Wanamaker’s Revenge

My friend Alan Mutter has an annoying habit of actually analyzing data rather than waving his hands at it.  Recently, he did his trick on the latest numbers out of NAA, which remain dismal (16 straight quarters of decline).  The most breathtaking piece is the precipitous disappearance of classified advertising from newspapers:

Among the classified categories, automotive and real estate advertising, two long-time pillars of the newspaper advertising model, each was down by 43% in the third quarter, compounding drastic declines in recent years.

Auto sales, which nearly hit $1 billion in the third quarter two years ago, were $321 million in the same period in 2009. Realty advertising, which topped $1 billion per quarter as recently as two years ago, declined to $358.6 million in the third quarter. It will take a long time for either vertical to return to its former strength, assuming they ever will.

Recruitment advertising, which surpassed $2 billion per quarter at the peak of the Internet bubble in 2000, all but dried up in the third quarter of this year, falling nearly 64.7% to a mere $175 million. Employment advertising is not simply at its lowest point in history, it is all but gone.

For those few of us who obsess on this stuff, the fusillade of ugly stats has taken on the feel of waves of body bags returning from Southeast Asia in the 1970s.  It’s both sickening and desensitizing.   But stepping back, here’s a way of thinking about these numbers in a broad-rushstroke sort of way.

At its peak, the newspaper industry probably had $15-18 billion in operating profits (30% of $55-60 billion in revenue).  The NAA numbers show the likely permanent disappearance  (due to the advent of cheaper substitutes, not merely “the uber-culpable “broader economic conditions” which the NAA is so fond of scapegoating) of about $10 billion in what were essentially pure profit dollars–60% + of peak industry profitability, before one even considers the slides in display and circulation revenues.

It’s oversimplifying the case a little, but it’s close enough:  $10 billion in newspaper classified ads has been replaced by less than $100 million in Craigslist revenue.  Last time I checked, 97 of the top 100 online classified sites belonged to the Craigslist newtwork.

So start with a very capital-intensive industry which is capped at mid teens operating profits percentage, and then consider two macro trends:  (1) for every buck in display advertising that disappears in print, something less than a dime comes back online; and (2) sightings of faithful newspaper readers born after the inauguration of a certain Georgia peanut farmer are about as rare as credible video footage of Sasquatch hitting golf balls in the Big Thicket.

But, I digress.  The classified franchise was  exceedingly valuable to newspapers because classified readers were the portion of the newspaper audience closest to actually transacting.  And especially in an absence of alternatives, the effectiveness of a newspaper want ad was was ultra-measurable:  whether you were advertising a used Toro or the Deputy Assistant Vice Presidency of the Southwest Iowa Region, you knew precisely how many people had responded to your ad.  Unlike legendary retailer John Wanamaker near the turn of the twentieth century, you knew damn good and well whether your advertising dollar was well spent:  it was close to the transaction, and its return was imminently measurable.

Today, we call those lead generation businesses.  And newspapers are simply not well positioned to be in the lead gen business.  If you want to see what well positioned looks like, check out the S-1 on file for Quin Street,  run by my business school classmate Doug Valenti and a competitor to AV-owned All-Star Directories (as always, I must remind that I speak only for myself, and not for AV,ASD, The Texas Tribune, or anybody else).

If mucking around SEC filings isn’t your thing, I’ll let you in on a secret:  Doug is laser-focused on matching big communities of buyers with sophisticated and price-sensitive populations of sellers.  The future of journalism?  Meh.  Not so much.  Ditto the teams at Sawbuck Realty and Responselogix.  Even though both are the beneficiaries of investments from A.H. Belo–and even thought the latter is run by an ex-Knight Ridder exec–neither company could spell journalism if you spotted them the consonants.  It’s simply not their raison d’etre.   They are all about creating liquid markets of buyers and sellers, period.

For a while, I was walking around saying that Wanamaker was right:  half of his ad spend was wasted.  Now, I’ve begun saying that he was wrong:  he was wasting a lot more than that.  And most of it he was spending with newspapers.  So this is what I mean when I say that public service journalism is is a public good.  And as such, it’s too important to be left exclusively to market forces.  Nothing I’ve seen in the data suggests that investment capital will strike a love match with the newspaper industry when investment capital does what it does naturally, which is to seek the highest risk-adjusted returns.     If you believe, as I do, in the importance of public service journalism, you simply have to examine non-market alternatives for producing it.  Call it Wanamaker’s Revenge.

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