Web May Not Save Newspaper Stocks

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.