The Fourth Estate: The Future Of The Media Industry

  • “If the product is free, you are the product.”: Advertising dollars speak volumes, and data collection on consumers is driving the bottom line
  • The newspaper industry has experienced a contraction in advertising revenues, and have to find other sources of cash
  • Subscription services will become more prevalent over time
  • It is vital to community success and engagement that local newspapers remain afloat
  • Digital media companies have strong growth prospects

The newspaper industry has been undergoing an evolution, and the economic challenges that the industry faces have been well-documented over time. Employment in newsrooms has declined by 45% since 2004. BuzzFeed, Huffington Post, and Gannett all let go a percentage of their workforce in late January 2019. Vice Media announced that they are cutting 10% of their workforce on February 1st, and more companies are expected to follow suit. Gannett owns USA Today, among other circulations, and many local newspapers. The local newspapers in particular have been slammed over the past several years, and the most recent round of layoffs were just another slap in the face.

The disruptive nature of the Internet and the changing demographics of a subscriber base are some of the variables that the industry has dealt with, but there are also underlying revenue deficiencies within the newspaper system. The advent of big tech and the power of Facebook (FB) and Google (GOOG, GOOGL) has put pressure on publishers. Despite Google and Facebook’s $300 million pledge to support journalism, that pressure doesn’t look like it’s going away any time soon.

Read it in Print: The Golden Age of Newspapers

Newspapers were booming during the early half of the 20th century. People would get two newspapers everyday, one with the morning news, and one with the evening news. The subscriber base began to flatline in the early 70s, but a true contraction in growth didn’t show up until the 1990s, where it has steeply declined since then.

Source: Journalism.org

The newspaper companies were thriving during the 1990’s, despite the contraction in the number of subscribers. Gannett (GCI) and Knight Ridder, the industry leaders, were trading with 20 – 30% profit margins, which by comparison to other industries, is pretty massive. The below chart is from a 1999 Nieman report. It documents clearly “the business strategies put in place at newspapers to emphasize profit over market share” according to the report.

Source: Nieman Reports

The shareholders invested in these companies began to expect these profits, and made that very clear to the papers. The papers shifted their resources into advertising as they continued to grow, taking money away from the newsroom and from payroll. Losing focus on news coverage and employee well-being is never a good sign for an industry.

Source: Nieman Reports

In the late 1990s, the Internet exploded. It would have been an incredible advantage to the papers, but most didn’t evolve accordingly. They rode the new tech wave, but they didn’t innovate their product for a digital audience, rather, they invested in technology to make the product easier to produce. The inefficiencies clearly show up in Gannett’s current stock price, and KRI’s sale to the McClatchy Company.

Source: Yahoo Finance

Then blogging came along, and self-publishing put another pin in the newspaper balloon. The chains had massive debt, and a shrinking readership base. The publishers were caught with their hands tied.

Naturally, the groups had to cut to where they could to continue servicing their debt obligations and meet the needs of shareholders. The newspaper quality declined. It was the Phil Meyer Death Spiral. They had focused on the wrong things and did not their dollars to improvement and growth. As Jeremy Littau wrote:

“Newspapers ate their own seed corn during bumper crop days and then had no resources when it got tough.”

Source: Jeremy Littau

By early 2000, over 75% of the newspaper’s revenue came from advertisements. However, advertisers were paying for access to readers, so when the number of readers began to decline, so did the number of advertisements hitting the papers.

Source: Jeremy Littau

Craiglist, established in 1995, created free classified advertisement opportunities. This put further pressure on the advertisement revenue of newspaper businesses. People did not need to post their “For Sale: 1991 Toyota Celica” in the local newspaper anymore. Newspapers lost about 67% of their revenue over the course of ten years. To compensate, they responded with price hikes that out-price what the average American can or wants to pay.

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Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can ...

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