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|Dr. Joe Webb - For Premium Access Members|
Fridays with Dr. Joe:
April 2005 may go down in the separate histories of Internet publishing and of the printing industry as a major turning point for each medium. This month, the Wall Street Journal’s Web site produced more profits than its print edition, and Google’s advertising revenues exceeded those of some major publishing operations. More about that later, in what some might call my urgent call to action.
Worries about inflation kept coming up in news stories these past two week, as conflicting data showing increased pricing pressures made “the experts” wonder if the Fed was too lax in its rate policy. Decreasing commodity prices made them wonder if the Fed was too aggressive in its rate policy, and should start loosening credit. Gosh, it seems the Fed can’t please anyone. Despite all of the actions taken by the Fed, long-term bond rates have changed little. Yes, the economy seems to be slowing, but it’s still growing. The Fed’s Beige Book seemed to present conflicting information, the consumer price index seemed intent on rising, and the leading indicators just seem to prefer to move sideways. It all means a growing economy, but growth at a slower rate.
The stock market suffered from profit taking, but the decline is an indicator of sagging profit expectations, though the pullback was relatively minor. The concern I expressed in our most recent webinar that corporate cash flow had declined seems to be playing out. Accelerated depreciation schemes from two years ago are now paying back as expected: decreased cash flow. After all, you can’t depreciate something for more than it’s worth, and all accelerated depreciation does is change the years in which the depreciation expenses occur. Depreciation schemes that increase cash flow in some years end up decreasing them in others. No one should be surprised. I assume the champions of the accelerated depreciation scheme originally hoped that by this time non-U.S., non-China economies would be picking up the slack, but they’re not. Big company CEOs will stay skittish and tight with their bucks, and there’s no reason to expect anything else.
Don’t be confused by recent bullish employment news, as weekly jobless claims broke below the 300,000 level for the week of April 16. At 296,000, this report reflects a robust economy, but we have to remember that employment is a lagging indicator, and these data kept improving as we started to enter the last slowdown—as they do for almost every cycle. The last time I can find jobless claims at this level was in July 2000, months after the NASDAQ started its steep decline and after the Dow Jones Industrials hit its still all-time high, and experts and politicians were talking about how great the economy was. It should also be noted that during the Internet boom, initial claims were rarely this low. At that time, the economy was violently restructuring as the bubble was being created, and there were constant reports about layoffs in “old economy” companies. I’d be cautious; it could be that the economy is “topping out” and no one really knows it yet.
On the Web:
Based on Commerce Department data for Printing and Printing Services (NAICS 323), fourth quarter 2004 profits before income taxes were 2.9% of revenues, down from 3.3% for the same quarter of 2003. I keep a quarterly data series of inflation-adjusted shipments and profits, and the chart is below. It’s a four-quarter moving total, which smoothes out odd fluctuations, so every point on a line is an annualized figure.
Profits were $4.4 billion for 2004, up from $3.6 billion in 2003. The better first half of 2004 originally made me giddy with optimism, but it’s now clear that I got way ahead of myself. The slide in profits seen in Q3 just continued in Q4, and I suspect Q1 of 2005 was more of the same. Sales are flat at best, so it seems there is no end to the pressures to decrease print prices to stay busy, and that won’t help industry profits at all. This year is starting to look rather sour. Even Courier Corporation, who has had a good run of profits when others didn’t, has scaled back its outlook though it will still be positive. Expect increasing pressure to consolidate among printers and as well as suppliers to the industry. These lackluster profits data can't be a good omen for the capital equipment companies, that's for sure. The printers who are doing well in this environment should be able to create a yet wider gap between them and their flailing brethren.
On the Web:
Google reported some stellar revenue results last week. Now, who would have thought a few years ago that our industry, and our customers, would be competing with Google? This line from the Wall Street Journal is a shocker: "...Its quarterly advertising revenue now outstrips the advertising revenue of most major newspaper publishers, including New York Times Co., Washington Post Co., Knight Ridder Inc. and Dow Jones & Co. ..." Luckily, Google is beating those companies individually, and not as an aggregate… for now.
