Newspapers: Paywalls Aren’t the Answer

Last week, Gannett Co. (NYSE:GCI) CEO Gracia Matore tried to drum up investors’ interest in charging readers to access some content produced by its 82 newspapers, including The Des Moines Register.  She had little choice.

Shares of the Virginia-based company have plunged nearly 75% over the past five years as Wall Street lost hope that it will ever be able to successfully navigate the transformation from print to digital.

The company’s paywall, which would allow access to as many as 15 stories a month, depending on the market, is a small step in the right direction, though years too late. Gannett’s plan comes at a key juncture in the development of online media.

Newspapers are alive and well on the Internet. Data released by the Newspaper Association of America (NAA)  show that websites of newspapers averaged 111 million unique monthly visitors in the fourth quarter, up nearly 15% from a year earlier. Over 60% of adult Internet users visited newspaper sites and increased the amount of time spent on them — a key metric for advertisers because it ups the chance of their ads being noticed — by 14%, according to the NAA.

“News in printed form is in secular decline,” Matore was quoted as saying. “However, news delivered the way consumers want it is growing and thriving.”

The problems with paywalls are many — especially getting people to pay for something they’re  used to getting for free. As newspapers’ business model erodes, though, they have little choice but to give it a try. The days of free content for all on the Internet are numbered.

Interestingly, Gannett is not putting its biggest paper, USA Today, behind a paywall. Last year, USA Today reported its first gain in circulation revenue since 2008. Perhaps Matore was worried about ticking off readers of USA Today, many of whom get the paper delivered to them while they’re staying in hotels.

Digital is far from a magic bullet for the newspaper industry’s woes, however.

Gannett, for instance, generated $1.1 billion in digital revenue in 2011, an increase of 10.1%. from a year earlier. While those figures are impressive, they accounted for only 21% of total operating revenue. Overall, Gannett’s revenue fell 5.1%, to $1.39 billion, in the quarter as the company’s print business faltered. Gannett recently announced plans to lay off 2,000 workers.

It was the same with New York Times Co. (NYSE:NYT), where  a 5.3% surge in digital advertising revenues in the News Media Group in the fourth quarter could not overcome a 7.8% decline in print advertising revenues. Total digital advertising revenues decreased 4.9%, to $95.7 million, because of declines in the About Group.

Washington Post Co. (NYSE:WPO), which also recently announced job cuts, reported that online revenue decreased 8%, to $105.8 million, in the last quarter. McClatchy Co. (NYSE:MNI), whose papers include The Miami Heraldsaw an increase of 7.5% in digital-only sales in the fourth quarter, though overall revenue fell 5%, to $351.4 million.

Much of this growth in newspapers’ online businesses may be tied to the surging popularity of the iPad and other tablet computers, which can transform the reading experience by seamlessly merging text with other forms of media, such as photos and video. Tablets are paying off for publishers and will continue to grow in importance.

As of January, News Corp (NASDAQ:NWS.A) reports that its Wall Street Journal Digital Network had 1.3 million paid digital subscribers, averaging more than 50 million visitors per month. The app has had more than 11 million downloads on the iPad, iPhone, Android, and Windows.

The New York Times, which has one of the better iPad news apps, had 406,000 subscribers to all of its digital products as of the end of the fourth quarter. The Washington Post recently launched the Washington Post Politics app for the iPad. The app is free, but the Post is charging $2.99 a month for select content. CEO Donald Graham has been one of the few publishers to reject the idea of paywalls, even though his mentor, Warren Buffett, a longtime Post shareholder, endorses the idea.

Unfortunately for investors, newspapers were and will continue to be a print business for years, if not decades, to come. The growing digital business, while nice, is too small to overcome the industry’s print declines. So all the stocks discussed here should be avoided.

Jonathan Berr does not own shares of the companies listed here.

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