McClatchy, New York Times Hit as Housing Moves to Web
By Tim Mullaney
Richard Smith, president of Realogy Corp. July 18 (Bloomberg) -- Richard A. Smith knows something anyone considering buying a newspaper company needs to know. He's taking his advertising dollars somewhere else.
Smith, president of Realogy Corp., the largest residential real estate broker in the U.S., said the portion of his Coldwell Banker and Century 21 branding budget devoted to newspapers will shrink by as much as two-thirds next year from 2006 as spending moves online. Newspapers will receive 70 percent of Realogy's home-sale advertising by 2010, down from 84 percent this year.
The shift, echoed by executives at Berkshire Hathaway Inc.'s HomeServices of America Inc., the second-largest broker, is a sign that real estate advertising won't recover fully from its slump when the housing market rebounds. Newspaper officials such as McClatchy Co.'s Gary Pruitt are mistaken in predicting a comeback, Smith said.
``It's going to be bloody,'' Smith said in an interview. ``The newspaper industry is going to have to adjust.''
A 14 percent decline in spending on real estate ads in the first quarter accelerated in the second period, estimated media consultants Borrell Associates in Norfolk, Virginia.
Newspapers' real estate ads will drop by more than one- third by 2011, while online housing ads will rise 60 percent and overtake print for the first time, Borrell predicted.
Sales Decline
The collapse is especially significant because home-sale ads propped up newspapers last year, after automotive and employment spending declined. Real estate accounted for $5.16 billion, or 30 percent of all classified spending at newspapers, where overall advertising totaled $46.6 billion in 2006, according to the Newspaper Association of America.
``Two billion dollars a year is going to come out of newspapers,'' said analyst Matt Booth at Kelsey Group in Pasadena, California. ``It's going to be tough to make that up.''
Gannett Co. kicked off second-quarter results from newspaper publishers today, reporting an 18 percent increase in profit to $365.7 million, helped by a gain from the sale of newspapers. Sales fell 3.4 percent to $1.93 billion. Real estate-related revenue fell 9.9 percent.
Shares of McLean, Virginia-based Gannett, publisher of USA Today, fell $1.36, or 2.5 percent, to $53.49 at 4:03 p.m. in New York Stock Exchange composite trading. They have fallen 12 percent this year.
McClatchy, owner of the Miami Herald, reports tomorrow and has tumbled 39 percent this year, including today's decline of $1.53, or 5.5 percent, to $26.28, its biggest drop in more than a year.
`Sell' Rating
Goldman Sachs Group Inc. this month recommended investors sell shares of McClatchy, based in Sacramento, California, and of New York Times Co., the third-largest newspaper publisher, which are ``particularly vulnerable'' to industry changes.
Through May, real estate advertising fell 16 percent at New York Times. Classifieds, which made up about 28 percent of newspaper ad revenue, fell 12 percent to $229.8 million.
The New York-based publisher started July with linage-count drops of more than 10 percent in help wanted and real estate, New York-based Wachovia Securities analyst John Janedis wrote in a July 16 note. Department-store advertising, technology and telecommunications ad linage each fell 20 percent or more, he estimated.
The New York Times is trying to capture more real estate advertising on its Web sites, Chief Executive Officer Janet Robinson said at an NAA conference in New York in June.
``Real estate is going through a down cycle and we're up against very strong comparisons,'' Robinson, 58, said. ``The major culprit is Sarasota'' in Florida.
Cyclical or Secular?
Newspaper executives say the drop in real estate ads is cyclical, concentrated in states where housing markets have slowed the most. Gannett, whose largest metropolitan daily is the Arizona Republic in Phoenix, said Arizona, California, Nevada and Florida newspapers are losing such ads more than twice as fast as the rest of the chain.
``It's not our business model people have a problem with,'' Gannett Newspaper Division President Sue Clark-Johnson said at the NAA conference. ``It's their own -- and it's the economy.''
The California and Florida markets will come back for McClatchy, Pruitt, 50, said at the same conference.
