NEW YORK (Reuters) - U.S. newspaper publishers are betting the Internet is the key to their survival, but a worsening classified advertising slump is hampering efforts to make good on their digital strategies.
Some publishers reporting first-quarter financial results this week said online ad revenue growth rates slowed. One, The New York Times Co., lowered its 2007 online growth forecast to below its previous estimate of 30 percent.
“My sense is this is a real red flag for the industry,” said Ken Doctor, a media analyst for Outsell Inc. “Rapid online growth appears to be dimming. That’s a big problem.”
The results come at a bad time for some companies. The Times holds its annual shareholder meeting next week, where some investors unhappy with its performance likely will withhold votes for a slate of directors in protest.
Tribune Co., which is going private in an $8.2 billion deal led by Chicago real estate mogul Sam Zell, is relying on increasing revenue, in part to pay down billions in debt that the company is using to finance the buyout.
U.S. newspaper companies have pinned their hopes on their Web sites and other Internet-related assets as circulation falls and advertisers shift their spending elsewhere.
The big question is when online revenue would make up for what they are losing in print.
This week’s results suggest that the transition “is going to be slower and perhaps less profitable than newspapers have anticipated,” said John Morton, a longtime newspaper analyst and president of Morton Research Inc.
The trend stems partly from a slump in classified ad sales because of the cooling housing market and regional economic conditions hurting help-wanted and automotive ads.
It also is hard to keep growth rates high for a long period. Goldman Sachs analyst Peter Appert said, “To sustain a 40-percent growth rate over five years for anything is extraordinary.”
Online ad revenue makes up somewhere between 5 and 10 percent of the total these days, analysts say, and newspapers have been heartened by online ad sales growth of more than 30 percent a year.
Washington Post Co. Chairman Donald Graham cautioned last year that such rates would not last forever. “We obviously cannot continue to grow revenue at 35 percent for very long,” he said at a media conference at the time.
In the first quarter, Tribune’s publishing unit reported online revenue that was 17 percent higher than the year-ago period. In the first quarter of 2006, publishing online revenue was up 30 percent.
At Gannett, total online revenue grew 16 percent, compared with 30 percent growth last year, according to documents on the company’s Web site.
The Times reported 22 percent online revenue growth, compared with 72 percent last year.
“Annual print declines of 5 percent could be offset by online revenue growth of 20 percent if the current revenue base was at least 20 percent interactive,” Deutsche Bank analyst Paul Ginocchio wrote about the Times. “But has only a 10 percent online exposure in 2007, and with 22 percent online growth, revenue growth won’t stabilize until 2010.”
That, he said, puts the Times on par with the industry. “This tells us that more acquisitions are needed, and that is not likely good for near-term shareholder value,” he wrote.
The slower rates are cause for concern, but they still beat print-side trends, analyst Morton said. He also cautioned investors against undue worry.
“We’re just talking about a quarter here, and a projection that may or may not turn out to be right.”