No, the Net Isn't Annihilating Newspapers


In December and January, hundreds of layoffs were announced by the online arms of newspaper giants New York Times Co. (NYT), Tribune Co. (TRB), and Knight Ridder (KRI). You might have thought that print publishers were losing their appetite for the Web. But look again. Amid the blizzard of pink slips, something more subtle seems to be happening: a complex restructuring aimed at proving that newspaper Web publishing can be financially successful -- if it's managed right.

More than a retreat, in fact, the cutbacks are the inevitable acknowledgement that Web businesses can't live a financial fairy tale forever. Record print-publication earnings over the past two years afforded these media behemoths the luxury of indulging in lavish experiments without incurring shareholders' wrath. Now, the bash is over, and they're consolidating operations and cutting costs. And not just at newspapers. Analysts expect belt-tightening to go on for months at the Time Warner operations of the newly merged AOL Time Warner.

Even as they become more efficient, newspaper Web sites are trying to diversify their revenue sources by syndicating products, selling access to archives, and even charging for an early look at the classifieds. Perhaps most important, they're moving to leverage their relationships with print advertisers just as major online ad vehicles, such as Yahoo!, are starting to lose their appeal with media buyers. Says Edward Atorino, a media analyst with investment bankers Wasserstein Perella: "The big newspapers can hang in there and wait. If there is a business there, they are going to get it."

PAPER PROFITS Two years ago, Internet soothsayers left newspapers for dead: Buoyed by huge helpings of venture capital, pure dot-coms with big niche audiences would steal newspapers' lucrative classified advertising, or so the theory went. Meanwhile, swifter Web rivals with global reach were supposed to grab the majority of eyeballs -- not to mention the upper hand -- in the nascent online advertising market.

How wrong they were. The booming U.S. economy fueled blockbuster revenues at big newspapers, whose ad sales hit an all-time high of $46.2 billion in 1999 -- up 4.3% from the year before, according to the Newspaper Association of America (NAA). The trend continued well into 2000. New York Times Co. saw profits rise by 12.8%, to $359.9 million. Knight Ridder racked up $314.4 million in profits, the fifth consecutive year of record earnings per share. And while Washington Post Co. saw net profits fall because of investment in new businesses, that didn't stop it from pulling in $136.5 million.

It was precisely the right environment for newspapers to engage in that rarest of all publishing pursuits -- real-time research and development. With the print business so strong, the cost of experimentation could be absorbed without worrying analysts or investors. "We don't debate if too many, or too few, are employed in a certain division," says Leland Westerfield, a media analyst at PaineWebber, who dismisses past losses at newspapers' digital operations as "irrelevant."

HOT TYPE. Actually, the R&D wasn't wasted -- if only for the valuable lessons it imparted. No. 1 was to take advantage of your existing assets. For example: Gone are online ad-space sales forces that wasted energy dealing with doomed dot-coms and time coordinating their efforts with print-sales counterparts. Instead, newspapers are all but merging their online and offline sales forces as they focus on selling advertising packages that include both print and online space. "There is leveraging we can do that we couldn't before because the clients were organized differently," says Martin Nisenholtz, CEO of New York Times Digital. The change makes sense, he adds, because "we look at The New York Times not as individual products but as a brand."

At the same time, sites are scrambling to scare up new sources of revenue. Online syndicators iSyndicate and ScreamingMedia are hawking newspaper and other content (including BusinessWeek Online) to myriad Web sites. And the dailies, with their stash of localized, up-to-the-minute content, are the perfect complement to mobile Internet service providers such as AvantGo and Vindigo. Perhaps more lucrative is the booming multimedia education market. New York Times Digital, for example, signed a deal on Jan. 12 that partners it with education company Bell & Howell to digitize Times content dating back to 1851 and distribute it to schools and libraries.

Furthermore, the frequently forecast snatching of classified ads by online upstarts has failed to materialize. According to the NAA, in 1999 revenues from newspaper classified ads increased 4.3%, to $18.6 billion. Similarly, Web-based job boards have failed to steal the thunder of local papers, whose employment listings soared from $5.7 billion in 1996, when the Web emerged as a consumer tool, to $8 billion in 1999. In fact, fear of the Web motivated many papers to develop nifty, searchable online classified sections that are now well positioned to dominate local markets, where most job advertising is still done.

INK IN THE PINK.Even when it comes to much-maligned online advertising, newspapers have the edge. Suddenly, national advertising on sites like Yahoo is out. In vogue with major advertisers are sites with strong local ties -- such as those of newspapers. According to Media Audit, a survey by International Demographics of more than 80 U.S. media markets, newspapers have built a commanding lead over other local media Web sites. The Web site of The Washington Post, for example, attracts 32.8% of the capital's residents who are on the Internet. Similarly, the Austin American Statesman's site pulls more than 25% of the online readers in its area. In 67 markets, newspaper Web sites attract more than 10% of the local audience.

By contrast, other local media outlets -- such as television, radio, and alternative weeklies -- are struggling to get out of the single digits. Some papers (such as The New York Times and USA Today) have forsaken much of their original online content -- shortsighted, perhaps, if they want to boost their readership share over time. But for now, the pressure is on to turn a profit fast.

Thus, even as KnightRidder.com was laying off 64 editorial and production staffers, it was hiring 34 salespeople. There's a lot of selling to do. At the New York Times' interactive arm, revenues rose 65% in 2000, to $66.6 million, but losses widened 400%, to $70 million. (Layoffs at New York Times Digital are expected to save the company $6 million in 2001.) Revenues at Knight Ridder's interactive division rose 43.9%, to $45.2 million, but the tide of red ink rose to $46 million, up from losses of $24 million the year before. Analysts speculate that Washington Post Co.'s Web revenues doubled to about $28 million in 2000 -- but that it racked up tens of millions in losses. Both Knight Ridder and the New York Times predict online profitability by the end of 2002. Washington Post Co. has not announced when it expects its interactive division to be profitable.

THE TOUGH GET GOING. Some of these losses reflect questionable business moves during the dot-com delusion. Take New York Times Digital's investment in Abuzz, a "knowledge network" where visitors can ask and answer questions on a variety of subjects. The Times paid $30 million to acquire the site -- not exactly a core business for the Gray Lady. Not surprisingly, when Times Digital laid off 68 workers in December, half came from Abuzz, insiders say.

The failure of many pure-play media companies, plus a looming consolidation of Web portals, will work in the big papers' favor: As the number of ad outlets falls, online ad rates should eventually rise. "Now is the time to be opportunistic. Now is the time for us to get the best employees. It is an opportunity to get tougher and better," says Dan Finnigan, CEO of KnightRidder.com. For an industry that supposedly was headed for the scrap heap just two years ago, that's not a bad place to be. By Jane Black in New York


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