Newspaper = buggy whip?

There has been a spate of recent announcement regarding the disappearance of traditional print newspapers and here is the latest from Hearst. The market is not surprised, and there is little sentimentality towards the demise of the industry.

According to the Newspaper Association of America, (NAA) print advertising revenue has been in decline since 2005. The category has been in free fall since the end of 2007 with Market Research reporting a 16.4% decline in revenues for 2008. Since peeking at $47.4B during 2005, US newspaper advertising expenditures have declined by 40.5% over a three year period to $28.4B. The outlook for 2009 may be even more bleak with JP Morgan predicting a 20% decline in advertising revenues to approximately $23.7B. This prediction infers a 50% decline in revenue for the industry in only 4 years. Put into historical perspective, the last time that the newspaper industry generated less than $24B in revenue was when Ronald Reagan was finishing his first term...1984.


The major media companies are obviously suffering. It was reported on March 9 that McClatchy (MNI) cut 1600 jobs as it struggles to service $2 billion of debt. Gannett (GCI), Hearst and New York Times Co (NYT) are also attempting to sell assets and shed jobs in order to cope with the cratering of the ad business. Some, like Tribune Co., have already declared bankruptcy.

Management at these operations have not been completely blindsided by the sudden emergence of the big bad Internet. Although there has been a lot of hang-wringing, spurious plans, ego-coddling, and various other forms of executional doddling, newspapers have been shifting focus onto the web for the past few years. However, this shift may have come too late to effectively compensate for eye-popping declines in print advertising sales. As late as 2007, online advertising still only represented 7.5% of total revenues according to the NAA, and the industry organization didn't even start calculating online revenue until 2003, a full decade after the commercialization of the Internet. Instead of viewing online publishing as a complimentary source of revenue streams, most newspapers initially viewed the Internet as a threat, or worse, a fad. This lack of initial recognition is the root of the damage being wrought on the industry now. This industry has missed so much opportunity to transform. Here is the laundry list of already missed billion dollar opportunities: search, RSS, ad networks, video, blogsphere, social networking, social broadcasting...uh...the point is made. To be fair to the much maligned buggy whip manufacturers, they only failed to recognize the threat/opportunity of one new innovation.

Just as newspaper publishers have begun to really press forward on the potential of monetizing the Internet, a significant recession has impaired the migration online. The only area of growth remaining appears to be paid search advertising, a category dominated by Google (GOOG). Online display advertising is expected to show a decline in revenues by up to 5% during H1 2009 before recovering. Newspapers were hiding, and now they have nowhere to hide.

They must forge ahead...but with what?

A really valuable data asset that newspapers retain via editorial systems is...context. One could even extend this value to historical narrative. Unlike social networks where history is a mere 3 years at best, and content portals where history is at most 10 years, newspapers have the potential ability to seemlessly link today's breaking events to literally millions of local and historical events, opinions, and commentary that are decades deep. Newspapers could be the gateway to context for online users, however they interact with information, or each other. And the technology is there. Nstein (EIN.V) has some advanced web content management solutions that can help newspapers create context on the fly. It has the ability to extract and index meaning from any article, advertisement, or caption. The system can then connect the meaning of multiple articles to deliver narrative and insight on-the-fly. This is pretty powerful stuff, and could represent some value-add that only a newspaper editorial system could deliver. Hearst became one of Nstein's biggest clients last year as it got serious about re-inventing itself.

In order to be relevant and make money, already leveraged media companies will need to find ways to continue to invest in the federation of proprietary data sources. Clearly, there is a lot of ongoing investment required in infrastructure, storage, middleware, and at the application layer. Besides Nstein, which is a micro-cap with limited liquidity, Open Text (OTC) should still be considered a good bet to benefit from the continued need for advanced content management solutions.

For newspapers, the geographic monopoly is long gone. the primacy of context, the "why" things happen has been deeply eroded. The print production and distribution techniques that were once barriers to empires are largely irrelevant. It took the leadership at once seemingly invincible newspaper empires a decade too long to recognize and then act upon the threats and opportunities posed by digital media. It may have been Mark Twain who said that history does not repeat itself, but it sure does rhyme. Newspaper = buggy whip.

