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A few interesting news stories hit the wires last week about Internet advertising and the state of the newspaper business. Overall, we believe newspapers have tremendous opportunities, despite the near term difficulties that dominate the headlines.

The News

The Interactive Advertising Bureau and PricewaterhouseCoopers announced that Q1 2006 ad revenues rose 38 percent over Q1 2005. Here is the IAB release.

Source: IAB

The Newspaper Association of American announced Q1 numbers. According to the NAA, advertising expenditures for newspaper Web sites increased 34.9 percent to $613 million in Q1 2006 versus Q1 2005. Here is the NAA release.

Morgan Stanley analyst Lisa Monaco cut the ratings for Tribune Co. and Gannett Co. A few days earlier Prudential upgraded Tribune Co. from Neutral to Overweight. Here is an analyst roundup for Tribune at Yahoo! finance. The analyst survey shows that they have become slightly more bullish in the past week, 2.9, versus 2.6 the previous week (note S&P 500 is at 2.42).

Tribune announced it would repurchase (with debt) $2 billion of its own stock, removing about 25 percent of the outstanding shares from the market. The day of the announcement, shares rose approximately 7 percent and nearly 10 million shares changed hands, up from an average volume of 2 million per day. Here is the Tribune release.

Tribune's Stock Price

According to Phil Rosenthal of Tribune, Dennis FitzSimons, the company’s chairman, president and CEO, told employees after the buyback was announced: "There’s a lot of uncertainty surrounding traditional media these days as investors are unsure about future growth … They’re staying away from the media sector, and that has had a negative impact on our share price. Because we believe in the future of our businesses, instead of borrowing to buy assets of other companies, we are buying our own assets at what we consider to be a discount."

As the chart shows, the stock price is down about 40 percent from its high.

Newspaper Online Ad Growth Vs. the IAB Average

It's worth highlighting that under immense competitive pressure the newspaper industry nearly matched the growth rate of Internet dd revenues (35 percent vs. 38 percent, respectively). Despite Internet pressures, many groups (investors, analysts, hedge funds, etc.) believe that newspaper stocks are a good investment and their share prices make them tempting targets. Tribune concurs and thought removing 25 percent of shares from the market was a worthwhile strategic investment.

Still, matching the Internet ad growth rate for a traditional media business would appear to be a good indication that newspapers can, in fact, compete with their Internet peers. So why sour on these assets?

Tribune Co.

The Tribune Co. figures that were released back in April for Q1 2006 highlight some of the issues. The Management Discussion in part reads:

Advertising revenues were flat for the quarter. Excluding Newsday, advertising revenues increased 1 percent. Revenues were favorably impacted by the timing of the Easter holiday.

Retail advertising revenues were down 2 percent for the quarter. Decreases in the food & drug stores, department stores, and electronics categories were partially offset by an increase in the hardware/home improvement stores category. Preprint revenues declined 2 percent; excluding Newsday, preprint revenues were up 3 percent.

National advertising was down 8 percent for the quarter, primarily due to a decline in the movie category at Los Angeles. Autos and technology were also down, partially offset by an increase in the telecom/wireless category.

Classified advertising was up 8 percent for the quarter: help wanted revenues were up 7 percent; real estate revenues rose 35 percent; and auto revenues were down 10 percent.

Interactive advertising revenues, which are included in the above categories, were up 30 percent to $51 million, mainly due to strength in classified help wanted revenues.

Circulation revenues were down 4 percent for the quarter.

Source: Tribune Co.

Google's Growth vs. the IAB Figures

Also back in April, Google released its stellar quarterly numbers, which showed revenues of $2.25 billion increasing 79 percent in Q1 2006 from Q1 2005 — a substantial increase compared with the IAB ad numbers.

Google 2005

Google 2006

But, it's also worth considering that in the same release, Google's Traffic Acquisition Cost (TAC, portion of revenues shared with Google’s partners) grew about 15 percent from $629 million in Q4 2005 to $723 million in Q1 2006. An increase in TAC has been widely expected even though on a year-over-year basis Google's TAC historically has been dropping as a percentage of total revenues (see chart). Google's incredible direct traffic retention and market share growth is a large contributor to this drop.

So, to state the obvious:

  1. Owning your own traffic is valuable.
  2. Buying traffic from other sources is getting more competitive and thus more expensive.

Newspapers Have Valuable Local Traffic

If overall TAC is climbing, this bodes well for large newspaper sites. It means more people are willing to pay more to access to the audience. We know many Internet and software companies are interested in newspaper partnerships; therefore, this inventory is considered very valuable. It's reasonable to assume that even though many newspapers do not have paid link distribution deals with YSM, Google or MSN an increase in TAC is a good barometer for the industry.

Although print usage is declining in many cases, Internet usage is strong. Tribune, for example, owns Web sites affiliated with the Los Angeles Times and the Chicago Tribune that have valuable local traffic. The Q4 average for all newspapers, according to Neilson NetRatings, was 53.6 million, or about 35 percent of active Internet users. But it's the big papers that pull the majority of usage (i.e., The Washington Post, LA Times, etc.).

Consumer Media Preference

We asked consumers to rate various types of media as a source of information for local shopping.

Source: Kelsey Group

As you can see, Print Yellow Pages and IYPs are down since August 2003. What's interesting here is the resilience of newspapers over this period despite the relentless pressure. There are a lot of reasons for this and we discuss many in our two previous newspaper advisories. Basically, consumers have an affinity for their newspapers and newspaper sites and look to them for a variety of information online and offline. This is true despite declining circulation numbers.


We believe that newspapers have a tremendous potential opportunity. This is not suggesting that these companies are without serious challenges to their core offerings. Nevertheless, the combination of an offline print product that is delivered daily with local sales forces and online traffic is valuable and does not exist elsewhere in scale.

There are indications that some newspapers are starting to test the inclusion of pay-per-call phone numbers in their remnant offline ads. These tests are similar in type to Verizon's pay-per-call print tests with eStara. Unlike the phone book, which is printed once a year, newspapers publish and deliver daily, so the inclusion of these numbers over time means that they can become more specialized and targeted.

We believe in the near future that online performance-based ad programs will be launched with offline performance-based print campaigns. These new supplemental programs will capitalize on valuable print content, local distribution and sales forces to initiate programs. Updated information will be provided on the newspaper Web site. Merchants will be enticed by offering a simple performance-based option that covers both.

Homes and apartments are a natural vertical starting point. For example, think about all those free apartment and home magazines in front of grocery stores. Homes and Land, for example, prints about 60 million free magazines a year. Its largest magazine competitor, Network Communications Inc., also prints about 60 million a year.

Unlike national Internet companies (the exception here is, local newspapers like the Houston Chronicle have been successful at negotiating with their local multiple listing services (MLS) to host homes for sale listings. This means they can build a comprehensive real estate experience online for their coverage areas.

In the future we expect the Sunday paper will contain a glossy real estate supplement filled with pay-for-performance numbers for homes and apartments and local area content. These tracking numbers will be carried over to the Web site, where listings content will be kept up to date. The next week, an updated print version will be released, cross promoting the Web section. It's true cross platform opportunities like this where newspapers have a tremendous competitive advantage.

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