On the Level: Extra! Read All About It! Papers Thrive Despite Internet!

Let's return for a moment to that brief shining moment in 1999 when the mere mention of "The Internet" was enough to send shivers of fear down the spine of every "Old Economy" CEO in America. It's April of last year and Intel (INTC:Nasdaq - news - boards) boss Andy Grove is speaking to the pooh-bahs of print journalism at a meeting of the American Society of Newspaper Editors (ASNE) in San Francisco. Grove's message? The Internet is going to devastate the newspaper business.

Grove's observations are worth quoting at some length not simply because he (so far) has been so wrong. You may be able to profit in the years ahead if you understand just why his analysis has not proven true. There's a lot to be learned from smart guys like Grove, even when they are wrong.

Responding to a question about what newspapers could do about the rise of the Internet, Grove said: "The problem starts from the publisher's standpoint, the business manager's standpoint, because two things are happening ... To use Internet terminology, you get my eyeballs with the news coverage and sell advertising, either retail advertising or classifieds. You're under attack at both ends. You're under attack in terms of somebody's already stolen a third or half of my eyeball time away from you, in my instance, and it multiplies. Increasingly, if I were to look for something in the classified section, I'd probably go to one of the auction sites. And my tolerance for commercial messages is being stretched by those annoying Internet ads on top. You have a problem two ways. The way you get people in the tent is being attacked, and what you have inside the tent is being attacked."

He went on to say: "You're where Intel was three years before the roof fell in on us. [Grove had already told the editors about Intel's difficult transition from chipmaker to microprocessor manufacturer in the mid-'90s when he saw his company's core memory chip business eroding.] You're heading toward a strategic inflection point, and three years from now, maybe, it's going to be obvious ... You're going to be in a profit squeeze, and it's going to be a very, very difficult time."

Now, Grove is a very smart guy. But he's not the only smart guy. The newspaper business is not run by complete fools. Don Graham, CEO of The Washington Post (WPO:NYSE - news - boards), is not a fool. Nor is Arthur Sulzberger Jr. of The New York Times (NYT:NYSE - news - boards). Gary Pruitt of McClatchy (MNI:NYSE - news - boards) (owner of The Sacramento Bee , Minneapolis-St. Paul Star Tribune and Raleigh, N.C.'s The News & Observer , among other papers) is no dope either. And these guys have senior management teams that are probably every bit as good as what you would find at most top-flight New Economy companies.

Messers Graham, Sulzberger, Pruitt and their top managers presented Wednesday at Credit Suisse First Boston's media conference in New York City. (Not to be confused with UBS Warburg's media conference also in town this week.) The overall message? These newspapers are more than holding their own online and are doing so without blowing up their earnings growth, let alone their balance sheets. They do not see classified ads -- the heart and soul of most papers -- migrating to online competitors. In fact, they see the Web as another opportunity for them to further dominate local markets.

McClatchy's Pruitt led off the morning by announcing that his company would achieve record earnings and revenue in 2000 and 2001. He reported that McClatchy's classified ads grew 9% through October and forecast more single-digit growth next year. (Any slowdown in ad growth, according to Pruitt, would be caused by general economic conditions, not the Internet.)

McClatchy's interactive media guy, Christian Hendricks, explained why McClatchy's Web sites are the local leaders in all its newspaper markets, except one. The company has ably harnessed its newspapers' brand names, community knowledge and the promotional possibilities. It pushes local entertainment and business directories and teams up with other local media like radio and TV to create decent, if not great, Web sites. Online revenue is rising 40% this year and will reach $20 million to $25 million next year, according to Hendricks. The greatest growth area for them online? Classified ads, which they cross-sell with their print publications.

No Dinosaurs Here

Pruitt & Co. hardly sounded like they are running a company on the verge of extinction. "We are bullish on newspapers," he said, an apt comment coming from a CEO whose stock has been an outstanding long-term investment. McClatchy isn't making a profit on the Web yet. And the business may not be as profitable as the newspaper business, but Pruit made a good point when he said the company's online success helps maintain the papers' profit margins.

The Washington Post's Graham spoke next. He said that his flagship paper would have record profits this year and that ad revenue had risen 4.6% through October. Classified ads rose 3.7%. Not great, but just the kind of grind-it-out numbers papers were putting up even before the rise of the Internet.

Graham, who has made the Internet his primary focus at the company, said his company's washingtonpost.com site achieved a 28% local penetration and 3.7% national penetration in the two weeks following Election Day, as measured by Media Metrix. Traffic at its washingtonjobs.com site has shot up too. Online revenue, which was $3.3 million in 1999, will have tripled to $10 million by the end of this year. Not bad, and certainly not a death knell for this old-line paper.

But Where's the Tie?

And then came Sulzberger of The New York Times. Young Sulzberger was so hip he didn't even wear a tie. He, too, boasted of yet another record year for revenue and earnings per share. His primary message was that his company "has successfully made it across the digital divide." Take that Andy Grove!

The Times has made a fairly significant online bet. Its New York Times Digital unit, which operates nytimes.com , will show a loss before interest, taxes, depreciation and amortization of between $52 million and $54 million this year. It's pretty impressive that the company can take that hit and still achieve record earnings. (Times management said they expect the Times Digital to be "EBITDA positive for year 2002.") The reason they will make their numbers is that ad revenue at the company's flagship paper did not falter as Grove suggested. National ads rose by 19%, retail ads rose by 7% and classified ads rose by 4%.

The Times new-media guru Martin Nisenholtz named four reasons why print and online media sustain each other. One, print has the content. Two, sell the Web via the existing ad sales force. Three, exploit the newspaper's brand name to win online readers. And four, promote the online site in the newspaper. Yes, off-line needs online, but off-line helps online succeed as well. The Times said that it will achieve 10% to 15% earnings-per-share growth next year. The bricks-and-clicks strategy seems to be working pretty well.

So, what does this mean for investors?

Obviously, you don't invest in a newspaper company based simply on one aspect of its business -- in this case, the Internet. But the fact that these companies are achieving record earnings, record advertising revenue and record online reach 18 months after Grove's dire warning suggests (dare we say it?) that he might have been wrong.

My takeaway: Things change more slowly than you might think. These newspaper guys are not going to roll over and die anytime soon. And who knows, if these papers keep up the good work, their stock price performance might best Grove's vaunted Intel.

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