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."
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.
According to a newspaper broker and an industry analyst Meyer interviews, the traditional rule of thumb governing the value of newspapers has been 20 percent of the value is assets—printing presses, computers, truck fleets, computers, etc.—and 80 percent is reputation or "goodwill" enjoyed by the brand. As the quality of newspapers drops and the price of subscriptions and advertising rises, the goodwill value plummets. Meyer posits a point at which an entrepreneur can enter the local newspaper market by investing 20 percent of the value of the fading established newspaper and produce its near equal. Meyer writes:
Because its outlay is only the cost of the physical plant, one-fifth the value of the existing paper, the challenger can get the same return on investment with a 6 percent margin that the old paper's owners get with a 30 percent margin. Voila! A happy publisher with a 6 percent margin! Because this publisher is building goodwill from scratch, he or she can cheerfully pour money into the editorial product, expand circulation, create new bureaus, heavy up the news hole, and do the polling and special public interest investigations that define public journalism.
In a 2005 column, I speculated that billionaire Philip Anschutz might be embracing the 6 percent return-on-investment strategy with his two free dailies, the Washington Examiner and the San Francisco Examiner. Anschutz has since started an Examiner in the Baltimore market, where the Tribune Co. has been cutting costs and the quality of its Baltimore Sun. Meyer posits a scenario in which an established paper challenged by a newcomer realizes that its continued lust for high margins is self-destructive, and lowers its financial expectations to thwart the new newspaper.
When I wrote that 2005 column, I had no idea that the value of venerable papers such as the Strib and the Globe would decline so rapidly. So, it could be that in addition to Examiner-like publications challenging established newspapers in the Meyer model, we may see other troubled newspapers sold at 50 percent or greater discounts.
Given the current climate, it's easy to say that the Tribune Co., which has been weighing a corporate breakup, overpaid when it bought the Times Mirror Co. (Los Angeles Times, Baltimore Sun, Newsday, Hartford Courant, et al.) for $8 billion in 2000. If and when the Tribune Co. sells these papers, it may suffer losses equal to McClatchy's in Minneapolis. Even the new owners of the Philadelphia Inquirer and the Philadelphia Daily News may have gotten fleeced when they bought the properties for $562 million in early 2006.
Last fall, former Los Angeles Times Editor John Carroll pilloried the pursuit of 20 percent margins on NewsHour. If owners reduced expectations to 10 percent profit margins, he said, circulation would probably start growing.
"And we would be able to invest very heavily in the Web, which is crucial to the paper's future," Carroll said. "At a 20 percent margin, I feel strongly that we are cashing in the paper's future in favor of current earnings."
Meyer portrays the high profit margins enjoyed by newspapers as a historical accident. "They were the result of a condition that no longer exists: their near-monopoly control over retailers' access to their customers," he writes. "That monopoly has been disrupted by technology that creates cheaper means of distributing."
Like Carroll, Meyer advises owners to face the future and accept lower payouts, closer to the "normal retail margin of 6 or 7 percent of revenues." He acknowledges the difficulty of convincing an industry accustomed to 20 percent to 40 percent margins to settle for less. The industry has based all of its investments on those continued high margins, he writes.
But the Strib and the Philly fire sales, the Boston Globe write down, and the $13.5 billion newspaper stock evaporation may force newspaper owners to reconsider faster than Meyer ever thought possible.
Meyer offers in his afterword that quality journalism will still be economically feasible, it just won't be as profitable because the industry has lost its monopoly. "The real problem is adjusting to profit levels that are normal for competitive markets," he writes. Embattled newspapers that give up on quality in pursuit of traditionally high profits, he predicts, will face disaster.
The Strib and the Philly papers, which no longer answer to Wall Street and whose financial footprints have been right-sized, are perfect petri dishes for Meyer's optimistic newspaper prescriptions.
There's nothing better than drafting behind the high-speed machine that is Philip Meyer's mind. Previously, I wrote an item about newsprint prices based on a 1995 piece he wrote for the Columbia Journalism Review. I also relied on him for a piece I wrote about Philip Anschutz. Draft Philip Meyer for president, I say. Who is your candidate? Send e-mail to email@example.com. (E-mail may be quoted by name unless the writer stipulates otherwise. Permanent disclosure: Slate is owned by the Washington Post Co., which owns the Washington Post and the Heraldin Everett, Wash.)