More on Newspapers

January 16, 2009 4:53 a.m.

I’ve been keeping you updated on the rash of major newspaper bankruptcies and other papers that are slated to cease publication altogether in weeks or months. But as TPM Reader JS notes the situation is more complicated and in some ways more promising than papers just not being able to make money any more. A lot of these papers that are in trouble are still profitable on an operating basis. They’re just leveraged with crazy amounts of debt and/or run by people who insist on making a annual profit margin that was just never sustainable …

I just wanted to comment on this (and other) newspaper bankruptcies. I have done a significant amount of strategic planning and management consulting work with major metro newspapers over the past 10 years and saw much of this coming via scenario-based planning in the late 90’s.

The problems are well documented by now – classified advertising (the most profitable part of the old print model) is done much better and much more cheaply online, young (and not so young) readers prefer the immediacy of the online channel, core display advertising clients have consolidated (fewer department stores, cellular providers, etc.). Meanwhile, advertising revenues always fall in a down economy (and this is a very down economy).

But, most of these businesses are still fine on an operating basis (i.e., they make money before interest and taxes). Having gone public (seemed like a good idea at the time given the 20% margins, etc.) and subsequently having been leveraged to the hilt, they are getting killed on debt-service as well as in the public equity markets (which prices assets based on future growth potential). For goodness sakes, every single operating entity owned by the now bankrupt Tribune Company is making money – but, Sam Zell (and John Madigan before him) loaded the company up with so much debt, there is no way out other than a bankruptcy judge.

The current owners (particularly the Sam Zell’s and private equity firms of the world) don’t give a hoot for the public trust aspect of the major metros that they own – unlike the families that started and ran these papers for generations. If they lose all their equity and the bond holders take big hair cuts (I’m talking buzz cut…), that strikes me as a fair and equitable outcome for people who never believed in the missions of the entities they owned.

So, these bankruptcies may in the medium to long run be good for journalism (in the traditional sense). Assuming the new owners emerge from bankruptcy with limited debt, the papers have many positive attributes upon which to earn a reasonable profit while building new sources of revenue. They have an unparalleled local focus and understanding, they are the most efficient vehicle for several categories of advertising, and they have significant advertising sales forces that can be re-focused on lines of business that can sustain the papers over the long haul. This is particularly true if the surviving owners are people who believe in the public trust mission of their papers and news-oriented web channels.

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