Brokerage executives differ, saying they will shift money to the Internet permanently because advertising is less costly and the Web offers consumers more information.
``Older sellers say, `I bought this house through the papers so I want to sell it in the paper,''' said Stephen Baird, president of Baird & Warner, Chicago's largest independent broker. ``When today's buyer sells the same house in five years, the paper will be irrelevant to them.''
Ripple Effect
Newspapers already have taken a bigger share of spending cuts than other media. At HomeServices' Esslinger-Wooten-Maxwell Realtors Inc. in Miami, President Ron Shuffield has cut newspaper advertising by 29 percent this year, faster than a 9 percent drop in overall marketing.
``If the market turned up, I wouldn't give the same percentage to print,'' Shuffield said. ``You don't want to advertise on a stone tablet if everyone has moved on to the Gutenberg press.''
An advertising slump at Tribune Co., including a drop in home-sale classifieds, has led to investor concern that the company's $8.2 billion buyout led by real estate billionaire Sam Zell won't be completed.
Home-sale advertisements fell 30 percent in May at Tribune's newspapers, the company said June 20. Overall sales at its biggest, the Los Angeles Times, fell 10 percent in the second quarter and cash flow slid 27 percent, Publisher David Hiller wrote in a July 13 memo.
Tribune, Dow Jones
Tribune shares climbed 10 cents to $29.83 in New York Stock Exchange composite trading. They are 12 percent below the $34 a share offer, indicating investor skepticism the sale will close.
Real estate advertising is likely less of a factor at Dow Jones & Co., owner of the Wall Street Journal, than at some of its rivals. ``Classified and other'' advertising volume at the newspaper slipped 3.5 percent this year through May, while at the Ottaway chain of local publications revenue in the same category dropped 11 percent.
The Journal, the second-largest U.S. newspaper by circulation, doesn't disclose what percentage of its revenue comes from real estate. Dow Jones said yesterday its board is prepared to accept a $5 billion takeover bid from Rupert Murdoch's News Corp., putting the fate of the deal in the hands of the controlling Bancroft family.
Dow Jones, based in New York, competes with Bloomberg LP in providing financial news and information.
Big Changes
At Parsippany, New Jersey-based Realogy, owned by Apollo Management LP, Smith is advertising on Web sites such as Move Inc.'s Realtor.com and at the company's sites for Coldwell Banker and Century 21. The amounts moved out of newspapers total tens of millions of dollars each for branding ads and for ads listing specific homes, said Realogy spokesman Mark Panus.
``I wish he would do it because I'd follow him,'' Baird, Smith's competitor in Chicago, said.
The sharpest change to date has occurred at Minneapolis- based HomeServices of America, owner of 20 real estate brokerages including Esslinger-Wooten-Maxwell and the biggest realty firm in Minnesota, Edina Realty.
Edina cut its newspaper budget 75 percent this year by eliminating listings of its open houses. Instead of five pages in two daily newspapers, the Minneapolis Star-Tribune and the St. Paul Pioneer Press, each Sunday, Edina runs a half-page ad or less in each. The ads point readers to Edina's Web site.
Wider Experiment
``After we pulled our ads in January, all the brokers in town followed suit,'' said Lynn Clare, Edina's vice president of marketing.
HomeServices plans to expand the Minnesota experiment to Phoenix, San Diego and Des Moines, Iowa, said CEO Ron Peltier.
``We want all of our companies to be where Edina is,'' Peltier said. Newspaper ad spending will be ``probably 30 to 40 percent of what we're spending now.''
McClatchy sold the Star Tribune to New York-based Avista Capital Partners in December for $530 million, and sold the Pioneer Press to Denver-based MediaNews Group.
Pruitt, who is McClatchy's CEO, said he knew Edina was considering the changes when he decided to sell the newspapers, while declining to say whether they were a factor in the sales.
``I knew there was discussion about real estate in general,'' Pruitt said in an interview, ``and that it was a possibility.''
To contact the reporter on this story: Tim Mullaney in New York at Tmullaney1@bloomberg.net .
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