CNET, a welcome SOS for CBS

It took a decade and a half to get there, but CNET finally is making it big in the TV business. Now, the $1.8 billion question is whether CNET can help CBS make it bigger in the Internet business.

On track to have its shares acquired for a juicy 45% premium by CBS, CNET originally was formed as CNET-TV in 1993 by Halsey Minor and Shelby Bonnie to create a technology channel for cable television in the days when the Internet was still a gleam in Al Gore’s eye.

Despite getting some programs picked up on the Sci-Fi Channel and the USA Network, the idea of an entire channel devoted to technology was deemed at the time to be way too geeky by cable-television executives, like me, who felt far more comfortable with shopping channels, old movies, bass-fishing derbies and pay-per-view wrestling extravaganzas.

With spare channels largely unavailable in the era before cable systems upgraded to digital broadband systems, the CNET crew decided to try its hand at creating programming for the then-emerging Internet. And the rest is history.

At the same time CNET was figuring out the Internet, “Dr. Quinn. Medicine Woman” topped the charts for CBS and the biggest headache at NBC was worrying about how to replace the blockbuster ”Cheers,” which was going off the air after a 10-year run that left it the fifth most popular show in TV history. (“I Love Lucy,” of course, will forever reign as No. 1.)

By the time the Internet got big and disruptive enough to merit the attention of TV and other legacy media executives in the late 1990s, the solution was to throw money at the problem. CBS bought a third of Sportsline, a feeble rival to ESPN.Com, for $100 million and was part of the group that plunged a collective $89 million into Third Age, a site for e-Geezers that essentially fizzled despite such puffery as a piece in Fast Company saying it was “poised for total media domination.”

Perhaps the best Internet investment CBS ever made was funding MarketWatch, which was sold to Dow Jones for $528 million in 2005. When Dow Jones finally woke up to the possibility of delivering market news over Internet after a dozing for more than a decade, CBS (then Viacom) owned a bit less than 25% of the business website. At that rate, CBS probbaly just about got its money back.

Critics of the CBS purchase of CNET say traffic on the site is growing too slowly and the price is too high. You also can add that CNET is a dilutive transaction, becasue its operating margin of 13.4% on sales of $408 million falls well below the 22.2% margins that CBS generates on $14 billion in revenues. Further, the 45% premium seems pretty strong for the apparently non-competitive purchase for a company that the New York Times said “no one wants to buy.”

On a strict financial analysis, therefore, the deal doesn’t pencil out (and that’s why CBS stock was falling this morning). But there’s more to this deal than dollars and cents, strategically speaking.

If CBS and CNET can be made to play nicely together (always a major "if"), each has a chance to help the other build stronger and more forward-leaning interactive businesses.

CNET possess the true Internet DNA that CBS can never hope to achieve. That’s why it had to do buy it. But CBS has a lot to offer, too, in its rich content, considerable financial resources and the inveterate showmanship that CNET can only dream about.

Given that he serves at the pleasure of the mercurial Sumner Redstone, Leslie Moonves is staking his career on making this work. But his risk is modest. If he didn’t do something like this to try to drag CBS into the 21st Century, he wouldn’t have much of a career, anyway.

The inconvenient truth for publishers

Another shoe is about to drop on the battered newspaper industry and it is going to be a big, fat, green Birkenstock.

With global warming and soaring gasoline prices focusing consumer, political and eventually regulatory interest on environmental sustainability and energy consumption, people looking to be kinder to Mother Earth are going to start wondering about the impact their daily paper makes on the environment.

They might not like what they learn.

A prototypical publisher selling 250,000 newspapers on each of the 365 days of the year adds nearly 28,000 tons of carbon dioxide to the atmosphere, according to calculations we’ll explain in a moment. That’s roughly equivalent to the CO2 spewed by almost 3,700 Ford Explorers being driven 10,000 miles apiece per year. (Disclosure: I own a 12-year-old Ford Explorer. Anyone want to buy it?)

CO2 matters, because a dangerous buildup of the gas in the atmosphere – caused by the growing consumption of fossil fuels and the decimation of our forests – is causing the earth to warm to such dangerous and unprecedented levels that the health of the planet and its inhabitants are imperiled.

The problem for even the most environmentally sensitive print publisher is that every aspect of the business does uncontestable violence to the environment.

From chopping down trees, to carting them to mills, to processing them into pulp, to hauling reels to warehouses, to powering massive presses, to delivering the finished project by truck and automobile, newspapers and magazines not only consume tremendous amounts of energy but at the same time require the harvest of millions of trees that otherwise would be gobbling up CO2 via photosynthesis.

But that’s not all. Even more energy is consumed when old newspapers and magazines are responsibly collected and hauled off for recycling, where the process (apart from felling more trees) essentially begins anew.

A neat summary of the newspaper supply chain is below in a clip of the introduction to the first “Lou Grant” television show in 1977. (It’s the one where he has to take an airport bus to his job interview, because he feared the publisher wouldn’t pay $22 for a taxi.)

In contrast to the inherent un-green-ness of print publishing, companies like Google assert their goal is to avoid adding CO2 emissions to the environment. The company’s plan for carbon-neutral operation in 2007 included generating electricity through massive solar arrays at the Googleplex and a dam to power an Oregon computer center. To offset unavoidable CO2 emissions, Google invested in such programs as a project to make electricity out of manure in Brazil.

I say Google “asserts” that it intended to be carbon neutral in 2007, because the company can’t yet confirm it achieved the goal, according to Niki Fenwick of its public affairs department. “Currently, we have a third party assessing our corporate emissions inventory and verifying our footprint,” she said in an email. “Our footprint is calculated globally and includes our direct fuel use, electricity, business travel, estimates for employee commuting and server manufacturing at our facilities around the world.”

She did not answer the specific question of whether Google’s carbon audit took into account the custom-fitted Boeing 767-200 that ferries the company’s founders. Information gleaned from ChooseClimate.Org and Boeing.Com suggests that a B-767 filled with 225 passengers and crew would generate 337.5 tons of CO2 on a round trip from San Francisco to London. With the flagship of the Google air fleet reportedly configured for only 50 lucky souls, the carbon footprint would be 6.75 tons per passenger.

Having said all that, it must be emphasized that there is more art than science to the task of estimating the carbon footprint for any product or activity. Several of the online sites offering free calculators even give slightly different outcomes for the same input. So, we have to take this stuff with a jumbo grain of kosher salt.

But one thing is sure: The growing concerns over fuel costs and global warming virtually assure that consumers (and the government) increasingly will begin scrutinizing the carbon produced by every sort of product or service. It’s already happening in the United Kingdom.

