Newspapers down but definitely not out

NEW YORK (Fortune) -- Last week could hardly have been grimmer for the newspaper industry. First off, Gannett (Charts, Fortune 500) and McClatchy (Charts) - the two biggest newspapers publishers in the U.S., respectively - reported diminished revenues and profits. Meanwhile, following the lead of Belo, publisher of the Dallas Morning News, Scripps announced it was splitting its growing television and interactive businesses off from the company's newspaper business so that investors could get excited about the company's slumping stock price.

The kicker of the week was when stock in the New York Times Company (Charts) hit its lowest point in a decade after a Morgan Stanley fund manager who had been agitating for changes at the company sold off the firm's entire 7.2% stake. Also last week, the equity research arm of Morgan Stanley laid off its newspaper analyst and dropped coverage of the industry, the Times itself noted wryly in its pages. This was almost certainly a coincidence. Otherwise, it might be construed as one heck of a kiss off. The present question in newspaperland is not whether the industry can reclaim its glory, but rather how quickly the erosion in business conditions that has accelerated in the past year or so can be slowed and even reversed.

Newspapers may not be growing, but they are still a viable, $60 billion a year industry.

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Maybe the unusually balmy Manhattan October is giving me a gauzier disposition than usual, but I can't help thinking the storyline is not quite as apocalyptic as it seems. Don't get me wrong, the list of dubious achievements in the newspaper business over the past decade is considerable: just a few include the Tribune Company's doomed merger with Times-Mirror; the New York Times' overpriced acquisition of the Boston Globe; the dismantling of Knight-Ridder; and, of course, the epic string of corporate miscues that has delivered Dow Jones and its prize asset, the Wall Street Journal, out of the control of the Bancroft family and into the hands of Rupert Murdoch's News Corp.

Even setting aside the drumbeat narrative about how news readers and especially advertisers have been increasingly moving online, the newspaper industry has always had unique characteristics and idiosyncrasies, both structurally and operationally. These include the public service mission good newspapers prize above even commercial success, and the inherent tension that mission creates with the side of the business that pays the bills.

Beyond that, big daily newspapers in particular are immensely complex organizations with myriad moving parts - and newspaper owners have hardly been alone at failing to heed the threat of emerging competition. Barely two decades ago, the major broadcast TV networks that dominated living rooms derided the emergence of niche cable channels like CNN, ESPN and MTV. And we know how well the music industry has fared in its grasp of digital downloads and file-sharing.

For the newspaper industry, the Internet is just the latest growth opportunity - think also of alternative weeklies and free dailies - that most big newspaper operators failed to clue into when the getting was good. "People are trying to defend the way they've done things and it isn't relevant anymore," says Lauren Rich Fine, who retired from Merrill Lynch earlier this year after a long career as a publishing analyst and is now on the faculty of Kent State University. "Newspapers will never be able to make money the way they made money before." While she said she commends the efforts publishers have made to remake their industry, "I still laugh at some of the conversations I had where they just didn't get what was happening around them."

If they didn't get it then, they ought to be getting it now. And if so, here's a few reasons to still be (cautiously) optimistic about the future of newspapers. One is that an industry's lack of appeal to public shareholders should not necessarily be confused with its viability or relevance. While most big newspapers may not be able to show the top-line growth that investors look for, they still churn out decent profits. One senior newspaper industry honcho said that a popular scenario being bruited around the publishing world is this: core print newspaper revenues continue to fall at 5% per year; costs are held in check; revenue from Internet operations grow at 20%; and increasingly popular targeted magazines (think the New York Times' T Style, the Wall Street Journal's planned weekend Pursuits magazine and Spice, a fashion monthly launched recently by Hearst's Houston Chronicle) grow revenue at 15% or more. "At some point, those lines will cross" and newspaper profits will stabilize, this executive says, although he is also quick to point out that this year is worse than any publisher expected.

What is often overlooked is where newspapers rank, at least for now, in overall spending in the pantheon of media industries fighting for dollars from consumers and advertisers. They are number one, ahead of TV networks, magazines, billboards, you name it. And it's instructive that no legacy medium has been obliterated by a new technology: consumers simply adjust and adapt. In the era of DVDs and downloads, we still go the movies and listen to the radio.

So much depends on how you view the numbers. A report by PriceWaterhouse Coopers estimates that revenue for the newspaper industry will be down 1.4% for 2007 to $59.2 billion, the second straight down year. The report sees advertising for the industry at essentially flat through 2011, after taking into account papers' rising online revenues. Put another way, according to this analysis nearly one out of every four dollars spent on advertising in this country is spent today on newspapers. And much of the upheaval is due to the fact that it is moving to one in five dollars in a hurry, largely thanks to online upstarts. There are plenty of businesses that wish they had these problems.

There's no question newspapers are an industry that needs reinvention - fast - as last week's dreary reports underscored. The Belo and Scripps spin-offs seem to Rich Fine and other analysts as precursors either to taking the newspapers private or further industry consolidation. For papers that are not owned by families or already privately-held, expect more opportunistic and convoluted deals like Sam Zell's buyout of the Tribune Company. And anxiety over whether newspapers will have the resources to be interesting and unique enough that people will read them - not to mention fulfil their public service missions - is not going to go away. Papers are already adjusting to a tough reality of needing to cut costs in some areas while investing in others.

But, call me ink-stained and old-fashioned, it seems a bit premature to put a $60-billion industry on the endangered species list.