In the past 15 years, American print publishers have experienced a massive decline in advertising revenues. According to Statista, after peaking in 2000 newspaper ad spending has fallen more than 70% and reached a 50-year low point recently. According to Macquarie Capital, a similar trend can be seen for magazines. This could get worse in the coming years as marketers continue to shift resources to online advertising. Nowadays, Americans spend only 4.6% of their media time reading magazines and newspapers, while almost 20% of their media time is devoted to mobile devices.
Newspaper companies such as The Washington Post Company (NYSE:GHC), Gannett Co. (NYSE:GCI) and The New York Times Company (NYSE:NYT) face a challenging situation here. These companies will need to find additional sources of revenue in order to offset the decreasing importance of print ads. The good old days, when a massive share of newspaper circulation was regarded as a competitive advantage, are long gone. To avoid becoming a dying breed, newspaper companies will need to use their strong brands and reputation as trusted information sources to start new businesses, from digital newsletters to educational enterprises. How exactly do these three companies plan to survive the decrease in print advertising?
Diversification remains a key factor
Using the strong cash flow that the newspaper business unit still generates to finance new ventures is typically a good long-term diversification strategy. The Washington Post is the ultimate example of how this strategy can change a business radically. One of the oldest newspapers in America, it was founded in 1877 and went on to become the most widely circulated newspaper published in the Washington D.C. area, on top of winning 47 Pulitzer prizes.
Surprisingly, The Washington Post does not even own a newspaper business unit now. It sold its newspaper business to Jeff Bezos, Amazon's CEO, for $250 million in cash on Aug. 5. The transaction is widely believed to have been positive for the Post, as the newspaper business unit suffered from low margins and consumed "disproportionate management attention" according to Morningstar analyst Liang Feng.
The Washington Post has successfully transformed its business and become a diversified holding entity. For instance it owns Kaplan, which offers undergraduate and graduate college degrees online as well as affiliated college campuses. Kaplan represented 40% of The Washington Post's revenue and accounted for 70% of its total earnings in 2010.
Using a strong brand to create new digital businesses
Although Gannett is still heavily exposed to the print media business -- the company owns over 90 daily newspapers and nearly 1,000 weekly newspapers -- it has leveraged its strong reputation as a trusted source of information to enter into new digital ventures. One example is Careerbuilder.com, the largest online employment website in America, which Gannett acquired from Tribune Company.
Recently Gannett acquired Belo, a group of television stations and regional cable news channels, in an attempt to create a diversified multimedia company. Although Gannett paid a 28% premium for the company, the move doubles its portfolio of television stations. This will translate into higher broadcasting revenue.
On the other hand, newspapers remain at the core of The New York Times Company's business model, despite the company's efforts to rightsize its business units. Digital operations, which represent a quarter of total revenue, may need to grow faster in order to offset poor print ad sales.
According to the latest earnings call, print advertising is down about 2%, while digital revenue is down roughly 3%. The good news is that the number of digital subscriptions in the third quarter alone was up 28%. With both Times and the International Herald Tribune, there are more than 700,000 subscribers in total. The company may need to experiment with new monetization models to take advantage of its increasing subscription base.
Final Foolish takeaway
Newspaper companies have gone beyond print media and are trying to become well-diversified media conglomerates. The Washington Post and Gannett have successfully used their strong brands to open new business fronts from regional cable news channels to educational services. The New York Times is still heavily exposed to the print media segment, but its fast-growing digital subscription base suggests long-term upside as the company experiments with new monetization approaches to increase its digital revenue.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Morningstar. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.