Newspapers are breaking records -- and it's not a good thing. A double-digit drop in newspaper ad revenue, the third consecutive year of declines, and record margin contraction makes this the industry's worst year ever. The newspaper industry's ad revenue is down 12 percent this year, on top of last year's already dismal 8 percent drop.

It's a perfect storm.

-There are sector challenges: Circulation is declining as readers move online and advertisers chase them, looking for more targeted and measurable ad outlets.

-And there are also cyclical issues: the economic downturn is hurting advertising hard, particularly the national, retail and classified ads that newspapers depend on. (While political advertising is giving the TV ad market a huge boost, it doesn't have the same positive impact on papers.)

-And the areas suffering from the biggest burst of the real-estate market (Florida and California) are seeing a huge drop-off in related ads...

The newspapers are trying to cope: cutting jobs ad pages, eliminating some distribution routes, even switching to a smaller format, to cope with rising newsprint costs. (Thanks to fuel costs, those raw material costs continue to rise, despite lower demand).

And the newspapers are trying new strategies: focusing on hyper-local news, or taking a more lighthearted feature-y approach. And while the Internet has been a significant part of the industry's demise, these companies are embracing it as their best hope, trying to build up their online revenues to try to compensate for the decline in print revenues.

But nothing is helping the stocks... Gannet's stock

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[GCI  Loading...      ()   ]  is down over 55 percent over the past twelve months, at a 13-year low. Meanwhile the Washington Post Company

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[WPO  Loading...      ()   ] is down about 28 percent over the same period, the New York Times

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[NYT  Loading...      ()   ] down about 10 percent. And News Corp.

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[NWS  Loading...      ()   ], which bought the other big newspaper giant -- Dow Jones -- for some $5 billion last year, has seen its stock fall over 25 percent in the past twelve months.

Do these depressed stock prices present an opportunity? Perhaps only if you're looking for a dividend income stream: both the New York Times and Gannet have very respectable dividend yields. Gannett's forward annual dividend yield is 7 percent, the New York Times Company's is 5.8 percent. But in terms of the stocks themselves, analysts say don't hold your breath. They could take a beating for a while now.

What next? Assuming the economy improves the revenue slide at newspapers should stabilize by the end of this year, or early next.

But if the recovery takes much longer, we could see consolidation, more companies going private (Sam Zell led a takeover of Tribune Co.) and perhaps even some bankruptcies. And for now the newspapers are trying to stake a claim, and reinvent their revenue model, online.

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