2012 OutlookBack to News

By: John Janedis, Analyst, UBS Securities LLC

After significant improvement in print ad growth trends from 2009 to 2010, the recovery appears to have stalled in 2011, with combined print & online ad growth declining approximately 7% for the year. We think 2012 will be another challenging year for newspaper companies, and we forecast total industry advertising to decline 5.7%. Ongoing challenges for the print business in 2012 include: 1) slowing overall U.S. ad growth as marketer’s budgets as a percentage of revenue have normalized; 2) a declining share of total advertising dollars; 3) an increase of web-based news sources; and 4) a successful transition to monetizing online content. On a more positive note, circulation trends appear to be improving and lower newsprint expenses should help support industry margins. The extent of the print ad recovery this year will be highly correlated to the health of the housing market and related industries.

Our print advertising model assumes relatively stable declines throughout the year; and we forecast national print ad dollars to fall 8%, local/retail to decline 7%, and classifieds to decline 7.8% in 2012. Within the classifieds category we forecast autos to decline 8%, real estate to decline 11%, help wanted to decline 9%, and ‘other’ classifieds to decline 6%. We think the shift of classified dollars moving from print to online will continue, though at a slower pace than in previous years. Print help wanted ad dollars have fallen more than 80% since 2003 and over the same time period, Internet’s share of help wanted advertising has increased to ~75%, from 19%. We estimate online help wanted revenues will increase 3% in 2012. In total, we expect online advertising to post 5% growth, print only to decline 7.4%, translating to combined industry revenue declines of 5.7%.

UBS forecasts total U.S. advertising to increase 4.2% in 2012 mainly buoyed by political/Olympic spend and growth in online advertising (we estimate total Internet advertising to increase 16% in 2012). We estimate print’s share of the U.S. advertising will decline to 11% in 2012, down from its 26% share in 2000. Over the same period, print advertising dollars have fallen over 50% to an estimated $22.66B in 2012.

Meanwhile, we estimate Internet’s share of advertising dollars will be 18% in 2012 from 4% in 2000. (See charts, next page.) However, we expect share losses to moderate going forward, as the erosion of classifieds has been the driver of share losses compared to the relative stability of local/retail advertising. National advertising and preprints will be a wildcard this year, given recent commentary from advertisers.

It is our belief that smaller market newspapers will be challenged to successfully implement paywalls in 2012. While The New York Times metered paywall has helped increase circulation revenue, its impact on digital ad revenues is less clear. In the smaller markets, it’s unclear if there’s an appetite from users to pay for news content online on a wide scale basis. The next twelve months will likely provide a lot of answers on the future of paywalls and the direction of the industry.