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Stop the Presses? Not So Fast

By Scott Kessler Are newspapers going the way of the dinosaurs? Advertising growth has been anemic (we at Standard & Poor's expect it to lag real gross domestic product in 2005). Subscriptions have been declining. Competition from other media, particularly the Internet, is substantial and growing. Input costs for paper and ink are quite high -- and rising. Employee-related expenses are also climbing.

In fact, over just the past week or so, Standard & Poor's Equity Research cut earnings estimates for three of the country's largest newspaper companies: Gannett (GCI

; S&P investment rank 4 STARS, buy; recent price, $74), Knight-Ridder (KRI

; 3 STARS, hold; $63), and New York Times Co. (NYT

; 3 STARS; $32).

In contrast, online advertising revenues rose 26% in the first quarter, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. Segment bellwethers Google (GOOG

; 3 STARS; $289) and Yahoo! (YHOO

; 4 STARS; $37) each outpaced this strong growth. Moreover, Web businesses are largely unaffected by commodity prices and don't have legacy pension obligations.

THE YEAR IN PRINT. On June 21, we raised our projections for ValueClick's (VCLK

; 3 STARS; $11) 2005 revenues and EPS, reflecting the company's more optimistic second-half outlook for its online marketing services businesses. ValueClick provides a variety of Internet advertising and marketing services.

Thus, it isn't surprising to us that most of the major newspaper companies have taken notable steps this year, primarily related to acquisitions, to bolster their Internet offerings. Here's a recap, by month:


Dow Jones (DJ

; 2 STARS, sell; $35) bought MarketWatch in January, 2005, in a transaction valued at some $538 million. MarketWatch is a leading online provider of business news and financial information.

Washington Post Co. (WPO

; 2 STARS; $854) acquired Slate, an online magazine founded by Microsoft (MSFT) in 1996. The price hasn't been disclosed, but unconfirmed estimates have been as high as $10 million.


Gannett, Knight-Ridder, and Tribune (TRB

; 3 STARS; $37) jointly acquired 75% of, a leading news content-aggregation service, valuing the company at roughly $64 million.

New York Times purchased, a provider of consumer information on a variety of topics, for $410 million.


Pearson (PSO

; not ranked; $12), publisher of the Financial Times, announced an alliance with Audible (ADBL

; 5 STARS, strong buy; $18) to deliver innovative learning products to the higher education market. Audible is a leading provider of digitally delivered spoken-word audio content via the Internet (see BW Online, 6/21/05, "The Sweet Sounds from Audible").


EW Scripps (SSP

; 3 STARS; $50) announced the proposed acquisition of Shopzilla (formerly, a leading Internet comparison-shopping service, for $525 million. We expect this transaction to be consummated this summer, pending necessary approvals.

Gannett acquired PointRoll, a rich-media marketing company. Unconfirmed reports indicate the deal valued PointRoll at some $100 million.

STRENGTHENING POSITIONS. After reviewing the deals listed above, I found it notable that all of them were for cash, not stock. This indicates to me that the acquirees were more comfortable accepting hard currency, rather than shares of companies in the troubled newspaper business.

S&P believes considerable concerns hang over the newspaper business, and its companies are spending a lot of money on acquisitions as a result. But, in our view, there are many ways these outfits could enhance their competitive position and growth prospects in the online world, without necessarily making big purchases of third parties. Here's how:

Embolden the brand. Newspapers have recognized and trusted brands. Their household names should be used to drive readers online. We think traditional media promotions for online offerings are being underutilized. Internet properties could also stimulate interest in the newspapers themselves. Partnerships (around content, distribution, or marketing, for example) are also a cost-effective way to promote Internet brands. Content alliances could enable newspaper Web sites to become more like portals, fulfilling a variety of user interests and garnering greater related usage.

Leverage existing relationships. Newspapers have direct relationships with millions of consumers. In many cases, they have specific, and thus useful customer information that could be employed for successful Net efforts. Newspaper companies could also invest more in developing and empowering online communities that could be the basis of differentiated content and engender greater loyalty.

Enhance customer focus. The Web is an excellent platform for interacting with customers. Customer self-service is a significant opportunity, in our view. Users would have easy and convenient access to service options at a significantly lower cost to the newspaper concerns. Moreover, newspapers could use the Internet to solicit feedback on current offerings and suggestions for new enhancements or services.

