PricewaterhouseCoopers' 2013 Global Entertainment and Media Outlook indicated that domestic newspaper revenue is forecasted to decline by a 2.9% CAGR between 2013 and 2017, with a 4.2% drop in advertising offsetting slight improvement in circulations. This is hardly surprising.
Firstly, readers enjoy free access to basic headline stories via both online sources and free dailies. Secondly, general-purpose print media publications are losing favor with advertisers that prefer specialist media that are able to target specific readers with respect to demographics and interests.
This suggests that publishers such as Time (NYSE:TIME), Lee Enterprises (NYSE:LEE), and A. H. Belo (NYSE:AHC) will be better positioned than their generalist peers to survive and even thrive in the new media landscape.
The country's largest magazine publisher
Time is the leading magazine company in the U.S., with the biggest share of both print advertising revenues and readership among its peers. Time enjoys a 23.7% advertising share of the categories it competes in, compared with an 18% share for its nearest competitor. Similarly, it boasts a print audience in excess of 100 million, according to an MRI survey. The next largest player, Hearst, only reaches approximately 80 million readers. What's the magic behind Time's dominance in magazine publishing?
Time's magazines are ranked either first or second in 15 of the categories they compete in. In other words, Time boasts a portfolio of specialist magazines that appeal to both readers and advertisers. These include Money (85% share in personal finance), Sports Illustrated (66% share in general sports), and Essence (56% share in African-American.)
As an example, a leading beauty company advertised a new lip color collection in seven of Time's magazines. The end result was a 5% sales life and close to 10 times payback in terms of advertising dollars.
Another example is Time's Instyle magazine that is focused on celebrity and style. It is estimated that Instyle readers buy approximately eight advertised items on average per issue. Instyle has such strong brand attraction to readers that it even had the opportunity to license its brand for a 2014 Nine West shoe collection.
The results speak for themselves. Time's advertising revenues declined by less than 1% year-over-year in 2013, which was an admirable feat given the current market conditions.
Leading small-town newspaper publisher
Lee Enterprises is a publisher specializing in community newspapers that are focused on mid-sized to small markets. Community newspapers belong to a specialized category with unique characteristics.
A 2013 survey by the Reynolds Journalism Institute showed that 77% of respondents rely on community newspapers for local news and information, while 69% of them think that community newspapers provide "valuable local shopping and advertising information." More importantly, a overwhelming 96% of readers pay for the community newspapers.
The results of the survey are validated by how Lee Enterprises' business model works. Lee Enterprises' publications focus on local news that isn't available in any competing print or digital publication. It also hires a greater number of journalists than all of its competitors combined to uncover niche stories.
As a result, it positions itself as the most reliable and in-depth source of breaking local news for its readers. Some exclusive stories reported by Lee Enterprises' publications include high suicide rates in Montana (Billings Gazette) and childhood poverty in Tucson (Arizona Daily Star.)
This is helped by the fact that Lee Enterprises enjoys at least 70% market share in all of the markets it has a presence in. Eight of its local dailies have no daily print competition, including the Billings Gazette, the Lincoln Journal Star, and The Courier in Waterloo. The proof of the pudding is in the eating. According to its internal estimates, Lee Enterprises' cumulative top line decline between 2007 and 2012 of 33% is among the lowest of its listed newspaper peers.
Award-winning king of Dallas
Readers aren't just looking for specialized content differentiated in terms of territory or interests. They are also demanding more in-depth content of higher quality. In this regard, look no further than A.H. Belo, which owns the award-winning The Dallas Morning News.
The Dallas Morning News is the winner of nine Pulitzer Prizes, the Oscar equivalent in news reporting. As a testament of A.H. Belo's commitment of maintaining quality content, it spent an estimated $35 million investing in The Dallas Morning News in 2012, primarily to hire new staff and reward existing top performers. Its results have paid off handsomely.
In the face of falling news readership, daily and Sunday circulation volumes for The Dallas Morning News actually grew by 1.5% and 1.7%, respectively, in 2013. Similar to Lee Enterprises, A.H. Belo's The Dallas Morning News has limited print competition in the Dallas, TX area, with three in 10 residents or workers in the area being avid readers.
In the first quarter of 2014, A.H. Belo registered the lowest year-over-year quarterly decline since 2008 at 1%. The increased printing and distribution revenue in Dallas was a key contributing factor.
Foolish final thoughts
Print media is under siege, but picking the survivors isn't difficult as long as you focus on the specialists among them. Of these three print media companies, Lee Enterprises is my top pick as it trades at a mere 0.35 times price-to-sales and has dominant positions in its niche markets.