EVEN IN THE BEST OF TIMES, WALL STREET CHOKES

The NAA reports glowing ad sales, then an analyst sends a jolt

I guess I'm missing something here. Last Tuesday, the Newspaper Association of America (NAA) released its findings on second quarter newspaper ad spending. It was all good – national was up 14 percent from the 1999 quarter, and retail and classified were both up five percent.

"The strong economy has continued to mean good news for newspapers," the Vienna, Va.-based NAA quoted its president and chief executive, John Sturm, as saying. "We're encouraged by the continued growth in ad spending across the board, particularly the outstanding increases in national advertising and recruitment advertising."

Shortly after the NAA released this upbeat report, a Wall Street analyst came forth with grumpy thoughts about four publicly traded newspaper companies – the New York Times Co., Gannett Co. Inc., Knight Ridder and Tribune Co.

Deutsche Banc Alex. Brown Analyst Peter Appert downgraded the Times Co., Gannett and Knight Ridder from buy to market perform; he hit Tribune with a downgrade from strong buy to market perform. Indications were that Appert was concerned about ... a decline in advertising (in addition to increased paper costs).

The market took him to heart and punished all the newspaper stocks that day. By the final bell, though, it wasn't too bad: The Times Co. was hit the hardest, with a one-day drop of a little more than four percent, which represented but a mere $25 million in market capitalization.

The next day, TheStreet.com's James Cramer, the almost-celebrity hedge fund manager, filed a column attempting to link the newspaper stock price "collapse" – which was caused by Appert's report – to the decline of spending in dot-coms. (Cramer actually had more to say about the artificial world of dot-com finances than about newspapers, but let's not be picky here.)

As best as I can ascertain, nobody in the newspaper business seems to be willing to guess what ad sales in the third quarter are going to look like – with or without dot-com advertising – and while the economy is still on track, the third quarter is always pretty slow (though usually offset by the back-to-school retail advertising).

But Appert's side comment about consumables got me to do some research. We've all known about the newsprint price increase that came at the first of the month, and newspapers have been preparing for it. It is a big increase – if it sticks, the industry will be paying almost $610 a metric ton. The consensus is that it will stick, and there are rumors that the paper mills are looking at another $35-$50 hike in early 2001.

"We do expect another price increase announcement," an anonymous West Coast newsprint buyer told the newsletter Pulp and Paper Week. "But I hope they don't go too high, or they'll kill the [newspaper] industry."

The problem is reduced paper-making capacity. As the few remaining newsprint makers close plants – in an attempt to reach their own profitability – the remaining plants appear to be running at full capacity. So with the mills at capacity, the paper-makers feel comfortable in raising prices, because consumption won't go down.

Ooops. All that noise about how reducing the web-width of the newspaper page will make it more convenient for consumers tends to forget that it will also reduce a publisher's paper consumption. As more and more papers switch to the narrower page, consumption will go down.

So, we're back where we started: If ads aren't going down and paper price hikes are offset by lower consumption, where is the problem with the newspaper industry that would cause one of its most exemplary citizens to lose $25 million in market worth in one day?

The problem is with Wall Street. It has never understood newspapers, and doesn't seem to be interested in learning.

So I guess maybe I'm not missing anything.

-- David M. Cole

e-mail: dmc@newsinc.net

Inside ...

• Arkansas alliance is a new creature bred to compete
• San Jose paper is just the latest to try to expand into another city
• Newspaper auction sites bang down the gavel for the last time
• A second paper plans to use bar codes to link print to the Web
• Media General is among the first companies to go decimal
• Web companies actually need newspapers
• Persons

From NEWSINC., Sept. 11, 2000, Copyright © 2000, The Cole Group. All Rights Reserved.