Those media enterprises that are reacting now are investing as aggressively as possible into enabling technologies. Not all of the ideas will work, not all of the transforming media companies will succeed, however the technology companies that provide content management, storage, and data solutions should continue to benefit from this mad scramble for the next 4 to 6 quarters.

I do not own shares in any of the public companies referenced in this post.

Nstein (EIN.V): Weak Q3 Results Leading Into a Rosier Q4

NStein reported Q3 yesterday with sales of $5.6 million, EBITDA loss of $0.8 million, and a net loss of $1.0 million or $0.02 loss per share. Although sales increase by 37% year over year, EBITDA losses increased. Late in 2007, the Company made incremental investments into its sales force to support scaling initiatives. Since that investment, the Company has been selling into a headwind of weakened balance sheets, and constrained credit. Although the sales pipeline remains solid, the ability of that pipeline to actually buy has been reduced.

On a relative basis, as I had expected, Q3 was a tough quarter due to continued delays in buying decisions by its prospects. The good news is that some of those delayed decisions have popped up during Q4 with major announcements with Hearst Newspapers, and Scripps Networks among others. As a result, I think that there is a better than 50% chance that EIN's Q4 could exceed my sales expectations of approximately $6.0 million and show positive earnings performance. Because a substantial percentage of sales to Nstein are in US$, and most of its expenses are in C$, there is also an expected benefit of between $0.3 and $0.4 million if the Canadian dollar remains below $0.85 compared to its US counterpart. If this market condition remains, EIN could gain additional marginal benefit from it.

Although there is an expected Q4 pop in sales, which has proven to be typical for this sector, it is unlikely to be as strong as Q4 performance during 2007. I expect that the company is likely to continue to reduce expenses in order to enhance marginal performance during 2009.

I think that 2009 could be as challenging a year as 2008 in terms of sales. Most of EIN's prospects are likely to continue to be careful with their capital, and time-to-revenue should remain extended for the foreseeable future. Also, its client base should continue to face uncertainty regarding online marketing revenues for at least the next two quarters. As the world economy continues to contract, I see CPA, and CPC advertising continuing to attract a greater percentage of a diminishing spend. In human speak, I see search advertising maintaining growth, with display advertising continuing to struggle. Most of Nstein publishers generate revenue from display ads.

The good news is that the Company has $6.3 million in treasury, and only $0.5 in long-term debt, which is easily serviceable. Although I doubt that the Company will engage in new acquisitions during the next 12 months, it has more than sufficient funds to survive even catastrophic market conditions.

Notwithstanding the market conditions, Nstein has developed an outstanding product that its market niche remains desperate for. The Company continues to innovate, and there are new applications of its semantic algorithms to come, just in time for a market upswing.

I really like this Company and, after holding up through much of the technology downturn earlier this year, the shareprice has come off quite a bit recently. It is currently trading at 2.4x cash and between .70x .75x forecasted sales for the year. If the Canadian dollar remains surpressed and the company remains vigilant on cost containment during 2009, there is probably a better than 30% chance that the Company could be cashflow positive next year even on modest sales growth. I expect that sales should grow between 8% and 15% next year with the Hearst contract representing over 5% of total sales.

I do not own Nstein shares, nor do I receive compensation in any form from the Company, its directors, or its employees.

Nstein lands a big'un

Today, Nstein (EIN.V) announced that Hearst Newspapers has contracted the Nstein platform for its entire content supply chain - representing 16 newspapers. This is Nstein's largest single deal - probably worth over $1.5 million in licensing alone. Services could be valued at twice that.

During 2009, Hearst Newspapers could represent more than 10% of revenue streams to Nstein. In the meantime, it is my understanding that the Company could recognize revenue from licensing during Q4, 2008. This would mean that there is a greater than 50% chance that the Company could exceed my expectations for Q4 in terms of sales and profitability.

More importantly, this transaction reduced balance sheet risk. The Company likely has sufficient funds to be able to survive the current downturn in the markets. However, I think that it would be an excellent time for the Company to more aggressively look to offering some SaaS licensing options to its client base. Although revenue ramp may not be as fast, NStein would not lose many clients to "stand-pat" decisions used to preserve weakened balance sheets. A subscription or user-based licensing solution would probably entice reticent prospects to more aggressively adopt Nstein's content management solutions during 2009. The cost/benefit equation tips dramatically towards deriving more revenue when capital is preserved.