Online Growth Proving to Be Industry’s Life Raft

By: Jennifer Saba

When combing through the most recent 10-Qs filed by newspaper companies, Banc of America came up with this startling stat: “We’re it not for online, several operators would have had flat to negative ad growth.” On average, the research firm found that “online revenue growth contributed close to 80% (at the median) to newspaper ad revenue growth at the publishers.”

In a report issued Friday, Banc of America ran the numbers to get a better sense of what’s going on. And from the looks of it, it’s all about the Web. Excluding online, ad revenue grew 0.6% in Q2 versus 2.2% with print and online combined.

Though online revenue was a huge growth driver in Q2, online advertising represents between 4% and 5% of total newspaper advertising (on average). That said, the research firm does not believe the industry has been able to leverage its natural advantage of local newsgathering to the online space.

In Q2, online revenue contributed to over 100% to total newspaper ad revenue growth for Dow Jones, Journal Register, Knight Ridder, and Tribune. On the low end, it contributed 20% to Lee’s total pro forma ad revenue growth of 4.1%. The median was roughly 78%.

Though online growth continues to be the life raft of the industry, weaknesses in print advertising still make for a challenging environment. “For the second straight quarter,” the report said, “we are also seeing evidence that rate pressures are beginning to catch up at some publishers, an unappealing proposition for an industry that has, for the most part, relied on rate increases to offset declines in ad volume.”

Overall, Banc of America warns investors that trends are still choppy and cautions careful play within the sector. The firm’s top picks are Dow Jones and Journal Register.

Meanwhile, Merrill Lynch summed up this week’s activity noting that the newspaper group outperformed the S&P500, which fell 0.7%, by posting gains of 2%. But the research firm also took a cautionary tone: “Investor interest in the group is largely stemming from several years of underperformance rather than conviction on the fundamentals. We remain neutral on the sector.”

Merrill estimates that July newspaper ad revenues, including online, rose a “tepid” 2.4%. Most companies were in-line with the research firm’s forecast, although Journal Register, Tribune, and Knight Ridder fell short. Retail ad revenues in July advanced an estimated 2%, classified was up 3%-4%, and national was flat.

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