NEW YORK -- The newspaper business is getting smaller. On Wednesday, five newspapers owned by Tribune Co. announced job cuts, but they're hardly alone. In recent weeks, no fewer than nine other well-known newspapers all announced cuts in payrolls or other expenses. What's happening?
Here are some questions and answers about the challenges facing the U.S. newspaper business.
Q. I keep hearing about newspapers cutting staff. The New York Times, The Boston Globe, two newspapers in Philadelphia and now the Los Angeles Times and the Chicago Tribune. Why is that?
A. Newspapers are under tremendous pressure from investors to show that they can continue to operate as profitable businesses in the future. One of the biggest problems facing the industry is slower growth in advertising sales, which makes up some three-quarters of their revenues. Analysts now expect growth of around just 3 percent this year, down from 5.2 percent last year.
Q. Why is advertising growth slowing down?
A. More companies are increasingly looking to the Internet to spend their money, plus advertisers are concerned that overall newspaper circulation has been declining steadily since 1988.
Q. Circulation is falling too? Why?
A. More and more people, especially the young adults whom advertisers most want to reach, are turning to other media such as cable television and the Internet for news. Advertiser dollars are following them.
Q. OK. So circulation is down, advertising is slowing. What other problems does the newspaper business have?
A. Actually, a few more. As one newspaper executive put it, the main costs for newspapers are paper and people. Costs for employee benefits like health care have been rising steadily, and newsprint expenses are up some 10 percent to 15 percent this year. So even as their revenues are faltering, their costs are going up at the same time.
Q. Wow. So newspapers must be losing a lot of money, right?
A. Actually, no. Newspapers are still a very profitable business -- for now. Industry analyst John Morton says that newspapers owned by publicly held companies earned an average of 20.5 cents on the dollar in 2004, a very healthy margin for any business. By comparison, companies in the blue-chip Standard & Poor's 500 Index of large U.S. companies made an average of 11.4 cents on the dollar in 2004, according to S&P.
Q. Wait a minute. If newspapers make about twice as much money as a typical large company, why are they cutting jobs?
A. Newspaper publishers are feeling pressure from investors to prove that they can still be profitable in the face of all these challenges. Cutting jobs and other costs, such as using less newsprint by printing a smaller newspaper, are some of the ways that publishers are trying to preserve their profit margins while revenues are faltering. Plus, many of them are expanding their efforts to make money on the Internet.
Q. So how is that part going? I see newspaper Web sites all the time -- don't they make money?
A. Yes, but there's a big threat to that business from Internet-only companies such as Yahoo Inc., Google Inc. and Time Warner Inc.'s AOL unit, which are giants in the emerging world of Internet advertising. They are drawing in Web surfers with various offerings of news, entertainment, weather and sports. Newspapers are seeing growth of some 30 to 35 percent in their online businesses, but that growth is coming off of a very small base. Currently, online advertising makes up only about 5 percent of newspapers' advertising revenues, Morton estimates.
Q. But if newspapers are still generally profitable now, why are their stocks down so much?
A. Investors are mainly concerned about what a company will make in the future, not what it's making right now. And that goes for bond investors as well as stock investors. Six newspaper companies had their debt ratings cut this year, an unusually large number, because of the deteriorating business environment as well as several big one-time expenses financed with debt, including The New York Times Co.'s acquisition of About Inc. and Dow Jones & Co.'s purchase of MarketWatch Inc. -- both investments in the online arena.
Q. So, are newspapers going away any time soon?
A. Don't count on it. Newspapers still have a tremendous ability to attract advertising dollars, especially in smaller communities where they are the dominant media outlet, and they have powerful name recognition, something that could benefit them greatly as they build up their online businesses. The big question facing them now is: How successful will they be in following their readers and advertising dollars as more of these migrate online?
