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False ProfitsWhen bad financial news for newspapers is good news for journalism.

By Jack ShaferPosted Friday, Feb. 23, 2007, at 6:10 PM ET

(Continued from page 1)

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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.