Bank of America: Newspapers Should Be Getting More Credit for Online Transition

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By: Jennifer Saba

With The New York Times shuttering its TimesSelect subscription, Bank of America research analyst Joe Arns finds that newspapers are making much progress with free online sites supported by advertising — and aren’t getting enough credit.

In a report released this week, Arns found that online ad revenue per reader is now roughly one-third to one-half of that generated by print readers — a marked improvement from just a year ago.

Based on the total ad revenue per reader, in Q2 Bank of America estimates that on average, newspaper publishers generated about $25 to $38 of ad revenue per daily online reader compared with $70 for each print daily reader. This suggests that online readers are worth about 36% to 55% of the value of print readers, up from 28% to 42% in Q2 2006.

“In our view, the gain in online revenue per reader is remarkable given the severe cyclical headwinds that have had a disproportionate effect upon classified advertising — which makes up nearly 80% of the online newspaper ad revenue pie,” wrote Arns.

Driving the online monetization: the shift of classified ad spending from print to online and the surge in local retailers turning to online advertising.

As for the industry’s current woes, Arns believes that the housing crunch and slowing employment growth accounts for most of the ad revenue downturn last year and this year and also explains the slowing growth of online ad revenue.

He’s bullish on the outlook for the industry estimating that newspaper stocks are trading at a 30% to 40% discount. Partly, he believes the current downturn in ad revenue is “almost entirely cyclical” and that the “industry’s success in monetizing online readership is underappreciated,” he wrote.

Those wanting to invest in for the long haul — more than 12 months — should put their money in those companies best positioned for an online transition, according to the report.

Arns recommends McClatchy and Lee. Bank of America estimates that McClatchy’s online readers generate more ad revenue than the industry average, about 46% to 70%. Lee’s online readers fall more towards the average — about 36% to 55% — but the stability of Lee’s print readership relative to its peers suggests a slower online migration, making print revenue more valuable.

Bank of America rated both Lee and McClatchy “neutral” but considers the stocks “top picks.”

The New York Times Co., also rated “neutral,” falls into the “least favorite” category. “Premium content providers are at a decided disadvantage during the transition to a hybrid print and online distribution model,” Arns wrote.

The New York Times derives about 28% of its revenue from circulation — compared to about 18 for the companies in Bank of America’s coverage universe. That means for the Times to remain as profitable as its peers online, it will need to convince advertisers to pay even higher online rates, according to the report.

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