With the UK government aggressively prodding businesses to disclose and reduce their energy consumption, British Airways is selling carbon offsets when you book a ticket and the Tesco supermarket chain is starting to post carbon counts on the labels of everything from orange juice to light bulbs to detergent.

Trinity Mirror PLC, which publishes some 150 titles in the UK, undertook a study of the environmental impact of its operations with the goal of striving for carbon neutrality. In so doing, it funded a study that determined its Daily Mirror, which is said to be printed on 100% recycled newsprint manufactured in England, consumes about 0.956 ounces of carbon for every ounce of the paper’s weight.

Applying the Daily Mirror figure to a newspaper with daily and Sunday circulation of 250,000, the paper would generate in 27,965 tons of CO2 in a year, assuming it averaged 8-ounce papers during the week and 24-ounce editions on Sunday.

Here's the problem for publishers:

While thriving companies like Google have the profits to invest in green projects or buy their way to carbon neutrality, the deteriorating economics of publishing argue against the likelihood of similar voluntary investments by newspapers and most magazines. Future government mandates, no matter how well-conceived, would amplify the commercial stress. And even in the best of circumstances, there is no getting around the fact that printing on paper requires the sacrifice of millions of trees a year at a time we can ill-afford to lose them.

Meantime, at the bottom of the publishing food chain, Newsosaur is happy to report that it produces less than a quarter of a ton of CO2 each year by limiting energy consumption to a single laptop that is turned off a night, a DSL router shared with the family, a single-bulb desk lamp and the power required to run a simple mobile phone.

Because a daily and Sunday New York Times subscription theoretically adds only a dainty 0.02 tons to my carbon footprint, I think I’ll keep it. But the Explorer has got to go.

Cablevision overpaying for Newsday?

Cablevision is valuing Newsday at more than twice the amount Rupert Murdoch thought it was worth, according to a side-by-side comparison of the two deals.

While the Cablevision offer for Newsday appears at first to be “only” $70 million more than the $580 million originally offered by News Corp., a proper comparison of the deals has to take into account the considerable benefit that News Corp. would have achieved by consolidating certain operations of the Long Island daily with those of its New York Post.

But Cablevision won’t be able to take advantage of most of the administrative, sales, production and distribution synergies that Mr. Murdoch said would have added an additional $100 million to the annual cash flow of $85 million that industry insiders believe Newsday produces.

If you divide Mr. Murdoch’s $580 million offer by $185 million in enhanced cash flow, he would have bought the paper for a bit more than 3 times its projected future operating margin. When you divide Cablevision’s offer of $650 million by the existing $85 million in cash flow, the cable company would be paying more than 7.6 times Newsday’s earnings.

In other words, Cablevision has agreed to buy Newsday for nearly 2½ times more than the value placed on it by the most daring and sophisticated publisher in the world. Do Charles and James Dolan, the father-son team leading Cablevision, know more about newspaper publishing than Rupert Murdoch?

Even discounting the improved profitability that News Corp. projected for the combined publications, the price Cablevision is paying for Newsday still seems too high.

While it is not easy to make an apples-to-apples comparison among newspapers in different markets, the case of the Minneapolis Star Tribune is instructive, because it, like Newsday, was a free-standing acquisition that was not consolidated with a neighboring property. (Unlike Newsday, it also was not destined to be partnered with the dominant cable television company in its market, the bold but untested strategy planned by Cablevision.)

The Strib was purchased by a private investment group for 6.5x cash flow in December, 2006, when it was generating almost the same profits (approximately $81.5 million) as Newsday does today. But the deal soured rapidly, with the paper’s sales slipping a reported 14%, operating profits falling by at least a like amount, its bonds trading today for barely 50 cents on the dollar and its investors writing off 75% of their equity.

In the 18 months since the Star Tribune was purchased, the value of newspapers has plunged so much that even the some of most well-regarded publishers in the country have been forced by accounting rules to drastically reduce the book value of their recent acquisitions. Among them:

:: The New York Times Co. wrote off 58% of the combined $1.4 billion it paid to acquire the Boston Globe and its sister papers in New England.

:: Lee Enterprises wrote off half of the nearly $1.5 billion it paid to acquire Pulitzer Inc. in 2005.

:: McClatchy wrote off three-quarters of the $4 billion it spent to buy the several Knight Ridder newspapers it purchased for 9.5x cash flow in 2006.

Given this treacherous environment, Cablevision's brass may have a tough time selling their shareholders on the rationale and pricing for this deal.

Cablevision's rosy vision for Newsday

Cablevision’s bold plan to purchase Newsday will test as never before the concept – and the economics – of the hyper-consolidation of local media by a single company. Don’t count on it succeeding.

By adding the dominant Long Island daily and the free amNewYork to the largest and most highly concentrated cluster of cable systems in the country, Cablevision has the potential to become nearly all things media to many of the more than 4.5 million households and 600,000 businesses who use its cable services in New York, New Jersey and Connecticut.

In addition to delivering the triple-play services of television, Internet and telephone, CableVision now intends to augment its arsenal with Newsday’s circulation of 387.5k daily and 454.2k on Sunday, plus the 310.3k free copies of amNewYork that are distributed weekdays in Manhattan and the neighboring boroughs. This not to mention News 12, the local television news channel fed to Cablevision subscribers in the Tri-State Area and such legendary venues as Madison Square Garden, Radio City Music Hall and the Clearview Cinemas chain of movie theaters.

The strength of Cablevision’s pre-Newsday strategy is revealed in the 11.3% surge in sales that lifted its revenues to just short of $6.5 billion in 2007. Its operating earnings grew almost 1½ times faster than its revenues, generating more than $2 billion in cash flow, much of which is earmarked for servicing the $11.6 billion in debt that makes Cablevision one of the most highly leveraged companies in the media business.

In contrast to Cablevision, which has been growing briskly despite direct competition from Verizon for nearly every one of its existing and potential triple-pay customers, business at Newsday, like that of most newspapers, has been deteriorating rapidly and uncontrollably for the last four years.

How rapidly and uncontrollably? Very.

Newsday has lost a fifth of its sales since hitting a modern-day peak of $622 million in 2003, according to filings at the Securities and Exchange Commission. With revenues tumbling every year since 2003, Newsday reported $498 million in sales in 2007. Based on the recent deterioration of the economy and the 11.2% drop revenues collectively suffered by the Tribune Co. newspapers in the first three months of this year, there is no evidence to suggest the situation is turning around.

Although the debt-laden Tribune Co. does not individually report Newsday’s profit, industry sources estimate the paper’s operating earnings were $80 million to $90 million in 2007. Further, they report that the profit margin has been falling more rapidly than the newspaper’s sales, notwithstanding a series of cutbacks that have shrunk the newshole, the distribution footprint and the newsroom.

