Newsprint: declining high technology.

The distinctively ubiquitous vending boxes of USA Today may very well sum up the newsprint industry. In the mid 1980s--10 years before the Internet--these striking white and black boxes appeared everywhere overnight. Many people marveled that modern technology allowed Gannett to beam the content to strategically located high-speed, four-color printing presses that enabled morning delivery nearly everywhere in America. Gannett aggressively drove the industry to provide a consistently high quality sheet to allow the work of those high-speed presses to jump off the page in living color, exactly the same way, wherever printed.

Those vending boxes have another feature that is perhaps at first view not important. They were permanently built with an unchangeable fifty-cent vending slot--a bold move after the hyperinflation of the late 1970s. The people at Gannett undoubtedly spent considerable time and thought regarding the pricing and permanency of this feature. A big portion of that analysis probably involved their expected improvements in news gathering techniques as time passed--a projection that efficiency in news gathering would help them hold the line on price. They probably also expected revenues to improve through advertising rate increases, as discussed below. Finally, they probably carefully analyzed the abundance and costs of supplies such as newsprint and ink and projected a steady supply at a constant price in real terms. As the conclusion to their analyses, Gannett was ahead of the entire industry because they accurately predicted that the newspaper they sold for 50 U.S. pennies in 1985 could still sell for that in 2003. They carved their faith in their prediction in the unalterable steel of the vending box circa 1985.

CONSTANT RETAIL PRICE

The Inflation Calculator (www.westegg.com/inflation/) supplied with an input of US$ 0.50 in 1985--the vending price of USA Today then and now--tells us that in 2002 this product should cost US$ 0.83. One can consider this another way as follows:

* Do you have trouble seeing the year-over-year change in the pricing of USA Today in Fig. 1? That is because it is zero (the price has remained constant).

* The picture on advertising revenues in Fig. 2 is a bit better because it shows steady increases until 2000.

* Combining the data shows how much better newspaper publishers have done at extracting revenue from newsprint than have the newsprint manufacturers as Fig. 3 shows.

The three parameters normalized in this figure are tracked since 1985--the time of the appearance of the USA Today vending box. By 2000, newspapers had managed to almost double their total advertising revenues in North America. Simultaneously, newsprint producers struggled to maintain capacity (see the intermittent black squares) and utterly failed to maintain--let alone grow--unit pricing. Kudos to the newspapers for doing considerably more with less. They almost managed to double advertising revenue they received per ton of newsprint produced in the time since 1985 while paying less for the medium! Marshall McLuhen said, "The medium is the message (1)." I say the medium is quite cheap and a source of great profits if you know how to use it.

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MANUFACTURING TODAY

How do the conditions of the USA Today experience translate into the newsprint manufacturing industry of today? Several major players and some smaller ones remain today. They include Abitibi-Consolidated, Bowater, NorskeCanada, Tembec, and some smaller captive players such as SP Newsprint and Bear Island. (By captive, we mean partially or fully owned by the newspapers they serve.) Another large player is Kruger, but this company is private and provides little public data. A good way to look at performance is through return on assets in (Fig. 4), because this will remove the effects of currency translation since newsprint is a cross border exercise primarily between Canada and the United States.

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According to Deutsche Bank, the top five players since 1984 have gone from holding 46.2% of the capacity to holding 71.5% of the capacity in newsprint. This may seem a large improvement, but only Abitibi-Consolidated has a market share over 30% among the top five. Market flexibility is therefore still available to purchasers of newsprint, who still control the economics of the business.

NEWSPAPER READERSHIP

All these conditions assume the long-term decline of newspaper readership in developed countries. Many studies have documented that newspaper readership is a demographic phenomenon somewhat based on the time one enters the technological curve. People born in the late 1930s grew up on newspapers as their primary source of information and entertainment. Generally, they are still reading newspapers today. Most of those born after 1980 probably do not read newspapers at all.

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Many prognosticators--far smarter than me--continue to predict a huge surge in newspaper demand in places such as China. To some degree, they may be correct. My hunch is that the demographic desiring newspapers in China is exactly the same as in the United States--those in the above example born in the 1930s. The demand to be fulfilled in China is a false one if I am correct--those older people desiring newspapers have a large appetite. When they are gone, the appetite will disappear. In 15 to 20 years, the newsprint capacity built in China today may be as starved for customers as that in the currently developed countries will be then.

LOCATION FACTORS

One must exercise care when looking at the short-term and long-term future of newsprint. For among a general decline in newsprint demand resulting in a general decline in the newsprint industry over the long term, strategic bright spots will survive and thrive.

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At the risk of playing favorites, I cite one example--the Dublin, Georgia, USA, mill of SP Newsprint. The site selection was pure genius. This mill is the closest by land transportation to the largest and most important demographic to the newsprint industry--Florida. This is the land of the idle retired who grew up reading newspapers. Only Bowater's Coosa Pines mill and Abitibi-Consolidated's Augusta mill have any chance to compete with Dublin on transportation costs to the customer. Essentially, everyone delivering by land must drive by Dublin on the way to Florida. Simultaneously, the raw material at Dublin is old newsprint (ONP). Where is the closest large source of ONP? It is Atlanta, a population center of 5 million-plus that is less than 200 km away.

The important point is this: Despite the long-term trends in newsprint and despite your personal stake--investor, supplier, consumer, employee--there will be select individual opportunities as long as you pick important attributes of survival carefully. For example, and please, please do not take this as investment advice, if my stockbroker told me he had a hot new mutual fund focused on the newsprint industry, I would tell him to jump in the lake. However, there may be attractive individual investments (and employment opportunities) if you pick and choose very carefully.

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REFERENCE

1. As proposed by Marshall McLuhen and Quentin Fiore in The Medium is the Massage, Penguin, 1967. "Societies have always been shaped more by the nature of the media by which men communicate than by the content of the communications." (no page numbers available). See also McLuhen, Marshall, (1964), Understanding Media: The Extension of Man, Routledge and Kegen Paul Ltd, London.

RELATED ARTICLE: IN THIS ARTICLE YOU WILL LEARN:

* How newsprint consumers have gained an advantage over producers.

* The future of newspaper readership.

* Short-term and long-term prospects for newsprint producers.

ADDITIONAL RESOURCES:

* "Newsprint in the headlines for all the wrong reasons," by Jim Kenny, Solutions!, Sept. 2003. (Available online at www.tappi.org).

JIM THOMPSON, TAII 

ABOUT THE AUTHOR

Jim Thompson is chairman and CEO of Talo Analytic International Inc., Atlanta, Georgia, USA. He is also a member of the Solutions! Editorial Board and writes the weekly column "Nip Impressions" in TAPPI's weekly electronic newsletter, Over-the-Wire. Contact him at [e-mail].