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July 18, 2007

The Oregonian ad sales in freefall

The downturn in the newspaper industry is getting worse. Last fall, newspaper executives and analysts were caught by surprise by the severity of a slump that took hold last summer. Since the beginning of this year, the rate of decline in advertising revenue has accelerated. Total print and online ad revenue was down 4.8% to $10.6 billion in the first quarter from a year earlier, according to the Newspaper Association of America, compared with its full-year decline in 2006 of 0.3%.

The rate of decline in newspaper advertising revenue has accelerated since the beginning of the year. Competition from the Internet and other media has transformed the market. In addition, real-estate classifieds have plunged along with the property market. The decline, which has sent newspaper stocks into a tailspin, has prompted restructuring and consolidation, and has affected Dow Jones's talks with News Corp. and the auction of Tribune Co.

Publishers have reported sharply lower ad revenue for April and May. The depth of the downturn is expected to become clearer as many companies report second-quarter earnings in coming days. Gannett Co. plans to report today, and Dow Jones, publisher of The Wall Street Journal, and McClatchy Co. tomorrow.

In the first quarter, revenue for every major ad category -- classified, national and retail advertising -- was down. The sharpest declines were for classifieds, where spending dropped 13.2% -- not so much a result of competition from the Web as of economic woes affecting certain categories of advertisers. Real-estate classifieds, until recently a bright spot for the industry, have plunged along with the property market. Auto and employment classifieds are also sinking. Financial-news outlets such as the Journal are being hurt by a slump in technology advertising.

"Right now, you've got a perfect storm," says Edward Atorino, an analyst with financial broker Benchmark Co. He predicts total ad revenue will fall 4.3% this year. The decline will be one of the steepest in history.

The newspaper industry has been suffering from slow growth for years, of course, after decades of declining readership. In the past couple of years, though, competition from the Internet -- big portals as well as free-classified Web sites such as Craigslist -- and other media has transformed anemic growth into slipping revenue.

The decline, which has sent newspaper stocks into a tailspin, has prompted restructuring and consolidation.

Publishers are putting initiatives in place to generate a larger portion of ad dollars through the Web. Still, analysts say that growth in Web revenue is beginning to slow and isn't enough to offset the decline in print.

Newspapers' online ad revenue increased 31.5% in 2006 to $2.7 billion. In the first quarter of 2007, online ad revenue increased 22.3% to $750 million. Still, online represented just 5% of the $49.3 billion in total newspaper ad revenue in 2006.

The industry outlook has colored both Dow Jones's discussions with News Corp. and the auction of Tribune Co., which decided to go private in a buyout backed by real-estate magnate Sam Zell.

The Bancroft family, Dow Jones's controlling shareholder, remains sharply divided on the wisdom of a sale, although Dow Jones negotiators reached a tentative pact with News Corp. on Monday. A major factor likely to affect the family's thinking, as it ponders the deal in coming days, is how Dow Jones would fare given the industry's gradual slide. If the family votes against the deal, it could face hurdles finding a new buyer in a world where ad dollars continue to decline.

The worsening slump has already raised questions about Tribune's ability to complete its buyout. The publisher is taking on a heavy amount of debt to go private, and some on Wall Street question whether the company will still be able to afford the extra borrowings. Tribune is among the hardest hit; its ad revenue dropped 11.8% in May.

"Our going-private transaction is on track, and the financing for it is fully committed. We anticipate closing the transaction in the fourth quarter, following FCC [Federal Communications Commission] approval, and expect to be in full compliance with our credit agreements," says Tribune spokesman Gary Weitman.

Few have escaped unscathed. Gannett, which publishes 85 daily newspapers, including USA Today, said its newspaper ad revenue dropped 6.8% in May. Ad revenue at New York Times Co.'s News Media unit -- which includes advertising generated at its media properties, but not About.com -- dropped 9.9% in May. At McClatchy, which publishes 31 dailies, ad revenue in May dropped 11.5% to $153 million. Ad spending at The Wall Street Journal was down 3.4% in May.

The Journal is being hit by an ad cutback at technology companies. But for most publishers, one of the biggest factors behind the latest slump is the real-estate market. Until recently, the booming property market had kept real-estate classifieds growing, softening the impact of lower ad revenue elsewhere. But with the market stalled, advertising is plummeting.