Nearly every ad category has fallen on hard times this year, with the poor economy and growing credit crisis, but newspapers may end up absorbing the biggest hit. The Newspaper Association of America predicted last week that total ad revenue for the newspaper industry will fall 11.5 percent this year, the biggest single-year decline since NAA began tracking such things nearly 60 years ago, to $40.1 billion. Further, online ad spending will slow to just 1.8 percent after double-digit growth last year. Whether this downturn is cyclical, related mostly to the poor economy, or part of a larger multi-year trend, remains to be seen, and it will rest in part on whether newspapers can retain local retailers, a huge source of revenue for both small and large papers. David T. Clark, senior research analyst for publishing and advertising at Deutsche Bank Securities, talks to Media Life about key developments over the next year and a half, what newspapers must do to secure a turnaround, and which chains are making smart moves.

 
In a recent report, you said the next 18 months could be "make or break" for newspapers. Can you explain what that means?
 
I was paraphrasing the words of some print agency and retail marketing executives. They believe that newspapers increasingly have their back against the wall and need to demonstrate their value proposition to retail advertisers soon, or we will see a meaningful acceleration in the marketing mix shift toward digital, outdoor, in-cinema and direct channels.

Their view is that this is a pivotal time for the newspaper-retailer relationship, and I’m inclined to agree. Share losses now will be amplified when we emerge from this downturn.
 
Retailers, particularly national and large regional chains, are seeking greater targeting and greater measurability. Retail chief marketing officers are under pressure to prove the value of their marketing spend, to reach younger audiences and to use more cross-media marketing.

In general, newspapers are making a great effort to try to meet these advertiser needs, but there is a lot of competition out there, particularly in the big markets.
 
The trajectory of print classified advertising is pretty clear, but the non-classified business, which is now almost 70 percent of newspaper ad revenue industry-wide, is still defendable.

The clock is ticking though. Newspapers must be perceived as a marketplace in which the advertising is considered content, not clutter. If they lose too much retail advertising, they lose the character of a marketplace, and we could start to see the leakage accelerate.
 

What is the single biggest issue facing newspapers right now?
 
The biggest issue, and this is no revelation, is the disruptive power of the internet. It comes at the newspapers in a handful of ways – it steals readers, it destroys pricing, it does classifieds nearly perfectly, it allows greater targeting, it breaks news 24/7 and gives it away for free.

The newspapers do digital pretty well, but there just isn’t enough revenue online to support a newspaper-size newsroom, and it doesn’t look like a viable business model will emerge in time to save some metro dailies.

Newspapers may see their steepest quarterly overall advertising decline ever during the third quarter. Do you think we'll see a turnaround, or is this a trend that will continue for the foreseeable future?
 
I think we need to distinguish between three daily newspaper business models: National newspapers (New York Times, Wall Street Journal, USA Today), major metro dailies (perhaps the top 50-75 markets) and small-to-midsized papers. I think most (maybe 75 percent?) of the declines we’re seeing with the nationals and the small market papers are cyclical.

Longer-term, I think those two categories will be able to stabilize revenue and EBITDA [earnings before interest, taxes, depreciation and amortization].
 
In the metro markets, I have a lot less confidence. They are at the bleeding edge of the structural issues the industry faces. They are going up against a lot of competition from other media. They have less homogenous markets that are difficult to serve. They’ve got a lot of Fortune 1,000 companies in their market, firms that have sophisticated marketing programs that are shifting away from traditional media.
 
Big-market papers compete against Craigslist, Citysearch, etc. Metro papers over-index to classified advertising, which is disappearing fast.

And culturally big-city papers make changes, even “fast” ones, at a glacial pace. People who work at small-market papers are used to being asked to wear several hats, so you don’t get push-back if you ask them to take on an additional task or change a behavior.

Small papers are much more nimble and can implement changes in strategy much more quickly. Big markets institutionally resist change, and it’s very hard to turn the battleship around.
 
So I think the ad revenue declines for metro market papers could still be meaningful, even after we climb out of the economic hole.
 
In terms of the economic cycle, the non-classified portion of newspaper advertising has historically bottomed out, in terms of year-over-year percentage decline, in the quarter after GDP hits the trough. The structural declines are greater this time around, so the pattern may be different in this downturn, but assuming that we’ve still got the worst of the economic cycle ahead of us, I think we’ve got at least several more quarters of very steep industry ad revenue declines to go before we see much improvement.
 

What have been the biggest factors in the ad decline for papers?
 
As everyone knows, classifieds are a perfect fit for the web – searchable, sortable, freshly updated – and the structural decline in print classifieds is what has driven the newspaper troubles up until this year.

Obviously, the economic cycle this year has hurt all categories and verticals. But it’s the loss of classifieds, driven both by secular and cyclical dynamics, that has produced the harrowing declines in 2008.
 

What can newspapers do to respond to the current market conditions?
 
I think it is extremely important for newspapers to do a couple of things during the downturn. First, they need to maintain local retail advertising market share and mindshare.

Advertiser perceptions are prone to change during a downturn, and the newspapers need to make sure that the cyclical trends don’t turn into structural trends.
 
Second, they need to get their interactive strategies in order, wean themselves from reliance on classified upsell.
 
I think they are doing a pretty good job on the second issue. The consortium partnership with Yahoo was a smart move. Newspapers have many competitive advantages online, but they don’t have the resources to do everything they need to do on the digital front by themselves, so partnering makes sense. And most papers are focused on developing online-only ad sales and pushing the non-classified part of the interactive business.
 
In general, newspapers have been slow to focus all of their resources on their core competencies (local content, local brand, local sales force) and get rid of everything else. For a long time they’ve been a vertically integrated industry, keeping pre-press, printing, distribution, etc. in-house.

I think they need to variabilize as much of their costs as possible, get all of that old media hardware off of the balance sheet. We’ve seen some of the companies move in this direction, for example McClatchy, which has outsourced printing at a couple of its papers to another newspaper company in the same region. I think we’ll see more of that kind of thing. Tough to sell a printing press these days, though, commercial printing isn’t a great business either.
 

Are there certain chains that have done a better job of responding to the current market?
 
All of the publicly traded companies are suffering significant declines this year due to the economic cycle, but I think that Lee Enterprises has done a very good job of squeezing ad dollars out of its markets. Revenue has fallen for Lee, but they’ve got an aggressive sales culture, which is fairly unique for a newspaper company, that has remained on the offensive against other media.
 
Gannett has responded to the tough environment by continuing to make small tuck-in new media acquisitions and investing in digital initiatives. I think they’ll reap the benefits of those investments as we come out of the downturn.
 
McClatchy, though I think they are in tough markets (due to size and geography), has moved dramatically to re-align their cost structure to match the new revenue reality. And they’ve done a great job shifting their online model away from the classified upsell.

These companies have smart managers and are doing their best in a horrible environment.