If the estimates are correct, then Newsday’s 17% operating margin is close to the average in recent years for the newspaper industry. But its profits are only half the size of those that Cablevision is accustomed to extracting from its existing lines of business.

So, why would Cablevision want to buy Newsday and all of its associated challenges?

Cablevision’s vision evidently is to develop a holistic advertising sales program that will enable merchants to buy everything from print to cable to Internet from a single representative offering a comprehensive bundle of integrated and interactive services. The pitch most likely will be sweetened by discounts that enable advertisers to save ever-greater amounts of money by directing ever-greater portions of their budgets to the Cablevision media.

Cablevision can boost News 12 with more and better local content from Newsday and amNewYork. It can use News 12 to put more video on Newsday.Com and steer more traffic to the newspaper’s website by making it the default home for the 2.3 milliom subscribers of its broadband Internet service. It could start a 24/7 video classified channel featuring homes and cars for sale. It might even try to boost sales at Madison Square Garden and its movie theaters by leveraging the newspapers to tout upcoming attractions.

For all the theoretical synergies that could be produced by this transaction, the reality is that Newsday is suffering from the powerful secular declines in readership and advertising that are affecting almost every newspaper in the United States.

Can Cablevision really build sufficient revenues and/or wring enough savings out Newsday to make the consolidation work? Only time will tell.

But the prospects for success seem less clear for Cablevision than they might have been if either News Corp. or the New York Daily News were buying Newsday, instead. Here’s why:

:: The consolidation of Newsday with either the New York Post or the Daily News would have created a single, overwhelming leader in the four-way battle for Sunday dominance in the Tri-State market (the New York Times, of course, is the fourth player). Sunday matters, because it typically generates half of a newspaper’s revenues.

:: As Rupert Murdoch said in advocating the Newsday deal before he abandoned it, the savings associated with the consolidation of the Post and Newsday could have yielded another $100 million in operating profits – or enough to turn the Post from a money-loser to a money-maker. The case would have been roughly the same for the Daily News.

Unless Cablevision goes out and buys a second newspaper in the New York market, it has no opportunity to achieve the revenue gains or cost savings that could have been reaped by Mr. Murdoch or Mortimer Zuckerman, the publisher of the Daily News.

Given the powerful reasons why News Corp. in particular should have purchased Newsday, why did Mr. Murdoch reverse course? Mr. Murdoch most likely concluded that (a) Cablevision is unlikely to pull off a successful quadruple-play with Newsday and (b) there was no need to over-pay for an asset in due course would come back on the market at a lower price.

Rupe might be wrong. But I doubt it.

Why Tribune has to sell Newsday

If you can imagine your mortgage payment tripling at the same time your take-home pay is shrinking, then you can understand the financial pain forcing the Tribune Co. to sell Newsday.

The first-quarter earnings release issued by the company late Friday, which touts a $1.82 billion “profit” based on an technical accounting adjustment, dances around the magnitude of the challenge the company faces in servicing a debt load that climbed to $263 million in the first three months of this year from $83 million in the same period a year ago.

As Tribune’s interest payments surged 317% in the three-month period, revenues fell 7.8% from the prior year to $1.1 billion. The situation would have been worse, if the 11.2% drop in newspaper revenues in the first period had not been offset by a 5.2% increase in broadcast sales.

The huge sums necessary to service Tribune’s debt, as well as the requirements that some of the $12.6 billion it has borrowed be paid down at yearend and in mid-2009, has motivated the company to sell its Connecticut newspapers, dispose of its Hollywood studio, put Newsday on the block and promise to auction off the Chicago Cubs. More dispositions could be in prospect, if revenue-generating or cost-cutting initiatives don’t produce cash fast enough to satisfy the lenders.

The magnitude of Tribune’s indebtedness at the most perilous time in the history of the American media is best illustrated by one simple fact: Its interest obligations in first three months of the year were equal to 24% of the company’s total sales. A year ago, interest payments represented only 7% of its revenues.

Although the Tribune may be the most heavily leveraged publishing company, it is far from alone. McClatchy, Lee, Media News Group, Journal Register, the Minneapolis Star Tribune and the Philadelphia Newspapers all borrowed vast sums to fund acquisitions in recent years.

They, like Tribune, today find themselves struggling with rising principal and interest obligations at a time of deteriorating sales and rising expenses for paper, fuel and health care. Some of them, including JRC and the Strib, appear to months from potential default, assuming they cannot boost sales, divest assets or significantly lower their operating costs.

The Tribune’s bodacious interest bill results from the $7.6 billion in debt that was added to the company’s existing $5 billion in obligations when Sam Zell took the company private in December in a complex employee stock ownership plan (ESOP).

One place that cash won’t magically appear to pay down Tribune’s loans is from the $1.82 billion in “profit” that the company claimed as the result of a bookkeeping adjustment in its first-quarter financial statement.

The “profit” is a legitimate accounting transaction occasioned by the reorganization of the New Tribune as a Subchapter S corporation, which is not required to pay taxes as Old Tribune did when it as a Subchapter C corporation. Gains and losses in an S corp are passed through to shareholders, who then are personally on the hook for any resulting taxes.

While Old Tribune was required to carry $1.86 billion of deferred tax liabilities on its balance sheet, New Tribune doesn’t have to, because any future taxes would be the obligation of such S-corp shareholders as Mr. Zell and the ESOP.

Even though the accounting adjustment didn’t produce any extra cash to fund interest payments or retire Tribune’s debt, the company this year did get to save the $19.4 million it spent on taxes in the first quarter of 2007. The $19.4 million in savings, however, hardly puts a dent in the $180 million in additional interest payments that the company had to pay in 2008.

Given the circumstances, it’s easy to see how an extra $70 million for Newsday could come in handy.

How the Net clobbered U.S. media

The abrupt decline of the newspaper business in the United States is strongly correlated with the rapid adoption of inexpensive broadband Internet service – a phenomenon that likely threatens most other media companies throughout the world.

That’s the conclusion of a presentation I delivered today to the annual world congress of the International Newspaper Marketing Association, which is meeting in Los Angeles. (For a free PDF of the presentation, email alan [dot] mutter [at] broadbandxxi [dot] com.)

In comparing data on the rise of high-speed Internet services with the decline of the U.S. newspaper industry, it is evident that circulation began deteriorating when household broadband penetration reached 23% in 2003 and that advertising began faltering when high-speed Internet adoption hit 31% in the following year.

The accelerating deterioration of the U.S. newspaper business since 2004 coincides with the near doubling of broadband adoption in the same period. With broadband penetration at a record 57% at the end of the first quarter of this year, print advertising sales were down by unprecedented double-digit rates and daily circulation was off by a record 3.5%.

