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Paper's plight is signal to industry: San Jose Mercury News' ad loss to Internet outlets is financial wake-up call.(Sacramento Bee, The (CA) (KRT) Via Thomson Dialog NewsEdge) Apr. 16--SAN JOSE - Needing to sell a used refrigerator three years ago, Ken Doctor, a former journalist working for San Jose newspaper chain Knight Ridder Inc.'s Internet division, tried a little experiment. He placed classified ads in Knight Ridder's San Jose Mercury News and two Web sites: the paper's own and an up-and-comer called Craigslist. The Craigslist posting brought the most responses, got the fridge sold - and provided a telling look at the Internet's impact on the media landscape. Today, Craigslist is an international phenomenon and the Mercury News is an orphan. Already zapped by the tech-industry implosion and a sluggish recovery, the paper is losing precious ad dollars to Craiglist, Monster.com and others. Although some of those dollars are flowing to Career Builder, an Internet operation partly owned by Knight Ridder, the paper is still struggling. Although it sits in one of the wealthiest regions of the country, the Mercury News is sufficiently troubled that The McClatchy Co. of Sacramento plans to sell the paper and 11 others it's acquiring through its pending takeover of Knight Ridder. McClatchy, publisher of The Bee, is keeping 20 other Knight Ridder papers. Mercury News executives say the paper can come back. Yet those who've witnessed its problems up close say the Mercury News may represent the proverbial canary in the coal mine - a paper whose troubles reflect challenges facing newspapers everywhere. Consumers are heading to the Web for news and advertising, taking dollars from newspapers in cities far beyond San Jose. "You'll see erosion in other cities," said Charlene Li, an analyst in Silicon Valley for tech consultant Forrester Research Inc. Newspaper executives insist the foundation isn't crumbling. McClatchy says buying Knight Ridder - a deal worth $4.3 billion, plus $2 billion in debt assumption - is a vote of confidence in an industry whose 18 percent profit margins are twice those of the average Fortune 500 company. McClatchy had margins of 23 percent and record earnings last year despite a soft second half. The company's earnings fell 14 percent in the first quarter. McClatchy says the papers it's keeping are better able to cope with competition - from the Internet and other sources - because of their high growth rates. While San Jose is largely built up and has relatively little room for growth, cities such as Fort Worth and Kansas City, whose papers are being kept, are adding population in droves. "The markets we're retaining have a leg up," said Gary Pruitt, McClatchy chairman and chief executive. "They are growing at a quicker rate, and with that economic growth comes more readers, more advertisers. The rising tide tends to lift all ships." Still, newspapers are struggling to meet Wall Street's raised expectations. The Mercury News' reported profit margin of 8 percent last year would have been quite respectable in the mid-1990s. Today it's a pittance. At the same time, investors fret about the industry's future. McClatchy's stock has fallen 11.7 percent since the Knight Ridder deal was announced, in part because investors are anxious about how successful McClatchy will be in selling the 12 papers. There are also fundamental concerns that newspapers are losing business to the Internet. "The metro newspaper challenge is the same everywhere," said Peter Appert, an investment analyst at Goldman Sachs. Newspapers say they can capture readers and advertisers as they migrate to the Internet. While print circulation is falling, online readership of newspapers' Web sites was up 21 percent last year, says the Newspaper Association of America. McClatchy's online ad sales grew 30 percent in the first quarter and accounted for about 6 percent of total revenue. A key asset it's buying from Knight Ridder is a one-third stake in Career Builder, a successful help-wanted Web site. Career Builder's other owners, Gannett Co. and Tribune Co., have the right to buy out that share, and the issue is unresolved. In the meantime, McClatchy is augmenting its Web sites by introducing search engines to link readers to local shopping information and news stories. "We want to deliver highly targeted local audiences to the advertiser," said Chris Hendricks, vice president for interactive media. In one of the bleakest segments of the business, McClatchy's auto ad revenue was down 18 percent in the first three months of this year. Analysts say the decline reflects a slump in auto sales as well as a movement of advertising to the Internet. While McClatchy captures some of that revenue, through its Web site and its part ownership of national Internet site Cars.com, the challenge is considerable. Overall, classified ads are a huge area of concern for newspapers. They are a big profit stream but are tailor-made for the Web with their "searchable" text, Appert said. Classified ad revenue has dropped 11 percent industrywide since 2000, says the Newspaper Association of America. Newspapers' Web sites run classifieds. But market research that Doctor, an independent consultant, conducted for Outsell Inc. of Burlingame suggests consumers are more likely to turn to sites like Yahoo and Google when they're shopping. What's happening in San Jose "is an important early warning sign for publishers across the country," Doctor said. For newspapers, the most troublesome rival may be Craigslist, founded by a San Francisco computer engineer named Craig Newmark. Except for help-wanted ads in San Francisco, New York and Los Angeles, Craigslist doesn't charge for listings. It runs 8 million classifieds a month, from Anchorage to Auckland. And while a fifth of its business comes from the Bay Area, CEO Jim Buckmaster said other cities are coming on strong. He said Craigslist is being scapegoated for newspapers' woes. "It's not like newspapers are losing money," he said. In the late 1990s, when Silicon Valley was booming, the Mercury News' operating profits surpassed $100 million a year, according to an estimate by Morgan Stanley. When the tech bubble burst, one key revenue category at the paper collapsed: Help-wanted ads fell from $118 million in 2000 to $18 million in 2003. "There was almost a direct correlation between the loss of jobs at Intel and the loss of a full-page ad for programmers," said Publisher George Riggs. Morgan Stanley said the paper earned $18.8 million last year. Help-wanted ads are trickling back, reaching $23 million last year. But the job market is tough, and the ad climate tougher. "The bounce-back has been impacted by competition from Monster, from Hotjobs, from all the other different sources, Craigslist," Riggs said. Yet he said the paper is recovering. After dropping 15 percent, circulation has stabilized, he said. So has total ad revenue. The paper has had encouraging success with niche products, including a Spanish-language publication and a group of free daily papers in the suburbs. Riggs said McClatchy is making a mistake selling the Mercury News. "I don't agree with it, but I respect it," he said. The sale has become a touchy issue. Knight Ridder CEO Tony Ridder, a former Mercury News publisher, told the newspaper that he learned of McClatchy's decision at the last minute. Pruitt said "we did our best to be forthright with Knight Ridder about divestitures." Around here, people are still digesting the decision. Economists wonder why Silicon Valley is lumped in with Rust Belt cities such as Akron, Ohio, and Fort Wayne, Ind., where papers are also being sold. "It struck me as odd," said Stephen Levy of Palo Alto's Center for Continuing Study of the California Economy. He said the valley is an above-average growth market. Journalists fear the paper will be sold to MediaNews Group Inc., a Denver chain with a reputation for slashing costs. At a recent San Jose symposium on the future of newspapers titled "Who Needs Ink?" employees handed out leaflets for a Web site called SaveTheMerc.com. But the fate of the Mercury News generates little interest among the tech elite, many of whom get their news from the Internet, said Paul Saffo, director of the Institute for the Future think tank in Palo Alto. "Among the inside tech crowd, so much is being done on blogs and electronically," he said. "It's fundamentally different than if (the paper's sale) had happened 10 years ago." |