When bad financial news for newspapers is good news for journalism.

Media criticism.
Feb. 23 2007 6:10 PM

False Profits

When bad financial news for newspapers is good news for journalism.

StarTribune. Click image to expand.

When McClatchy Co. sold its Minneapolis Star Tribune to a private equity gang for $530 million at the end of 2006, the teensy price paid stunned even the self-pitying newspaper industry: It was less than half the $1.2 billion McClatchy had paid for the paper in 1998.

Back in 1998, nobody questioned McClatchy's $1.2 billion Minneapolis bet. Newspaper consultant John Morton cheered the purchase in his American Journalism Reviewcolumn. Acknowledging that it was a high price, he claimed that "in the long run it will prove to have been well worth it."

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But Morton was wrong. Discussing the sale, McClatchy CEO Gary Pruitt told the Wall Street Journal that the Star Tribune was the company's worst performer in terms of revenue.

Morton's column also saluted 1993's $1.1 billion takeover of the Boston Globe by the New York Times Co., which has turned out to be as solid as McClatchy's Strib acquisition: Just a few weeks ago in a "required accounting adjustment," the Times Co. wrote off about 60 percent of the Globe's value.

Although this halving of newspaper value, which was unforeseen by such an industry sage as John Morton, is tragic news for McClatchy and Times Co. stockholders, it's potentially good news for journalism. It pops the bubble that had carried newspaper valuation beyond the Van Allen Belt. And by doing so, it presents publishers—and Wall Street—with more rational expectations about what sort of profits the newspaper industry can make without destroying itself.

How did so much value get boiled out of the Strib and the Globe in such short a time? Philip Meyer's brilliant book from 2004, The Vanishing Newspaper: Saving Journalism in the Information Age, helps explains all.

In recent decades, publicly owned newspapers have earned an average operating margin of 20 percent or better—which is to say 20 percent of revenues before taxes, interest, and depreciation—and some companies have earned even more. Whenever a newspaper came onto the market, media companies would bid like crazy because of their certainty—and Wall Street's—of continued high and rising profit margins.

Although the newspapers have maintained high margins in recent years, their revenues are essentially flat, which has soured Wall Street on the industry's future prospects. The stock prices of newspaper companies declined 20.5 percent in 2004-2006, calculated analyst Alan D. Mutter, vaporizing $13.5 billion in value. In other words, Wall Street isn't just worried about the newspaper present, it's worried about the newspaper future.

The decline in newspaper stocks, of course, is bad news for owners, stating unequivocally that the market wildly overvalued newspapers. As Meyer sees it, a daily newspaper operator can do several things with his overvalued property as the market makes its corrections. He can simply sell it at a loss, as did McClatchy with the Strib. Alternatively, he can maintain its high profit margins by cutting costs—fewer reporters, smaller news hole, retrenched circulation—all of which translate into an inferior product. At the same time, he can raise subscription and advertising rates until, like a vampire, he has sucked the value out of his publication. When the last readers and advertisers die, he can bury his newspaper. Meyer calls this the "decision to liquidate," and you see it happening at too many newspapers.

In both examples, the owner has essentially declared his loss and gotten out. Meyer's third strategy is for daily owners—or their successors—who want to stay in the game. They need to acknowledge that now that they're no longer the monopoly conveyors of information in their markets, their days of guaranteed 20 percent operating margins are over, and those astronomical valuations of yesteryear were a fluke.

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