Even though the U.S. population has more than doubled in the last 60 years, absolute newspaper circulation this year will be lower than it was in 1946. Newspaper penetration today amounts to less than 18% of the U.S. population, as compared with more than a third of the population in 1946.

There is evidence to suggest that the broadband effect is not unique to the United States. In comparing high-speed Internet penetration with circulation and ad sales around the world, it is clear that circulation and ad sales have declined the most at newspapers in the countries when broadband penetration has risen to 20% or more.

Although the wealth and sophistication of a country’s population are associated with broadband penetration, one of the clearest predictors of broadband adoption is the price of the service. High prices and limited availability appear to have held back broadband adoption in countries like Mexico, New Zealand, Slovakia and Turkey, according to data from the Organisation for Economic Co-Operation and Development. By contrast, inexpensive and widely available service is correlated with high penetration rates in China, Korea, the Netherlands, the Scandinavian countries, the United Kingdom and the U.S.

Newspapers tended to show the largest circulation declines between 2002 and 2006 in countries where broadband penetration today exceeds 20%. Canada, Germany, the Netherlands and the U.K. each lost between 9% and 11% of their circulation during the four years when broadband adoption surpassed 20% in their countries, according to data provided by the World Association of Newspapers. Mexico and Turkey both suffered steep circulation declines despite low broadband penetration in each country, suggesting that other variables were in play. Those variables could range from local economic conditions to changes in reporting standards.

The momentum in advertising sales between 2002 and 2006 generally was weak in countries where broadband reached more than 20% of households. Newspapers in such well-wired countries as Canada, France, Japan, the Netherlands, Sweden, the U.K. and U.S. reported notably weaker advertising growth than countries like China and India, where Internet penetration is far lower. To be sure, the rapid expansion of the economies in China and India had a major impact on ad sales in those countries, underscoring the reality that broadband penetration is but one indicator of the future health of a media business.

While this study concentrated on the impact of the Internet on the newspaper business, the findings may well be applicable to other media ranging from broadcasting to Yellow Pages.

In a new analysis of the global Yellow Pages business, Paul Ginocchio of Deutsche Bank found that print advertising sales tend to decline in direct proportion to rising Internet penetration. Based on his analysis, Paul predicts that a 1% gain in broadband penetration in a country will drive a drop of approximately 0.8% in sales for print Yellow Pages.

The impact of the Internet on broadcasting is equally profound. As but one example, Americans on average spend twice as much time on the Internet today (32.7 hours per week) as they do watching television, according to IDC, an independent research company.

If history is any guide, there is nothing to suggest that Internet adoption in the typical developed country will stop at anything less than 90% (or more) of households. It took only two years for the penetration of television to triple from 9% of the households in the United States to a third of the homes in 1952. By 1955, two-thirds of homes had a TV. By 1962, televisions were in 90% of U.S. households. With nearly one television in existence today for every American, 98 out of every 100 households has at least one set, according to the website TVHistory.TV.

To ensure the future health of their business, traditional publishing and broadcasting companies must adapt not only to the existing technology environment but also to such major future challenges as mobile computing on small, handheld devices like the iPhone and its eventual successors.

Publishers operating in countries where English is not widely spoken will have a distinct advantage over those who operate where English is more prevalent. First, language will slow the diversion of non-English speakers to the millions of Internet sites that are published in English (though Google translation services can help overcome the language barrier). Second, publishers will have the opportunity to adapt to their own languages and cultures many of the characteristics of the most popular English-language sites.

Successful transition to the new media will require far more than distributing existing content on the emerging platforms. New types of content must be developed to appeal to the young consumers who have a completely different relationship with the media than their parents.

U.S. media companies cannot be faulted for failing to foresee the rise of the Internet – or the speed with which it has been embraced. But they have been far too unimaginative and entirely too slow in developing the content and advertising solutions necessary to appeal to the next-generation users whose patronage will determine the prospects of their businesses in the coming years.

As such, those once-formidable franchises face the future as far weaker competitors than they ought to be.

Will Murdoch be Zell's exit strategy?

Rupert Murdoch may be standing pat on his bid for Newsday, because he knows that Sam Zell knows that News Corp. is probably the only plausible acquirer if the highly leveraged Tribune Co. deal goes south.

Like a pair of masters plotting several moves ahead in a chess game, Rupe and Sam may be using the Newsday transaction to see how News Corp. could come to the rescue in the event the Tribune Co. can’t reverse the declining performance that threatens to plunge it into default on its $12.8 billion in debt.

With Tribune owing approximately $1 billion a year in interest payments and the company producing less than $1.2 billion in free cash in 2007, it is perilously close to being unable to satisfy its obligations within a couple of years. The skinny margin for error is why the major bond-rating agencies have dropped Tribune’s ratings deep into junk territory and have warned within the last three weeks that the rating could be reduced even further.

The bond agencies, and Mr. Zell, have reason to be concerned. As Sam and his CFO reported in a recent conference call for investors, publishing cash flow fell 16% in 2007 and newspaper ad sales, which historically have produced three-quarters of the company’s revenues, slid at double-digit rates in the first three months of this year.

While Plan A for Sam and his crew of Clear Channel alumni certainly is to reverse the declining fortunes of the company, they would be remiss if they were not at least considering Plan B. And the most likely one would be selling Tribune to News Corp., the only company with the financial capacity, the demonstrated appetite and the testicular fortitude in the person of Rupert Murdoch to heavy up on traditional media at a decidedly inhospitable time for such businesses.

Assuming the News Corp. acquisition of Tribune were blessed by the federal authorities (more on that in a minute), the combined company would possess, among other things, three television stations and three newspapers (including the Wall Street Journal) in New York; three television stations and the major newspaper in Los Angeles; three television stations, one cable channel and the major newspaper in Chicago; two television stations and the newspaper in Orlando, and one television station and one of the major papers in Miami-Fort Lauderdale.

This is not to mention such enviable assets as the WGN superstation carried widely on cable TV and Tribune’s shares of Cars.Com and Career Builder, the only successful online ventures produced by the newspaper industry in the last 1½ decades.

Careful readers, which may include certain federal antitrust authorities, will note that the rich collection of assets in these major markets would surpass the cross-ownership limits now in place. But that’s where the Newsday deal comes in. Rupe and Sam hope to convince regulators that massing mainstream media properties in a market is necessary to assure their survival in an age of competition from the likes of Google and myriad other web and mobile upstarts.

If Rupe and Sam are successful in pulling off the consolidation of Newsday and the New York Post to achieve new efficiencies in marketing, ad sales, news gathering, production and distribution, then how hard would it be to argue that there is no harm in combining WPIX, WNYW and WWOR to do the same thing on the broadcast side of the business?