Unlock content value. People want information, and newspapers have been successfully fulfilling this demand for more than a century. They provide compelling content, but we think it isn't being leveraged to its full extent. Many newspapers are giving away all of their online content for free, and we think greater associated discipline is probably appropriate. Charging for access to premium content and archives of stories, photos, and even front pages is a possibility.

We think new distribution formats, such as spoken-word audio, have potential. In addition, new types of content are being created in the Web world. Blogs and podcasts are a good way to reach a younger audience and can generate advertising revenues, in our view. Real-time chats with writers and other special events could be made exclusively available online.

I'm not an expert on the newspaper business, but I think its companies have more assets and opportunities than people realize. S&P expects newspaper concerns to continue acquiring Net companies, and many are taking steps like those listed above. However, we also believe newspapers have brands, customers, and content that could be used more effectively to drive more online traffic and revenues. Additionally, in our view, new types of content, services, and distribution, specific to the Internet, constitute a notable opportunity.


S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.

S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:










Above Average


In Reorganization




Not Ranked


Below Average

S&P Issuer Credit Rating: A Standard & Poor's Issuer Credit Rating is a current opinion of an obligor's overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor's capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. The Issuer Credit Rating is not a recommendation to purchase, sell, or hold a financial obligation issued by an obligor, as it does not comment on market price or suitability for a particular investor. Issuer Credit Ratings are based on current information furnished by obligors or obtained by Standard & Poor's from other sources it considers reliable. Standard & Poor's does not perform an audit in connection with any Issuer Credit Rating and may, on occasion, rely on unaudited financial information. Issuer Credit Ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.

S&P Core Earnings: Standard & Poor's Core Earnings is a uniform methodology for calculating operating earnings, and focuses on a company's after-tax earnings generated from its principal businesses. Included in the Standard & Poor's definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

S&P 12 Month Target Price: The S&P equity analyst's projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics.

Standard & Poor's Equity Research Services: Standard & Poor's Equity Research Services U.S. includes Standard & Poor's Investment Advisory Services LLC; Standard & Poor's Equity Research Services Europe includes Standard & Poor's LLC- London and Standard & Poor's AB (Sweden); Standard & Poor's Equity Research Services Asia includes Standard & Poor's LLC's offices in Hong Kong, Singapore and Tokyo.

Required Disclosures

In the U.S.

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.8% of issuers with buy recommendations, 56.7% with hold recommendations and 12.5% with sell recommendations.

In Europe

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 29.2% of issuers with buy recommendations, 50.5% with hold recommendations and 20.3% with sell recommendations.

In Asia

As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 34.3% of issuers with buy recommendations, 48.0% with hold recommendations and 17.7% with sell recommendations.


As of March 31, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.2% with hold recommendations and 13.8% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.

For All Regions:

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, NY, NY.

Other Disclosures

This report has been prepared and issued by Standard & Poor's and/or one of its affiliates. In the United States, research reports are prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"). In the United States, research reports are issued by Standard & Poor's ("S&P"), in the United Kingdom by Standard & Poor's LLC ("S&P LLC"), which is authorized and regulated by the Financial Services Authority; in Hong Kong by Standard & Poor's LLC which is regulated by the Hong Kong Securities Futures Commission, in Singapore by Standard & Poor's LLC, which is regulated by the Monetary Authority of Singapore; in Japan by Standard & Poor's LLC, which is regulated by the Kanto Financial Bureau; and in Sweden by Standard & Poor's AB ("S&P AB").

The research and analytical services performed by SPIAS, S&P LLC and S&P AB are each conducted separately from any other analytical activity of Standard & Poor's.


This material is based upon information that Standard & Poor's considers to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued by S&P LLC-Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P LLC nor S&P guarantees the accuracy of the translation. Assumptions, opinions and estimates constitute Standard & Poor's judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

For residents of the U.K.: This report is only directed at and should only be relied on by persons outside of the United Kingdom or persons who are inside the United Kingdom and who have professional experience in matters relating to investments or who are high net worth persons, as defined in Article 19(5) or Article 49(2) (a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001, respectively.

Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Kessler is director of information-technology equity research at Standard & Poor's

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