The recently (around April 27, 2005) released consolidated statistical report for The McClatchy Company reveals the ongoing disturbing trend for traditional media companies. If you look at the net advertising revenue for the Carolinas (which includes The News & Observer, the newspaper for whom I used to work), you will see a rather healthy increase of 8.9%, from $11.2 million to $12.2 million.

While that may seem good and you might be inclined to see it as evidence that the newspaper business is back on its feet after the most recent economic downturn, I would urge caution in that assessment, for two reasons:

Why does this matter? While I do not have access to detailed financial reports, my inference from this publicly available data is that if circulation is down and linage is down (which is the amount of space devoted to advertising), then the cause of the revenue growth is more than likely primarily driven through rate increases and possibly through increases in online advertising, which is often bundled with print advertising when sold. According to the report, online advertising revenue has grown significantly, but the underlying relationship between the two forms of advertising and the revenue generated is a little murky. In any event, newspapers have traditional grown revenue purely through rate increases since circulation overall has been in a state of decline since the 1970's.

The primary reason for their ability to successfully enforce rate increases without any qualitative improvement in the newspaper itself was because they operated in a competitive environment in which they enjoyed monopolistic pricing power. This does not mean that they are monopolies, per se. The textbook definition of monopolistic competition is of a competitive environment typified by relatively few competitors with highly differentiated products. Newspapers, radio stations and television stations compete for consumers and advertisers in the same markets, but their products are highly differentiated -- which means that advertisers often find one medium to be a more effective advertising outlet than others for their particular product. The result is a kind of micro-monopoly in that advertising category. Newspaper enjoyed this kind of monopoly with recruitment (help wanted) advertising for many years....until monster.com burst on the scene.

The other factor that producted monopolistic pricing was government regulation. Local television and radio is highly regulated by the federal government which issues licenses and sets limits on broadcast power and this places an artificial cap on the supply of competing outlets. While newspapers do not like to think of themselves as subsidized by government they are, in fact, subsidized in the sense that most local governments have laws regarding the publication of legal ads that require them to be published in a newspaper, often the "newspaper of record" in a given county. Being designated a newspaper of record gives one newspaper a competitive advantage over the rest which, in addition to other barriers to entry has lead to the existence of only one newspaper in almost every market in the country.

This monopolistic pricing power will not persist. McClatchy is a particularly strong and well-run company. Other newspaper chains are fairing much worse and the beginning of the end is clear. The only hope they have of survival in the future is to find a way to successful migrate away from a business model built around the physical distribution of printed goods and centered squarely on the distribution of information through electronic channels.