Careful readers also might observe that Fox and Tribune both own CW affiliates in certain markets. But this is an opportunity, not a problem. News Corp. could use one of the spare CW outlets to air the Fox News Channel, the Fox Business Channel or perhaps something like a 24/7 interactive version of its wildly popular American Idol. In a regulatory pinch, News Corp. simply could sell off the third stations to mollify the feds.

The knowledge that he is the most realistic, if not the only, exit strategy for Tribune Co. is likely why Mr. Murdoch has been patiently letting the bidding for Newsday play itself out.

Mortimer Zuckerman, the publisher of the New York Daily News who stands to lose the most if Newsday goes to News Corp., essentially has matched the terms of Mr. Murdoch’s offer in the hope the government will block the combination as anti-competitive. Although Cablevision reportedly has bid $70 million more than the $580 million that Mr. Murdoch and Mr. Zuckerman each has offered, the deal includes real estate that Mr. Zell , the consummate landlord, evidently is not disposed to sell.

If Mr. Zuckerman is right, then he presumably will get to buy Newsday and give the New York Post a proper run for Mr. Murdoch’s money. If Mr. Zuckerman is wrong, then his marginally profitable newspaper will be in the fight of its life.

Either way, the sale of Newsday will buy Mr. Zell a bit more wiggle room to pursue a profitable outcome for Tribune Co. If the wiggling goes badly, however, Rupert Murdoch is most likley the guy Sam Zell will call for help.

AHC and NYT lost most circ

Circulation at the New York Times Co. and A.H. Belo fell considerably more than the reported industry average in the most recent six-month reporting period, according to an analysis by Deutsche Bank.

While industry-wide daily circulation dropped an average of 3.5% and Sunday sales fell an average of 4.2%, daily circulation slid 8.3% at A.H. Belo and Sunday circulation plunged 7.8% at the New York Times Co. Particularly eye-popping was the 9.3% swoon in Sunday sales of the New York Times (maybe more articles about elegant, clothing-optional spas will help).

Analyst Paul Ginocchio reports that not one of the 10 publishing companies had an over-all increase in circulation. Even the best-performing publisher – News Corp. – lost 0.9% in daily circ and 1.2% on Sunday.

The big-name papers showing double-digit declines were the Dallas Morning News, off 10.4% daily and 7.6% on Sunday; the Rocky Mountain News, off 10.9% daily and 14.4% on Sunday, and the Miami Herald, off 11.4% daily and 9.1% on Sunday.

A larger-than-average circulation drop in one reporting period does not necessarily indicate an individual newspaper or company is any more trouble than the industry as a whole. Rather, it may reflect a company's desire to rein in distant circulation to create a tighter (and more economical) distribution footprint. Or, it could result from a decision to reduce or eliminate the sale of deeply discounted promotional copies.

Nevertheless, growth is better than contraction. Apart from the 0.3% gains at both USA Today and the Wall Street Journal, there are no other positive numbers on the table below. You can click on the image to enlarge it, but the results won't look any better.

Newspaper circ at 62-year low

The accelerating decline in circulation has brought newspaper sales to the lowest point in more than 60 years.

Based on the record 3.5% drop in daily circulation reported today for the nation’s largest newspapers, it appears that average daily circ this year will be no better than 50 million. If so, that would be the lowest level since 1946, when daily sales averaged 50.9 million, according to statistics provided by the Newspaper Association of America.

Though circulation has fallen back to pre-Baby Boom levels, the population has more than doubled since 1946. If you divide circulation by population, you will find that fewer than 18 out of 100 Americans today buy a daily or Sunday newspaper. Back in 1946, 36% of the population bought a daily paper and 31% took a Sunday edition.

While newspaper circulation has weakened since the 1980s, the decay has accelerated sharply since 2003, as illustrated in the chart below. Sunday circulation, which had been relatively more resilient than daily sales, now is falling more precipitously than daily sales. In the six-month reporting period ended on March 31, 2008, Sunday circ fell 4.2%, nearly a full point higher than daily circ.

Some of the circulation drop has been self-inflicted. As discussed here previously, a growing number of publishers have curtailed the expense of hauling papers to distant points to preserve vanity circulation that impresses neither advertisers nor shareholders.

While some publishers also have eliminated heavily discounted circulation, there is anecdotal evidence that other newspapers, including those in the San Francisco market, continue to offer such bargains as a yearlong subscription for a mere $20.

News of the worst newspaper circulation plunge in history coincided with a story today on the cover of Advertising Age, the bible fo the ad industry, which was entitled “The Newspaper Death Watch.”

Will the the tailspin in circulation and ad sales be accelerated by the growing accumulation of bad press about the press?

Where mass media lost ad share in '07

The share of advertising sold by newspapers and local broadcasters last year slipped in favor of such targeted media as the Internet and cable television.

As shown in the table below, local TV sales and print newspaper advertising suffered the deepest declines between 2006 and 2007, falling respectively 9.5% and 9.4%. Radio advertising, which is somewhat more targeted than that of newspapers and TV, nonetheless dropped 3.5% in the year.

The gainers, as you might suspect, were led by Internet advertising, which climbed 24.9% to a record $21.1 billion. While web advertising advanced a brisk 18.8% at newspapers, the gain represents only three-quarters of the growth achieved by the over-all online industry.

As total advertising spending rose by 0.4% to $171.1 billion in 2007, the share of the dollars spent at newspapers fell 3 points from the prior year to 25% of the total media market. Local TV fell 1 point in the 12 months to 10% of the market.

The Internet attracted 13% of ad dollars, rising 2 points for the year. Magazines and cable TV, which are the most targeted among the traditional mass media, each gained 1 point of market share, claiming respectively 18% and 11% of the total spend.

Deadly duel for N.Y. tabs

Those saying Rupert Murdoch wants to buy Newsday to squeeze the New York Times are missing the point: His immediate goal is weakening the New York Daily News so he can, once and for all, dominate the Big Apple.

While a beefed-up Murdoch presence in the New York market undoubtedly would cause new troubles for the already troubled New York Times Co., the publisher with even more heartburn than Arthur Sulzberger Jr. has got to be Mortimer Zuckerman, the owner of the Daily News.

The extent of Mr. Z’s concern may be revealed shortly, if he comes forward as widely expected with an offer to top the $580 million that Mr. M reportedly has offered Sam Zell for the Long Island tabloid. Tribune Co. is being forced to sell Newsday to scrape up cash to service its hefty debt.

As the biggest-selling daily paper in metropolitan New York, the Daily News – not the Times – would have the most to lose if the Post and Newsday were successfully teamed under News Corp. Indeed, a well-executed combination of the Post and Newsday could pull enough money out of the metro advertising market as to literally suck the life out of the Daily News, which, like the Post, is known to make little or no money.

