, enter a period of slow decline.

"'Advertisers do think in CPM (cost per thousand),' said Paul Ginocchio, media analyst for Deutsche Bank Securities. 'If circulation is down 3 percent or more, that probably means no rate increase.' The volume of advertising has been also been declining 2 to 3 percent a year. 'So, yes, this (2006) could be the year that ad revenues go negative.'" (This is a good piece putting the circulation picture in context. Read it.)

Wall Street analysts are making similar predictions. E&P reporters that Goldman Sachs says it's "'very unlikely' revenue growth will accelerate in 2006" and that Merrill Lynch says "companies are placing advertising outside of traditional media," meaning "newspapers will likely suffer."

To put the importance of advertising in newsroom terms, consider that the price of a full-page movie ad in the New York or Los Angeles Times is about $100,000 (says L.A. Weekly) - about the annual cost of a reporter. The math isn't good. Lose an ad, lose a reporter.

As I said at the top: There's no good news here. The continued circulation loss will trigger revenue decline that will lead to further newsroom cutbacks that will contribute to further circulation loss through a dilution in quality and quantity of content.

The only way out of this destructive cycle - destructive to the economic ability of these institutions to support journalism - is a reinvention of the business and newsroom models. This is a not a crisis that can be solved by cost-cutting alone.

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Posted by Tim Porter at November 7, 2005 09:36 AM

You're a regular ray of sunshine, you are. :-)

Posted by: Lex on November 8, 2005 11:08 AM
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