Ad Forecast for 2007: ‘Flat’ Would Be a Victory

By: Jennifer Saba

Anyone thinking that 2007 is going to be the industry’s lucky year, with a sudden and profound turnaround in ad revenue (don’t even dream about circ gains) should take a fistful of aspirin and hope for the best in ’08. Few newspaper executives at the annual Media Week presentations in New York in December dared to express much optimism. Even a surprising upsurge in shoppers at department stores may not translate into ad dollars for newspapers.

“This has been a tough year,” The New York Times Co.’s chief Janet Robinson said during her opening remarks. “I’m not going to describe all the challenges. I’m sure you are familiar with them.” McClatchy CEO Gary Pruitt explained that the acquisition of the former Knight Ridder papers has gone well, but the timing of the deal? Not so much. The downturn in advertising revenue sweeping the industry has been, as Pruitt characterized it, “awful.”

If executives were uncharacteristically blunt when describing current conditions, they flat-out refused to offer even a glimmer of hope in the six months ahead. Industry observers, however, never have a problem hoisting their fingers to determine the direction of headwinds (or, in the case of 2007, the lack thereof).

The Newspaper Association of America provided the sunniest forecast, calling for a 1.2% increase in total ad revenue. Merrill Lynch countered with an estimate that projects ad revenue will be down 1.5%. Industry analysts Miles Groves and John Morton wrote in their newsletter that they expect total ad revenue in ’07 to slip 0.6%.

Online ad revenue will gain in double digits, of course, but even the one thing going up for the industry is showing some strains: Merrill Lynch’s online outlook for the year pegs revenue to grow 23.3%. That’s down from 2006 estimates of a 34% increase.

Bob Shamberg, chairman and CEO of Newspaper Services of America, the country’s largest newspaper planning and placement agency, took a sledgehammer to the notion that the industry is merely experiencing a bad cycle. During a conference call hosted by Wachovia Securities analyst John Janedis, Shamberg said the industry would be doing well if ad growth turned up flat in 2007.

National will continue to wane because of the consolidation in telecommunications and the falloff of movie advertising. The three categories of classified ? real estate, help wanted, and auto ? are looking more Kate Moss than Rubenesque. Retail was the only category he predicted would show any increases, including preprint revenue. “There is a tendency for retailers to be very hesitant to move out of newspapers because it is still an immediate-response mechanism that’s hard to replicate elsewhere,” Shamberg said during the call.

Department store advertising, one of the most important segments of retail, is bucking some trends of its own. The New York Times reported in November that during the past 12 months, department store sales have blossomed 4.1%, while specialty chains grew 1.3%.

In theory, that trend should trickle down to newspapers, but for now, department store mergers ? most notably Federated/May ? are putting a stopper on that. Merrill Lynch retail analyst Stacy Turnof wrote in an advertising outlook report that department store spending in ’07 will be reduced as the year wears on: “We anticipate advertising spending to continue to be at similar levels for the next few quarters at Federated, but reductions should start mid-to-end of 2007.” Federated’s ad budget is estimated between $1.2 billion and $1.4 billion.

Yet many executives said during Media Week that they are planning to increase rates, while acknowledging that circulation is on the decline. Many publishers highlighted the gains made in what has surely become the new circ buzz phrase, “paid circulation,” to justify raising rates.

Shamberg called them out: “Newspapers are getting on thin ice with their rate structures.” He explained that no matter what publishers focus on ? an increase in individually paid circ, a decline in other-paid circ ? fewer people are reading the paper, and the ones who do are aging. This makes it difficult for newspapers to hike their ad rates, and if they continue to do so, it will push advertisers to look more favorably on direct mail.

“I think what will be interesting next year is to see how newspapers structure their rates, given the decline in circulation and the fact that many advertisers are taking a much harder look at their investment in newspaper advertising ? particularly traditional heavy newspaper advertisers,” Shamberg added.

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