Don't Worry be Wary

By: Lucia Moses Dot-com crash leaves safety Net in tatters, but newspapers remain airborne - for now

When the Nasdaq exchange sank 25.3% in mid-April, the hopes and the hype of a generation of Internet entrepreneurs went down with it. The venture capital that had been fueling start-up dot-coms evaporated that day, and the smart money has it that it will not be coming back any time soon. As the vast majority of dot-coms do not make money, it was the venture capital that was funding their esoteric branding campaigns. Logic would dictate that now that the money is gone, the branding campaigns will go as well.
But neither stock markets nor Internet entrepreneurs have much use for logic. Thus there are those, indeed many, who are saying that the Nasdaq crash was a mere bump in the road, that the Internet, of course, is here to stay and that dot-coms will inexorably rule the business world. The branding campaigns, then, will continue.
In the newspaper industry, whether the branding campaigns continue is the $275-million question. There are signs pointing in both directions. But prudent publishers will do well to recall that it took a full nine months for the stock-market crash of October 1987 to make its way into the newspaper advertising economy -- and to remember the cost cutting it eventually necessitated.
Some are already getting a message. The San Jose (Calif.) Mercury News and its sister paper, the Contra Costa (Calif.) Times, in the epicenter of the Internet boom, together raked in $5 million in online advertising in 1999, up from $700,000 the year before. Scott Haskins, general advertising manager for both papers, says with so many companies scrambling to place ads, it was "absolute chaos." Hoping to soak up as much of the newfound riches as possible, the papers assembled a five-member team this year to focus solely on online ad revenue.
The Monday after the Nasdaq nosedive, when Haskins met with Internet executives in New York to drum up new business, his hosts' mood was decidedly different. The world had changed, not just for the Internet start-ups, but for the newspapers that had come to enjoy their fruits.
"Some of the dot-coms, they probably will not launch, some will revise their plans, and the real strong ones will continue," Haskins observes. "We've done extremely well in the first quarter. Where it's going to take us from April on is another question. Where the stock market goes, the IPOs go."
True, the dot-com dollars were a small part of the total $46.3 billion spent last year in newspaper advertising, and most of it went to a small number of metro dailies. But there is no accurate estimate of how much advertising was directed into newspapers due to a sold-out TV marketplace during several periods last year. The dot-coms were paying premium prices for TV avails and sending traditional advertisers packing for other media options.
By itself, the dot-com advertising in newspapers has helped make up for the lag in retail ad spending through the first quarter of this year, and if it were to continue, it would help offset higher newsprint prices that publishers expect to see toward the end of this year. If many of the dot-coms go away, newspapers could be faced with the loss of that revenue as well as the advertising that was driven their way by dot-com activity in other media.
Even before the April crash, consolidation was expected to wipe out many of the e-commerce companies, which could reduce total ad spending. Come summer, Internet companies will be finalizing their holiday ad spending plans, and some could be looking for places to trim.
The Internet beating, on the other hand, could have an upside for publicly traded newspaper companies, whose CEOs often complain that their company stock prices are undervalued. "As we see a shakeup in e-content, it could shine positive light on more traditional companies, including newspaper companies," says Kevin Gruneich, analyst with Bear, Stearns & Co. "The group might actually be considered a safe haven."
But beyond the dot-com effect, there's the bigger, more disturbing economic picture. The market downturn exposed concerns about interest rate hikes, which could have a cascading effect on ad revenue in the retail and classified categories, newspapers' bread and butter.
The bulls would say all this worry is needless -- for now. The April shakeup portends little change in the outlook for ad spending in 2000, perhaps the single most important indicator of the newspaper industry's performance.
"I don't think retail advertisers are going to change their advertising schedule because of what happened [in mid-April]," insists Miles Groves, senior vice president and chief economist of the Barry Group, a media marketing firm based in Bethesda, Md. "There's nothing fundamentally changed. We've just seen a lot of wealth evaporate, and a lot of it has come back. A lousy week in the market does not turn the economy around."
For 2000, Groves predicts national advertising to grow 10% to 11% and retail and classified each to advance 4% to 5%. Prominent media investment bank Veronis, Suhler & Associates' forecast was even rosier, calling for national to grow 13.3%, retail to rise 8.1%, and classified to gain 7%.
Indeed, the markets have regained some of their devastating losses. High energy prices that helped drive the market plunges have come down. Jobless claims are at a 26-year low. First-quarter retail sales were strong. Another major economic indicator, consumer confidence, while down slightly in April, has barely strayed from its record-breaking high of January. "The recent volatility of the financial markets has clearly had little, if any, impact on consumer confidence," says Lynn Franco, director of the Conference Board's Consumer Research Center. "In fact, while consumers rate current economic conditions less positively than last month, their short-term outlook has improved. The boost in optimism, coupled with tax refunds, should continue to fuel spending."
But the further out, the hazier the forecast gets, and the worst may be yet to come.
