A silver lining amid red ink for newspaper industry

You think the economy is sending mixed signals? Just look at the newspaper industry.

For every "green shoot" that appears, there's a tumbleweed or two rolling by next door.

On the positive side, advertising sales firmed a bit in June at major chains such as Gannett Co. and New York Times Co., enabling those companies to post unexpectedly strong second-quarter profits. Newspaper stocks rallied sharply -- Gannett shares have rocketed 156 percent since the end of June -- as some investors bet that aggressive cost cutting has positioned the companies for higher profit once the economy rebounds.

Publishers are finally talking seriously about charging for the online content they now offer for free. And small-town daily and weekly papers are holding their own even as many of their big-city brethren struggle.

Read between the lines though, and the news isn't so upbeat. At most papers, profit growth was driven mostly by cost cutting, not higher revenue from selling more ads or increasing circulation. Reaching into the wallets of the 70 million people who visited newspaper Web sites in June sounds lucrative, but publishers are still debating how to do that without alienating readers.

That stock rally? Despite the recent run, Gannett shares are worth half what they were a year ago, and the U.S. economy is flashing conflicting signals about the prospects for a robust recovery.

And failures continue to loom. Freedom Communications Inc., operator of the Orange County (Calif.) Register, is expected to declare bankruptcy this week, according to a Wall Street Journal report Sunday that quoted people familiar with the situation. It would be the latest in a string of bankruptcies, including that of Los Angeles Times owner Tribune Co.

These crosscurrents come only months before the crucial holiday shopping season, which in good times portends papers fat with department store ads. This year, however, the holidays are shadowed by fears that the worst economic downturn in decades will keep shoppers out of stores -- and retail ads out of newspapers.

If advertisers do ramp up spending, analysts will be watching for answers to a crucial question: How much of the advertising decline of the last two years has been due to the economic downturn, and how much has migrated to the Internet, never to return?

"This is an important time for the newspaper industry," said Brad Adgate, senior vice president of research for Horizon Media Inc., an ad services firm. "They'll get some of that advertising back, but how much, only time will tell."