Eric Schmidt, Google’s CEO, gained his initial claim to fame at Sun Microsystems, and then left to try to turn around Novell (no real luck there, but they did survive when they were headed for the computer graveyard). Schmidt, who went to Google at a time when people wondered how the company could ever make money, was quoted in the WSJ as saying "...strong earnings growth was largely due to revenue outpacing expenses..." Now that’s a novel idea. This means they already have economies of scale, and as they grow, their margins will expand faster than their revenues. “Experts” have started to claim that Google is worth more than $300 a share, and Wall Street analysts rushed to post their buy recommendations upon the release of Google’s latest earnings.
This was after Yahoo! had reported very strong earnings and improved—and growing—advertising revenues as well.
Just a few days prior, on April 15, Dow Jones reported that the Wall Street Journal's online business was more profitable than its traditional business. This wasn’t reported as a percentage; they were talking about real dollars. The New York Post put it this way "...its fledgling online operations earning more money for the first time than the flagship Journal and the weekly Barron's..." While I still wonder if www.wsj.com is being allocated its deserved share of fixed costs, I doubt that Dow Jones could do anything other than use a fair allocation without causing an internal revolt among its executives. It’s long past the excuse of “well, it’s a start-up.” Dow Jones just had an executive shake-up as part of an effort to turn around declining print advertising to attempt to right the ship.
The idea that online could have crossed its breakeven point this significantly, especially at such an old-line firm as Dow Jones is incredible, and it is certainly a sign of the times. It's easy to blame lower advertising revenues for print media revenue declines, and it’s too easy to express the hope that ad budgets will pick up, along with whatever other excuses might come to mind. But the truth is that the B2B ad market has significantly changed, and it's not ever going back to the way it was. Ad dollars go where audiences go, and new media has now had a demonstrable corrosive effect; it's like a feather pillow that has been cut open with its stuffing dispersed in the wind, impossible to be fully retrieved and collected, never to be stuffed back the way it originally was.
I don’t know how much ad revenue can actually be generated by an Internet publication. The pricing for print ads is based on ads delivered whether they are seen or not seen, while Internet ads are paid for when they are actually served to a viewer's screen or a viewer clicks on them. A print publication just increases its page count as it gets more ads. Web page space and reader attention spans that lead to clicks still seem to limit the amount of space available for Internet ads, at least in my mind. Web advertising does not have anywhere near the scalability that print publications do in terms of increased ad real estate. Today, advertisers are enthralled with the idea of paying only for ads viewed and targeting their ads to the most likely buyers. Unlike print, where you have to rely on readership research (or coupons or similar tools) to "guess" what effectiveness might have been, Internet advertising generates readership statistics on the fly, and it can be measured hourly or even more often if you wanted to.
We may look back at this as a significant turning point in the publishing marketplace. The fixed cost, legacy infrastructures that support print production are under attack. Changing consumer preferences are forcing the administrative bureaucracies of managing print production and distribution to crumble. The pressure of ubiquitous direct and instantaneous access to news and information offered by new media, combined with a willing audience, will force a major publishing restructuring. The only question is when.
And what does it mean for us? To date, only wsj.com and consumerreports.com are paid Internet subscription models that are working. The rest of the publishing industry is still scratching its collective heads. There will still be print (how long have we said or heard that?) but we have to wonder of what type and in what format. What’s happening in publishing can be logically extended to the way the public uses all printed matter. The final answers will play out as technology, economics, demographics, and ideas converge in the marketplace in ways we can’t even begin imagine today. There is a growing urgency for the industry to define its place in the new media mix, and we need to do it before someone else does it for us.
But the fact of the matter is that an industry can’t decide such matters, however tempting it is to pretend that it can. Individual print businesses are the ones who will decide the future role of print in the new media marketplace. However, as an industry we can become more aware that the long forecasted changes are not a “slow economy” or a few “lost customers,” but something far greater. After all, you’re reading about this on the Internet.
On the Web:
WSJ: Google Net Soars on Web Ad Boom (subscription required)
Google is still “tweaking” its advertising capabilities
The official release of Dow Jones' earnings can be found here
Space is limited this issue of Fridays with Dr. Joe, so please take my word that these items are definitely worth reading.
Three Advertising Age articles
Bob Garfield's"Chaos Scenario" will be identified as a seminal point in how the use of media changed
Yahoo is offering free services to small businesses; gee, are they grabbing business away from “quick” and “business” printers? You bet.