While the consolidated daily circulation of the Post and Newsday would power the two papers into unrivaled leadership in the market, the potentially decisive factor in the life-and-death battle among the tabloids would be the huge lift in Sunday circulation enabled by the combination. Sunday matters above all else, because it’s the day of the week that typically generates about half of the advertising revenue for a newspaper.

As you can see from the circulation figures in the graphic below, the combined Sunday sale of the Post and Newsday (less a bit for overlapping circulation) would put the papers in some 44% of the middle-income households in the market. The broadest and deepest penetration in the metro area would give News Corp. a major advantage in selling advertising at a time when newspaper revenues are generally contracting.

By successfully shifting sufficient market share away from the Daily News to its twinned-up tabloids, News Corp. could put the Daily News in the position that it could not survive without an ever-growing subsidy from its owner, Mr. Zuckerman.

As the 188th wealthiest man in America, Mr. Zuckerman is estimated by Forbes Magazine to be worth $2.4 billion, so he could prop up the Daily News for quite some time. But Mr. Z would be going up against Mr. Murdoch, who, as the 33rd richest man in the country, has not only $8.8 billion in personal wealth but also heads News Corp., which puts another $16 billion in cash and other assets at his command.

Sunday circulation wouldn’t be the only factor in a war of attrition between the billionaire publishers. Another major weapon in News Corp.’s arsenal would be the 314.2k copies of AM New York that Newsday distributes every weekday. The free tab would enable News Corp, to gnaw away at Daily News circulation sales while consolidating an ever-larger portion of the available advertising dollars.

If you reverse the circumstances and postulate that the Daily News bought Newsday, the outlook would be nearly as dire for the Post – but for the fact that Mr. Murdoch appears to have the resources and determination to keep his paper alive for as long as he pleases.

With the fate of each of the other tabloids depending on who wins Newsday, Mr. Z and Mr. M are likely to up the ante for a few more rounds before the matter is decided. Nothing would make Sam Zell happier.

Reading is so passé

Reading on the web could become almost as retro as, well, reading a newspaper. (Not that there’s anything wrong with reading a newspaper.)

A pair of companies promoting beta versions of their technology this week at the Web 2.0 Expo in San Francisco showed how they can create audio and video from simple text, thus obviating the need to read.

After wrestling a bit with Dixero.Com, I got it to render an ordinary RSS feed of Newsosaur in a highly mechanized, but reasonably understandable, voice. Dixero is based in Lugano, Switzerland, and you can subscribe to the service now to experience the effect.

A Montreal company called Xtranormal.Com built a system that allows you to make animated films on the fly by typing text and cues into a dashboard. At the moment, the players in the video are limited to a bunch of Lego-like bobbleheads available from a library on the site. In addition to the canned demos on the site you get an idea of the application from the video below.

While these science-fair projects admittedly are more fanciful than practical at the moment, imagine the day when a newspaper or broadcast website could hook simple text feeds to an Xtranormal-type system to inexpensively produce automated videocasts of the news, sports, weather and more.

The robocasts could be hosted by images of real-life (or, alternatively, synthesized) news readers and then published not only on the sites but also syndicated via widgets, YouTube and mobile devices.

If users were given a choice of RSS feeds or subjects, then each could get a uniquely tailored video. For that matter, they even could pick the roboanchor of their choice.

Web ad sales slump at newspapers

As if plunging print advertising sales weren’t bad enough, newspapers also suffered a significant slowdown in new media revenues in the first three months of this year.

Nearly overshadowed by the double-digit print declines reported widely throughout the industry, the interactive slowdown results from the stubborn determination of most publishers to try to sell online advertising to the very same people who are forsaking print advertising.

But the plan isn’t working.

In the same three months that sales leaped 41.5% at Google, online revenue at newspapers in the first quarter of this year ranged from a gain of 10% at McClatchy to an increase of 7.5% at Lee Enterprises to a decline of 3.3% at Media General. This compares with the online gains of 17%, 54% and 66% that McClatchy, Lee and MEG respectively reported in the same period a year ago.

How could Google be doing so much better than newspapers? And why are interactive sales decelerating at newspapers when they are booming at Google? The answer to both questions lies in the difference between the types of the ads sold by Google and by newspapers.

Nearly all of Google’s sales come from the keyword ads that run on the right-hand side of search results, as well as the millions of other websites that carry Google ads in exchange for a split of the revenue generated when someone clicks on an ad. This business is growing explosively because advertisers love the idea of paying for an ad only when someone cares enough to click on it – and because marketers prize the precise (and free) metrics that Google provides to monitor their campaigns.

By contrast, most newspapers generate something north of two-thirds of their online advertising revenues by selling listings in the three major classified categories: auto, employment and real estate. These would be the same ad verticals where print sales, respectively, have fallen 14%, 28.8% and 25.8% since 2005, according to the annual industry statistics compiled by the Newspaper Association of America. (For an in-depth look at the collapse of the recruitment market since 2000, see this post.)

While Google is minting money by selling truly interactive advertising, newspapers for the most part continue to base their online businesses on the idea of “upselling” web versions of classified ads to marketers who are rejecting the one-to-many print model at an ever-faster rate.

Companies like Lee and Media General may have thought they were on to something a couple of years ago when they affiliated with Yahoo’s HotJobs to gain a host of new online recruitment offerings. Though the expanded product line indeed enabled the publishers to produce enviable sales gains in 2007, the publishers have no comparable new products this year to replicate last year's one-time feat.

Worse, you can pretty much count on each of the major classified categories to continue eroding as long as the economy remains in a recession. The big question, of course, is how much business will return when the economy revives.

In the same years Google ventured deeper into banner, video and other popular new forms of interactive advertising (including mobile), newspapers inexplicably continued to put their faith and energy into trying to shore up the classified-advertising business despite its obvious and seemingly irreversible secular decline. (One way newspapers could get beyond their heavy reliance on classified advertising is discussed here.)

Now that online growth is shrinking at the same time print revenues are shriveling, publishers will be harder-pressed than ever to muster the economic resources necessary to assure the economic vigor of their enterprises.

If the new media are supposed to be saving the newspaper business, then newspapers had better act quickly to start saving their new media franchises.

Drive-by surfers peril news sites

While more people than ever may be visiting newspaper websites, they are sticking around less this year than they were in 2007.

That’s the troubling problem the Newspaper Association of America failed to mention this week, when it reported that the number of unique visitors at its members’ websites increased 12.3% to an all-time high of 199.1 million in the first three months of the year.

But an analysis of the first-quarter web traffic reported by the industry association determines that, by most other key measures, the relative popularity of newspaper websites has waned in the last year in spite of the industry’s professed commitment to aggressively building online products and revenues.

