Web May Not Save Newspaper Stocks

Steve Birenberg

Editor's note: This column by Steve Birenberg is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on June 18 at 8:48 a.m. EDT.

Last week, while I was telling you to use the recent strength in New York Times(NYT Quote) and E.W. Scripps(SSP Quote) to reduce positions, my good buddy Cody Willard was telling RealMoney subscribers that both stocks were buys. Cody's thesis is that creators of quality content can monetize the Web and other new forms of digital distribution, such as video on demand.

I believe that Cody has a point, but I believe that the ease of creating quality content and putting it on the Web undercuts the strength of even the greatest brands. As a result, there is not enough market share at decent pricing to compensate for the loss of revenue momentum and operating profit margin on the content in its traditional form.

This problem is particularly acute for shareholders, because the deterioration in traditional businesses is occurring more rapidly than even successful efforts in new digital distribution channels.

Thorns in Scripps' Side

SSP faces additional questions regarding its Interactive segment, which houses Web-only businesses it has acquired in recent years: Shopzilla and uSwitch. Both companies are in the comparison-shopping business, and each has dramatically underperformed expectations in the last several quarters.

In fact, SSP's interactive segment is forecast to show just 3% revenue growth, while earnings before interest, taxes, depreciation and amortization (EBITDA) falls by 53%. Analysts expect revenue to accelerate to 21% in 2008, with EBITDA rebounding by 72%, but that would still leave EBITDA in 2008 below the level of 2006.

Most of the shortfall is related to Shopzilla, where the cost of buying traffic through Google and other paid search engines has become unprofitable because of dramatic inflation in keyword pricing.

SSP management is taking what it claims is a self-inflicted wound by giving up keyword purchased traffic in favor of raising its marketing spending to attract direct traffic. Current 2008 estimates assume this strategy will be successful, but that seems like an optimistic assumption, given how rapidly revenue growth stalled and margins contracted.

Web Shopping Near a Plateau?

Potentially adding to the pressure is a dramatic slowdown in the rate of growth of online shopping. According to an article in Sunday's New York Times, online sales growth has decelerated each year since 2004, growing a little over 15% this year. By 2009, JupiterResearch expects online sales growth to slow to under 10%.

With online sales slowing, keyword pricing rising and marketing expenditures to attract direct traffic dramatically accelerating, I'd say there is a real question about future profits at Shopzilla and the value of the asset. Of course, there are believers in online comparison shopping. Just last week, I wrote about the purchase of Nextag.com, the No. 2 comparison shopping site, by Providence Equity.

The boys from Providence are pretty smart, so despite my skepticism, the reality is that the jury is out. I'll stick to my guns, though, and bet Cody that barring a takeover, SSP sees the $30s before it sees the $50s.

Editor's note: This column by Steve Birenberg is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on June 18 at 8:48 a.m. EDT. To sign up for Street Insight, where you can read Mr. Birenberg's commentary in real time, please click here.

---