SMOOTH SAILING NOW MAY GIVE WAY TO ROUGH SEAS SOON

Earnings reports are good news that may be masking the bad

Sailors who traverse the seas without benefit of modern tools such as radios or global positioning systems scan the horizon for signs of bad weather – or landfall.

On clear days, I can sit here at my desk and watch sailboats venture out into the Pacific Ocean. I often wonder whether they have the full benefits of modern technology, or whether they plan to sail with the skills and traditions of the generations of sailors before them.

Sometimes, I think I too am constantly scanning the horizon. In my case, though, my vessel is on the sea of the newspaper business and I am looking for the squalls of economic downturns, the bad seas of advertising fluctuations and the rain and wind of Wall Street. With a majority of the publicly traded newspaper companies having reported positive results for the third quarter of 1998, I should be seeing smooth sailing ahead. Unfortunately, I don't.

Inside, Senior Editor Pete Wetmore reports on the almost-dozen quarterly reports that were available at press time (we'll get you the others in the next issue) and the only waves come from those companies who have television assets. Pure-play newspaper companies are making money, and those with a mixture of media assets find their newspapers are offsetting other losses. Still, despite the clear skies and flat sea immediately around us, I think I see troubles out there where the Earth begins to curve.

Two troubling signs are found in the NewsInc. Stock Index (available on our web site daily). One is that the price/earnings ratio of the index versus that of the Dow Jones Index over the last 10 weeks has been dropping, with a high of 108 percent and a low (from Oct. 20) of 87.2 percent. The other indicator that troubles me is the one-year composite industry return, which was at 4.4 percent in mid-August and most recently was at -22.9 percent.

For those as numerically impaired as I, you just have to look at the bar chart of the NewsInc. Stock Index: The white boxes that represent the newspaper industry are visibly lower than the black boxes that represent the Dow. Seven months ago, the white boxes were above the black boxes. This is despite the fact that newspaper companies are making their numbers – and frequently exceeding them.

It can all be boiled down to this sentence: Wall Street perceives newspapers to comprise a mature industry with little hope of growth.

With the Federal Reserve Board's recent cuts in interest rates stabilizing the economy (though some economists are calling for more cuts, theorizing that there has been a "virtual disappearance of inflation"), concerns in that arena have fallen by the wayside.

And, as Wetmore and the newspaper industry analysts postulate inside, with good prospects for advertising in the fourth quarter (political advertising, the unburdened-by-strike General Motors, regular holiday advertising), only Wall Street poses a potential for bad sailing.

Though I don't disagree about the fourth quarter, I'm less sanguine about 1999. The assault on classified advertising continues from a variety of sources; real estate, employment and automotive advertising sites continue to proliferate across the Internet.

And more and more people will be on the Internet – and soon. Last issue, I spoke of a $750 personal computer being available by Christmas; I was updated by one reader who knows of a $499, Internet-ready computer that will be available for sale next month. Breaking the $500 mark puts computers on a par with TV sets – we're going to see a dramatic growth in PC penetration into homes over the next six months.

When PCs are as common as TVs, how long will it be that people prefer to get their advertising in print?

I have sailed in the ocean and there's no truer fear than when the wind comes up and you're not prepared – I thought I was going to die. The sea may seem smooth right now, but I think I see something on the horizon.

– David M. Cole

Inside ...

• Records are set as third quarter earnings are unveiled
• Earnings harbor no surprises, industry analysts report
• Editors hold up a mirror and see much to frown about
• ABC to air proposal for a way to count readers, not just sales
• Sunday magazines discover paths to more reliable footing
• Quality is in the web site of the beholder
• Persons

From NEWSINC., Oct. 26, 1998, Copyright © 1998, The Cole Group. All Rights Reserved.