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The New York Times Company (NYT), The Washington Post Company (WPO): It’s Time to Recycle These Two Newspaper Stocks

The New York Times Company (NYT)It’s no secret that the newspaper industry is tattered and torn. Newspaper businesses, namely The New York Times Company (NYSE:NYT) and The Washington Post Company (NYSE:WPO), have devolved from market dominating heavyweights to battered and bruised flyweights over the past decade. As the Internet has steadily made freely distributed, ad-supported news articles the industry standard, content mills such as Demand Media have made recycling old news into new stories a very profitable business.

Now that both the Times and the Post have reported dismal first quarter earnings, what lies ahead for the industry that edges closer to obscurity? Can these old newspapers finally catch up with the times and prove to their shareholders that not all is lost?

Heading toward the recycling bin

During its first quarter, The New York Times Company (NYSE:NYT) earned a meager $3.1 million, a 93% plunge from the $42.1 million it reported in the prior year quarter. Meanwhile, The Washington Post Company (NYSE:WPO) reported that it earned $4.7 million, an 85% decline from the $31 million, it earned a year ago.

The top line at both companies also failed to hold up. Revenue at The New York Times declined 2% year-on-year to $465.9 million. The Washington Post reported a 4% decline to $127.3 million at its newspaper division, which was exacerbated by a 3% drop in $527.8 million in its larger educational division, Kaplan.

If both these companies continue their steep declines, then I believe that both companies will be deep in the red by the first quarter of 2014. There simply isn’t a market for print advertising in newspapers.

The New York Times Company (NYSE:NYT) and its other two brands, The Boston Globe and The International Herald Tribune, reported a combined average 13.3% decline in print advertising, which contributed to a total advertising revenue decline of 11.2% to $191.2 million. Meanwhile, The Post reported an 8% decline in print advertising revenue to $48.6 million.

Print circulation of the daily The New York Times Company (NYSE:NYT) declined 6.2% to 731,400, and its Sunday edition slid 0.9% to 1,254,500 copies. The Washington Post Company (NYSE:WPO) fared even worse, with its daily circulation dropping 7.2% to 457,100 copies as its Sunday edition declined 7.7% to 659,500.

In other words, fewer readers want to read a print newspaper anymore, sending the print businesses at both companies straight to the recycling bin.

To stay afloat, The New York Times Company (NYSE:NYT) has stated that it intends to sell The Boston Globe to downsize its operations further. The Washington Post Company (NYSE:WPO), which is still propped up by its education business and a small stake in cable broadcasting, can hold out for a while longer, but those segments are either shrinking or too small to save the ailing company.

Cashing in on the Internet a decade too late

The main beacon of hope for both companies is growth in digital circulation. At The New York Times and its European version, The International Herald Tribune, digital circulation rose 49% to 676,000. Digital subscriptions at The Boston Globe rose 50% to 32,000. The Washington Post reported a 41% gain in daily digital circulation to 1,097,500.

Although those percentages look impressive, the actual numbers are mediocre. By comparison, Yahoo! Inc. (NASDAQ:YHOO)’s portal homepage, often regarded as the original “online newspaper,” boasts 34 million daily visitors. Yahoo links to exterior news sites, many of them provided by the AP or content mills.

Despite these comparatively tiny figures, online display ad revenue is considered an essential area of growth for The Times and The Post. During the first quarter, The Washington Post Company (NYSE:WPO)’s online display advertising rose 16%, but The New York Times’ declined by 4%.

To increase their digital revenue, both companies have erected or announced paywalls over the past year. This system of paid content has been controversial and has yet to yield any significant results. Both newspapers offer free access to their digital versions with print subscriptions.

Major strategic flaws

Right away, I can see major problems with these strategies. Counting on display ad revenue to offset lost print revenue is unlikely to work. Yahoo recently revealed this problem when it stated that its first quarter display ad revenue declined 11%, due to a shift in the market toward mobile ads.

This means that to truly capitalize on Internet advertising, The New York Times Company (NYSE:NYT) and The Washington Post must create mobile apps that are optimized for these newer ads. Only Facebook Inc (NASDAQ:FB), Google Inc (NASDAQ:GOOG) and a handful of other companies have been able to truly capitalize on the growth of mobile ads, owing to their massive user base and ecosystems.

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