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Newspaper Publishing: Equipment Values Hit Hard by Shift to Digital Media

By: AccuVal Associates, Inc.

Generations have relied on printed newspapers to keep up to date on the world around them. However, during the past decade, there has been a noticeable and rapid transition from printed news circulation to electronic consumption of information. More people now turn to the Internet than newspapers as their source for news.

This shift has been so swift because consumers increasingly desire more real time, on-demand and personalized information. Many are showing an interest in interacting with the content by posting comments or sharing stories with social networks as well. Electronic media outlets are well positioned to meet these wants by converging content online, but the newspaper industry has struggled to keep pace.

Newspaper circulation falling

Since 1994, total newspaper circulation has been on the decline in the United States. But in 2004, the impact of electronic media options began to really show. The pace of decline began to accelerate. In 2009, the last year the Editor and Publisher International Yearbook reported data, total paid circulation was at its lowest numbers ever, dropping 6% in 2009 alone.

The major players in the newspaper publishing industry are Gannett Co. Inc. (13.3 percent), Tribune Company (8.0 percent) and The New York Times Company (6.5 percent). All others, including regional and local, represent 72.2 percent of the 2011 marketplace. Overall market share concentration is low with the top four players expected to account for about 33 percent of industry revenue in 2011.

The top 50 newspapers account for about one-third of total circulation, and a select handful have national print readership of one million or more including the Wall Street Journal, USA Today and The New York Times. Of the top 20 U.S. daily newspapers by circulation, nearly half registered a double-digit decline when comparing similar six-month periods at March 2010 and March 2009.

Newspaper revenue still in decline

The Pew Research Center's 2011 State of the News Media reported that the percentage of audience looking online for news increased 17.1 percent from 2009 to 2010. During the same timeframe, every other platform including local television, network, newspaper, audio, magazines and cable saw audiences shrink. However, most media outlets were still able to increase revenues by making changes to their business models. Only newspapers, fraught with structural economic challenges, saw continued revenue declines.

The newsprint industry derives about 84 percent of its revenue from advertising. The Newspaper Association of America (NAA) reports that advertising revenue fell from a high of $46.6 billion in 2006 to just $22.8 billion in 2010, illustrating an astonishing annualized decline of some 16.4 percent.

While newsprint advertising revenue has declined, the demand for digital advertising is on the rise, but not enough to stabilize the industry. The initial decline began in 2001 during the time of the dotcom bust and economic recession. In addition, the most recent economic recession further impacted business conditions, thereby reducing the amount of advertiser spending in all arenas, leading to job losses and related domino effects.

Research studies conclude that wealthy and educated audiences are far more inclined to maintain their thirst for news in printed format. Estimates are that although far less than 50% of adults read newsprint on a daily basis in 2010, 84% of the college-educated and 82% of adults with a $100,000 plus household income are daily newsprint subscribers. This trend provides a motivating factor to advertisers as incentive to invest in print. Even so, as newspapers overall are expected to decline in number by closure, the remaining publishers will experience an influx of readers and advertisers through consolidation.

Capital investments losing value

The barriers to entry in the newspaper publishing industry segment are high which are reflective of the startup costs associated with the hiring of journalists, in distribution and marketing and in the acquisition of capital equipment such as printing presses and mailroom equipment.

The fixed assets that comprise a typical newspaper print facility include:

• A web fed offset printing press;
• Prepress equipment such as platesetter/imagesetter and register punching/bending systems;
• Bundling/distribution equipment including storage/retrieval system, inserters, stackers, packaging machines and conveyors; and
• A full complement of infrastructure and support equipment in the form of ink storage and delivery system, water purification system, compressed air equipment, boilers and IT equipment.

The above equipment is comprised of assets that vary greatly when considering useful life estimates and the related degree of depreciation and obsolescence, whether those are technological or functional. Prepress and IT assets would certainly be subject to more rapid value depreciation due to inherent changes in technology as compared to certain other infrastructure and support equipment, such as air compressors, HVAC or boilers. Likewise, certain assets (i.e.: printing presses) are less prone to rapid depreciation due to functional obsolescence but are very installation-intensive and therefore present challenges when considered for resale and removal from their initial place of use. Special foundation work, building improvements and piping are all part of the high cost of initial investment in such a facility. Other assets are either portable or easily installed and can be moved within a facility or removed and reinstalled at another.

In conjunction with the recent five-year decline in newspaper publishing and plant activity there currently is over-capacity in the industry and in general underutilization of these assets. A number of related bankruptcies during this period have also contributed to industry woes. This inutility has resulted in a marked slowdown in new equipment sales and an oversupply of used equipment, some of which cannot be absorbed into the marketplace. Late model assets, especially those that can be readily removed from the floor, are more desirable, while older and more installation-intensive assets are far less desirable when considered for resale.

Continued consolidation internally among publishers and their newspaper plants will result in further plant closures which will prolong the ongoing decline in the potential for equipment sales. It is common knowledge that certain publishers have made large capital expenditures in fixed assets that were never deployed for use. There have been a number of other unrelated industries and/or industry segments that have suffered a similar circumstance over the prior two decades only to rebound upon the removal of this oversupply of equipment in the marketplace.

Content syndication providing hope

In response to these numerous pressing issues, the newspaper publishing industry has focused on syndication as a means of producing revenue to combat diminishing readership audience. In doing so, prime news wire agencies have benefitted from major newspaper publishing companies purchasing their articles, some in exchange for adding content to these syndication networks. Syndication permits the industry to reduce employee headcount, eliminate redundant news coverage and enhance the real-time delivery of late breaking, newsworthy storylines.

Industry performance from the standpoint of profitability is and will continue to be at least partially dependent on the utilization of technology as publishers integrate newspaper websites with mobile devices. Investments previously made in capital equipment will continue to shift to building out virtual infrastructures.

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About AccuVal
AccuVal provides a broad range of valuation, advisory and asset management solutions that contribute to growth or help ensure survival. We appraise the business enterprise and shareholder equity; bonds; intangibles and intellectual property; machinery and equipment; inventory; real estate and accounts receivables in over 100 industries worldwide. Learn more at www.accuval.net.