James Conaghan, vice president/market and business analysis for the Newspaper Association of America (NAA), while cautioning that economic forecasts haven't changed, sketches a worst-case scenario. "If there's a continued significant decline," he speculates, "and there's a significant diminution of the wealth effect, and considering that the economic expansion has been fueled by consumer spending, then it could impact consumer spending and have a cascading effect, and then lead to an overall advertising decline."
Among the prudent publishers now evaluating the dot-com dilemma is The Seattle Times Frank Blethen, who believes dot-com spending will stay strong this year because Web sites are still flush with cash and still need to increase traffic to their sites. But he's not so sure about next year.
"I think our big concern is, if people pull back from prayer-and-promise stocks, they are not going to have all this money to spend on advertising, and that could affect us," Blethen reveals. "We'd probably have to do some budget-tightening."
But dot-com advertising isn't Blethen's biggest concern. He and many of his peers are wondering if last month's turmoil was only the start of a sustained market decline -- and whether more anticipated interest rate hikes will trigger a recession.
"Interest rates are starting to go up, and it's starting to affect housing, and it won't take very long to affect autos," Blethen says. "The increase in interest rates could risk putting a damper on consumer spending." The paper is already seeing some flatness in classifieds as home sales have softened, and Blethen knows that as interest rates rise and dot-com wealth dries up, big-ticket purchases such as homes and cars, and hence advertising, will dry up.
At The Boston Globe, Peter Newton, vice president/advertising, is concerned that dot-com advertising, particularly in e-commerce, will "take some hits" during the second half of 2000. "It certainly gives you pause," he admits. "It makes you wonder a little bit, but in the long run it's a healthy thing. I think the dot-coms needed to take a breath."
They may have picked the wrong time, however. After a tremendous 1999, the newspaper sector was headed for a growth slowdown this year even before the market downswing. Publishers already faced tough ad revenue growth comparisons with last year, when a jump in dot-com advertising powered a 17.7% surge in national advertising, its highest percentage increase in 23 years.
Even if the macroeconomic fundamentals remain good, newspapers are facing pressure on several fronts. The most serious is coming from the retail category, which accounts for some 46% of the industry's ad revenue, according to the NAA. The nation is over- malled, and competition and consolidation among retailers has left 1980s-era megastores shuttered in the same way the malls caused the dislocation of the downtown merchant in the '60s and '70s.
Moreover, retailers have continued a long-term shift in their advertising budgets away from run-of-paper (ROP) ads and into pre-prints, which generate less profit. Advertisers like pre-prints because of their lower cost and because they can exercise more quality control while targeting them to the consumers most likely to buy their products. In terms of revenue, inserts surpassed ROP in 1997 for the first time since the NAA has been tracking them, and Conaghan expects the trend to continue this year.
And now, with more interest rate hikes to come, consumer spending and ultimately, retail advertising, could be slowed. "Retail is this year's question mark," Gruneich says. "I think that most publishers are generally disappointed with how retail is going."
Retailers such as discount home improvement and drug stores that spend a relatively low amount on advertising relative to sales have been a tough nut to crack. The challenge for newspapers is to get those stores to look at them as a new source of sales and customers.
And retailers of all stripes are facing increasing pressure from e-tailers. In one scenario, they react to the threat of e-tailers by upping their newspaper advertising. In another, e-tailers turn out to be nothing more than electronic versions of the L.L. Bean catalog and the retailers pull back on newspaper ads they were using to fend off the competition.
Either way, they will not be receptive to traditional rate hikes, especially since they have been steadfastly resisting them the past several months. "You've seen a recent increase in volume discounting," Gruneich says. "As newsprint goes up in price, I'm sure you're going to see some rethinking of that strategy."
On the bright side, newspapers have traditionally had more ability to pass on rate increases compared with other media, he points out. Looking to other revenue sources, circulation is a hot potato. Newspapers can't easily raise circulation prices as they're trying to retain and add subscribers.
To make up the difference, they've been looking to classified ads, which have been advancing at a healthy clip. The category has gotten off to a strong start this year, although there's been some softness in real estate due to a hot housing market, and the tight labor pool has driven employers in some markets to try other recruiting avenues besides newspapers.
But the outlook is cloudy here as well. Changes in the labor and housing markets and interest rates could change the forecast for classifieds, which deliver 40% of newspaper ad revenue. While a cool-down in the job and housing markets could drive more job and home seekers to classifieds, higher interest rates are likely to hurt auto classifieds and, in the longer term, real-estate classifieds.
While newspapers haven't seen a significant defection by classifieds to the Internet, some analysts believe it's only a matter of time. Competition from online job boards is pressuring newspapers to keep classified rates low while threatening to hold down growth. In response, newspaper companies have been forming online classified partnerships, such as CareerPath and Classified Ventures, but analysts agree that the jury's still out on the success of these enterprises.
Lest the Internet factor be overblown, Conaghan says the biggest threat to newspaper advertising is still coming from other media such as radio and niche publications. "If you look at the broad competitive landscape, we had a good year last year," he observes. "But radio had a good year, too."

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(copyright: Editor & Publisher May 1, 2000)