An ASTECH InterMedia Reference Article

The State of the News Media 2004

by Miles Groves

Recent news on the U.S. economy supports the prospect of a sustainable recovery. Recruitment advertising growth for many newspapers is double-digit as businesses are hiring. Advertising Growth among the public companies reporting revenues was up 8.8 percent in March with first quarter growth up 5.5 percent. This is good news, but with it comes stronger newsprint demand (newsprint price is up 10.8 percent on a year-over-year basis). Along with surging energy costs, this will impart earnings pressure that must be dealt with. Already, newspapers are beginning to announce circulation rate increases as necessary steps to offset newsprint price pressure. Always a carrot and stick cycle!

In a Deutsche Bank Securities Brand Power Study, Keeping Cash in Circulation, they statistically modeled what the circulation should be for a newspaper in a particular market. Any circulation above the estimate was identified as a measure of the newspaper’s brand power. The study found that newspapers with excess circulation (strong brand power among readers) tended to have advertising pricing power. It was not an unintuitive result, and they extended the model to identify which newspaper companies were performing above or below their potential as part of their own effort to value media companies.

The key take away was not how they valued a particular media company, but their focus on the importance of circulation to the valuation. A concern was raised that much of the circulation loss was purposeful (or perhaps accidental) strategy. They argued that investors valued quality because they understood that quality strengthened readership, which generated excess circulation that fostered advertising pricing power.

In the context of this cycle and the Wall Street view on quality and excess circulation, it is a good time to consider a recent assessment from a different perspective, the Project for Excellence in Journalism at www.stateofthenewsmedia.org entitled, “The State of the News Media 2004.” This assessment pulls in all the standard trend information in terms of circulation and readership, but includes aspects of quality in terms of content. It also focuses on journalism staffing as it relates to circulation and profitability. There are two core questions.

1. First, “do newspapers believe that if they invest in creating new content and even new kinds of newspapers they can attract new readers?”
2. Or “is this a mature and declining industry where investing in those things would be throwing money away?”

My own perspective is that newspapers can succeed if they provide quality content across the evolving range of channels and products (or new kinds of newspapers). So, I plowed through the assessment to see what was suggested.

It focused on evidence that the industry cannot continue to sustain rapid circulation losses and on the results of those who maintained quality and had better circulation and penetration performance. In the end, this assessment did not answer either question. Instead it argued that (for those who do not accept that this industry is a mature dinosaur) that the resources exist to address the challenges, though the time to act was not infinite. It noted that the industry had the financial durability and resources to diversify existing product and seek new audiences. Furthermore, if the challenges outlined in the assessment are not addressed, the industry’s financial health can not be sustained.

There is no doubt that public companies focus on earnings performance. Many, as does this assessment, suggest that this is a core reason that most focus short term rather than invest for the long term. It is always a balance, but many on Wall Street (as in the Deutsche Bank Securities study) recognize the relationship between quality, excess circulation, and pricing power. They look to industry executives to execute and deliver the brand power that affords both short and long-term value. This is something that industry executives need to consider as they balance earnings performance through this improving advertising cycle. The upward pressure on newsprint pricing in inevitable; balancing it with circulation losses does not need to be.

This article was originally published in the Morton-Groves Newspaper Newsletter on April 24, 2004, and is published here with the author's permission. Miles Groves is president of MG Strategic Research, Ltd. He can be reached at (202) 289-4094.

© 2005 ASTECH InterMedia, Inc.