Watching McClatchy (First in a Series)
As a leading indicator of the newspaper biz's health, what does the chain's bad news portend for the rest of the industry?
Just two years ago, McClatchy Co. President and CEO Gary Pruitt boasted the sunniest disposition of all newspaper executives. In a Wall Street Journal op-ed, he toasted newspapers as "still among the best media businesses" as his firm's purchase of the Knight Ridder chain tripled its print holdings.
Pruitt conceded that newspaper advertising had peaked in 2000, but he maintained that no competitors in local markets had held their audiences as well as newspapers. Far from being a "dying industry," wrote Pruitt, the newspapers were adding the "unduplicated reach of newspaper Web sites to newspaper readership" to grow their audiences.
Since Pruitt's declaration, McClatchy stock has fallen, fallen, and then fallen some more. It's dropped about 75 percent in the past year and is now trading at less than $10. Last week, the McClatchy-owned Sacramento Bee reported that the company is taking a $1.47 billion write-down, this following a similar $1.37 billion write-down in November.
Essentially, the write-downs are McClatchy's way of acknowledging under accounting rules that it paid way too much for Knight Ridder, that its stock price has vaporized, and that advertising has croaked. McClatchy's January ad revenue dropped about 16 percent over the previous year, a company press release reports. Real estate ads are off 34 percent and employment ads—a bigger business—fell 30 percent.
By scrutinizing McClatchy's agonies, I don't mean to rub Pruitt's nose in his optimistic 2006 op-ed. His reputation as one of the nation's best and most creative newspaper executives makes his chain a leading indicator of the newspaper future. Other chains are experiencing similar downturns, but McClatchy isn't just another chain. It's supposed to be smarter and more nimble than the rest, but is it? Did Pruitt show bad geographical judgment by overinvesting in the wrong markets at the wrong time? He bulked up on real-estate-driven economies, adding newspapers in Florida and the Sun Belt, just as those places were about to decline. He doubled down on newspapers just as newspaper's core advertisers—real estate, finance, job listings—were opting out for Web alternatives.
Pruitt must somehow reference his Journal op-ed and admit that he was wrong about his industry's prospects and then explain what he's going to do to rectify his error. He bought Knight Ridder at the peak of the housing bubble and obviously didn't foresee the subprime crisis. In that regard, he's not alone. The subprime monster has trashed real estate ad revenue in California and Florida, home to some of the chain's biggest papers. "Revenue from California and Florida operations dropped more than 20 percent," the Bee reports. Newspapers have traditionally been patient about riding out advertising downturns, but the subprime disaster may make this downturn an abyss for McClatchy's most affected newspapers.
As Alan D. Mutter noted in his Newsosaur blog last month, Pruitt mistakenly jettisoned the Knight Ridder newspapers in Akron, Ohio; Philadelphia; and the Dakotas in favor of the hot-house Sun Belt properties. Pruitt's plan to grow the Web side of McClatchy as advertisers migrate there, sketched briefly in the Journal op-ed, didn't work out, as Mutter reported in another post last September. "With industry-wide online sales up 20.8 percent in the first half of this year, McClatchy's interactive revenues gained a meager 1.4 percent through June, according to the company," he writes.
Tomorrow comes in installments, depending on whom you are and where you live. By virtue of the bets McClatchy made, it may be the first chain to enter the newspaper future. (Or will Sam Zell's Tribune Co. beat him there?) Whatever Pruitt does with his troubled company newspapers—sell some titles at depressed prices, cut expenses, cut circulation, cut staff, or something more inventive—will inform the strategies of other newspapers. He's got to do something. What will it be?
I won't predict because every prediction I've ever made has turned out wrong. Every. Single. One. Send your McClatchy predictions to email@example.com. (E-mail may be quoted by name in "The Fray," Slate's readers' forum, in a future article, or elsewhere unless the writer stipulates otherwise. Permanent disclosure: Slate is owned by the Washington Post Co.)