As you can see in the chart below, the growth in the key metrics of newspaper web activity grew explosively in 2006, decelerated in 2007 and slowed this year to the point that two of the four indicators actually declined.

In the first three months of this year, the average amount of time visitors spent on newspaper sites fell by 2.9% to 44 minutes and 18 seconds per month, or less than 1½ minutes per day. In the same period, the average number of pages viewed per unique site visitor dropped by 6.6% to 47.2 per month.

While the total number of page views rose by 4.9% to a record 9.4 billion for the first quarter of 2008, the increase was far short of the 51.9% increase achieved in 2006 and the 12.6% gain in 2007.

The decline in the average duration of sessions at newspaper web pages suggests that visitors are not utilizing the industry’s sites as primary destinations, but, rather, as places to episodically view individual articles highlighted by Google News, Drudge, Digg, blogs or any of the thousands of other places they might be.

This could be a big problem for an industry that already has enough to worry about. Here’s why:

If drive-by surfers continue to generate a growing proportion of newspaper traffic, will advertisers put a high enough value on these relatively fickle visitors to pay the premium rates necessary to continue funding these elaborate, content-rich websites?

I wouldn’t count on it.

ASNE's senselesss newsroom census

Although it’s finally pointing in the right direction, I wouldn’t put any faith in the annual newsroom census just released by the American Society of Newspaper Editors.

In a confounding statistical mélange of apples, bananas and bowling bowls, the association – which ought to know better – would have us believe that only 1,000 journalists (less than 1.9% of the work force) lost their jobs at America’s newspapers since 2006 and only 3,800 positions (6.7% of the work force) have been eliminated since the peak employment of 56,400 reached during the tech bubble in 2001.

Would the toll were that low. But common sense tells you it is not.

To pick one admittedly extreme example, the news staff of the San Jose Mercury News has been trimmed to 175 today from some 400 in 2001. Compare the 56% drop in headcount at the Merc to the 6.7% industry decline reported by ASNE in the same interval and you can see why I question the census provided by the group that ought to be the first to want to accurately assay the decimation of the nation’s newsrooms.

As you may recall, the ASNE last year reported that newsroom employment actually rose 4% between 2006 and 2007 to 57,000. When I asked the ASNE then how employment could have climbed after a year of relentless cost cutting throughout the industry, the answer from a spokesperson who didn’t want to be identified was that, um, well, uh, the ASNE changed the way it counted online staffers.

This year, yet a new methodology was employed to further confuse matters. Instead of saying that there were 57,000 journalists on the job in 2007, the ASNE now says there were 55,000. The difference, as explained by the ASNE, is that, um, well, uh, it is counting people who work at free papers in a different way this year than last year.

As a consequence of continuously tinkering with seemingly ineptly gathered data, it is likely that the ASNE is materially understating the decline in the newsroom population in the last half-dozen years. With apologies in advance for the complexity imposed by the association’s illogical statistics, here’s one example of how goofy this gets:

The association reported yesterday that the number of journalists at America’s newspapers fell by 2,400 between 2007 and this year, a 4.4% decline that brought total newsroom employment to 52,600, the lowest level since 1984. But the association inexplicably – and counter-intuitively – added 1,400 jobs to the industry total between 2006 and 2007, so as to report that the industry employed 55,000 journalists in 2007 vs. 53,600 in 2006.

For 1,400 new journalism jobs to have been created between 2006 and 2007, the industry would have had to be beefing up its newsrooms. I don’t recall that happening. Do you?

What went wrong at JRC

Teetering near default on a tower of debt and days from being booted off the Big Board, Journal Register Co. shows how strategic missteps and bad luck can imperil even as good a business as this highly profitable chain of community newspapers.

For all that’s wrong with JRC – and there is a quite lot, to be sure – the company’s 19.3% operating profit not only compares quite favorably with those of several of the largest Fortune 500 corporations but actually surpasses the margins of such giants as Chevron (18.5%), Wal-Mart (7.5%) and General Motors (3.5%).

The ability of JRC to continue generating rich profits at a time of unprecedented contraction in the newspaper business is the direct legacy of the rigorous expense management enforced by Robert Jelenic, the chief executive who ran the company for two decades until he resigned in November to undergo cancer treatment.

In addition to leaving JRC with some of the leanest-running newspapers in the land, Mr. Jelenic also left the company with the hefty $628.4 million in debt that now threatens to force it into bankruptcy. Most of the debt results from one bold, but less than successful, acquisition he undertook in 2004 in an effort to keep the company’s sales, profits and stock price growing.

Not only did the transaction prove over time to be a serious miscalculation, but a steep drop in JRC’s sales in the last two years has made it increasingly unlikely that the company can generate enough profits in the future to service its ponderous debt.

Between 2005 and 2007, JRC’s sales tumbled 20.2% to $463.2 million, a drop nearly 2½ times greater than the over-all industry decline of 8.2% in the same period. (Some revenue was eliminated in JRC's sale of a few modest operating units, but the volume of the discontinued operations comes nowhere close to accounting for the disparity between the performance of the company and the industry as a whole.)

Caught between high debt and declining sales, the company today finds itself in a world of hurt:

:: JRC’s share price has fallen by 99% from a high of $21.84 in 2004 to $0.265 Friday at the New York Stock Exchange. The Big Board plans to ban the shares from trading this week, because the value of the company is too low to meet the minimum listing standards.

:: The company’s debt, which amounts to an untenable seven times its operating earnings for the last 12 months, is now rated at Caa1 by Moody’s Investor Services, which means the rating agency believes the company has better than a 1 in 3 chance of default. Moody’s is concerned that the company cannot generate enough cash to cover the debt repayments scheduled for 2009.

:: The largest portion of the debt that threatens to force JRC into bankruptcy resulted from the acquisition for $415 million in 2004 of a group of community papers concentrated around economically distressed Detroit. To date, the company has been forced to write off $215 million, or nearly 52%, of the value of those assets.

:: An investment banker has been hired to explore the sale of some or all of the company’s assets, but few parties are interested in acquiring newspapers these days, given the the unsettled outlook for the industry. Further, it is questionable whether a buyer, if one materializes, would pay much more than the 7x earnings necessary to extinguish the company’s debt. This fear has caused investors to hammer the stock to the point it is all but worthless.

Ironically, JRC, which owns 22 daily newspapers and more than 300 non-daily publications in six geographic clusters, got its start as the reincarnation of a newspaper empire that was run off the rails in the 1980s by Ralph Ingersoll II, a buccaneering publisher who built his eponymous empire by overpaying for newspapers and financing them with junk bonds.

When Ingersoll Publications collapsed under its debt in 1990, its investors turned to Bob Jelenic, Mr. Ingersoll’s protégé, to restart the company as Journal Register.

