Red All Over

 | Oct 31, 2012 | 3:19 PM EDT
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Earlier this year in April, I put out this brief 10 page presentation outlining why I believed New York Times (NYT) would cease being a stand-alone newspaper. At the time, I remember getting a lot of heat from the Columbia Journalism Review and other pro-old-journalism folks that I was being alarmist.

In light of last week's disappointing earnings, I've dusted off the presentation and looked at it again for the first time in months. It turns out the analysis holds up pretty well.

At the time I granted that gains in circulation were set to overtake advertising for the first time and that these trends were likely continue -- but I also estimated that advertising revenue would continue to drop at an increasing rate. While this was occurring, moreover, it seemed to me as if cost reductions had recently hit a plateau for the Times.

At the time, there had still been some assets that the Times could sell -- and it has now basically sold all of them, including its stakes in the Boston Red Sox,, and However, as was clear months ago, the company would eventually get to the point where they would need to run on the cash made from the business.

Unfortunately, at that point New York Times appeared to be facing a future of losses -- unless it was to embark on much more radical restructuring, which it hasn't yet done. As a result, as I then said, by the end of 2015 the most likely scenario I could imagine would be the Times getting subsumed into part of a larger organization that had a different and more viable business model to support itself, such as Bloomberg. I still think that's where the newspaper is heading.

Since my presentation came out in April, New York Times' shares rose more than 60% -- until last week's earnings. At that point, the stock dropped precipitously, and is now only 23% above where it was in April.

Circulation revenue is now greater than advertising revenue at the Times, having passed the inflection point this year. Back in 2003, ad revenue was double circulation revenue at the company; for all of 2012, it looks like ad-based sales will be down to $620 million. In 2010, the number totaled $800 million.

New York Times management seems very confident that it can keep increasing circulation revenue by selling more digital subscriptions, which were up 11% sequentially this quarter. I'm skeptical on this and on its ability to keep increasing the cost of the print magazine.

On the cost side, perhaps the company has been waiting for Mark Thompson, the new CEO, to get on board before it starts anything really radical. We'll have to see what happens, given the current scandal surrounding Mr. Thompson If he doesn't come on board, board chairman Arthur Sulzberger Jr. might have to start the cost cuts himself, but he probably wants to leave that for the new person.

The bottom line here is that the stock can probably rally in the short term if the company announces some big cost cuts that it claims will make New York times profitable in the long term. Still, be careful of dropping ad revenue in future quarters. Long-term, I still see no reason why this company won't agree to a takeout by a Bloomberg in a couple of years.

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