Story not all bleak for newspaper industry's outlook

Advertising sales firmed a bit in June at major newspaper 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% 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 websites in June sounds lucrative, but publishers are still debating how to do that without alienating readers. And 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. Failures continue to loom. Freedom Communications Inc., operator of the Orange County Register, is expected to declare bankruptcy this week.