The strategy for JRC, which went public in 1997, was essentially the same as that of Ingersoll Publications: Build the company by aggregating neighboring newspapers into ever-larger clusters that would make it possible to sell advertising more efficiently while lowering the costs of producing the publications.

It’s a terrific idea, so long as you don’t overpay for acquisitions and have a plan to build sales while judiciously cutting costs. But the execution didn’t prove to be much better at JRC than it was for Ingersoll Publications.

As JRC pursued its rollup strategy, Mr. Jelenic sought to boost his company’s stock by aggressively reducing expenses to increase earnings as much as possible, thus earning the reputation as the most zealous cost cutter in the newspaper industry. “Nobody cinches the belt tighter than…Journal Register Co., where cost-cutting has become an art,” reported Forbes Magazine in a 2001 article titled “Cheapskate Journalism.”

Beyond shrinking staff, benefits and newshole, JRC was known for such practices as printing on ever-thinner newsprint and requiring executives to check the odometers of journalists before reimbursing them for driving to their assignments. A former JRC publisher told the American Journalism Review in 1999 that Mr. Jelenic sometimes demanded the instant firing of an employee, any employee, if his paper missed its weekly revenue target.

JRC produced some of the highest operating profits ever seen in the newspaper industry when its earnings before interest, taxes, depreciation and amortization (EBITDA) hit 29.1% in 2001. But it is hard to replicate annually such one-time savings as downsizing a newsroom or consolidating two printing plants into one. In the absence of significant sales growth from 2001 to 2003, JRC’s profitability, though still ample, began faltering.

To boost the company’s growth and potential for future profitability, Mr. Jelenic in 2004 bought 21st Century Newspapers in what it called “affluent markets” in Michigan for $415 million, paying a generous 11.5x EBITDA. But the domestic auto industry was facing a decline that, if anything, has accelerated since then.

The Michigan acquisition not only failed to produce the hoped-for sales and profits, but also saddled JRC with substantial debt at the same time revenues began falling at its properties and most other newspapers in the United States.

Now, JRC is caught in a squeeze it may not be able to survive. Unlike newspapers owned by other publishers that are trying to tough out the tough times by paring expenses, most JRC newspapers have little left to cut – and limited resources to build sales with new print and online products.

Despite its straitened circumstances, JRC in 2007 did manage to pay Mr. Jelenic more than $6.3 million in salary, severance and other compensation, which represented a fourfold increase over the nearly $1.5 million he received the prior year.

As part of his severance arrangement, Mr. Jelenic got an extra 192,000 shares of JRC to add to the nearly 2.3 million shares he already owns. Unfortunately, his stock, like mine, isn’t likely to be worth anything near what it used to be.

Congrats, with an asterisk

Like the baseball Barry Bonds swatted into the stands to break the all-time homerun record, there ought to be an asterisk on the Pulitzer Prizes awarded to journalists this year and for the foreseeable future.

Unlike Bonds, who has been accused of using illegal steroids to enhance his performance, the writers and photographers who earned the industry’s highest honor did nothing inappropriate to devalue their achievements.

But nearly all of them were competing with an unfair advantage, because they were lucky enough to work for the relatively few remaining news organizations still in good enough economic condition to afford the staffing and other resources necessary to produce distinguished coverage.

It’s no happenstance that the Washington Post collected half a dozen Pulitzers, given that its well-staffed newsroom (now in the process of being reduced by early-retirement incentives) has been largely immune from the cost cutting that has thinned the ranks at most other newspapers. And the Milwaukee Journal Sentinel, which shared top investigative honors, still has a dedicated, 10-person investigative unit after undergoing its own bout of layoffs.

Staff cuts that have hit the indusry in the last few years require fewer people to do more work to fill the paper and feed the website, reducing the opportunities to produce ground-breaking investigations, riveting photos, sparkling features and exceptional coverage of big, breaking stories.

Although the Washington Post has suffered sales and profit declines like the rest of the industry, the newspaper represents only a fifth of the revenues of a closely-held, family-controlled company that recorded nearly $4.2 billion in sales in 2007. The sales and profits from broadcasting, cable television and the Kaplan testing and education business -- plus, the Graham family's unswerving commitment to sustaining the quality of the paper -- helped insulate the Post’s talented newsroom from the economic calamity buffeting the rest of the industry.

The Post has a far more moderate debt load than those burdening such once-formidable Pulitzer contenders as the papers owned by McClatchy and Tribune Co. (the Chicago Tribune's Pulitzer was earned for work completed prior to the sale of the company in December, 2007). Even the New York Times Co. is being forced to do more with less, owing to pressures from restive shareholders and the weak performance of such major divisions as the Boston Globe.

Regardless of how extreme the divide grows between the journalistic “haves” and “have-nots,” it always will be an honor to earn a Pulitzer, even with an asterisk. Sadly, only a shrinking handful of fortunate newspapers have a realistic hope of capturing the prize in the future.

Newspaper revenue crisis mounts

After suffering the worst sales decline in nearly 60 years in 2007, American newspapers could be heading to an even deeper drop in 2008, based on the industry's performance in the early months of this year.

If sales continue deteriorating at the same dismaying rate for the balance of the year, the resulting revenue crisis will threaten the economic viability of the financially weakest and most debt-ridden newspapers – and the journalistic mission of nearly all of them.

Slammed by the unprecedented collapse of every major advertising category, American newspapers in 2007 recorded their worst sales decline in modern history, as print revenues fell 9.4% to $42.2 billion (vs. a forecast here last fall of $42.7 billion).

Apart from the 9% plunge in print sales in 2001 after the twin calamities of the tech bust and the terror attacks, there has been no other annual sales decline approaching this magnitude since 1950, according to the records kept by the Newspaper Association of America. Because NAA’s published data only go back to 1950, there’s no telling when, or if, sales ever dropped more than 9.4% in a single year.

Grim as it is, last year’s record may not stand for long, if the industry cannot reverse the queasy sales decline it experienced in the first two months of 2008.

While many publishers have stopped reporting their monthly sales, those who still provide the information posted far worse performance in the opening months of 2008 than they did a year ago.

Back in 2007, the industry reported a 6.4% decline in total print sales in the first three months of the year. The best sales performance in the first two months of this year among the reporting publishers was an 8.8% drop at Gannett. The worst performance was a 16.8% plunge at McClatchy.

In other words, the sales declines for the two publishers were respectively 1.4 times and 2.6 times deeper in the first two months of this year than the industry experienced in the first quarter of 2007.

And the first quarter of last year was, gulp, the best. Sales fell 10.2% in the second quarter, slid 9.0% in the third period and dropped 11.6% in the final three months of 2007.

It’s not possible to forecast sales for the balance of this year for two reasons. First, the economy is too unsettled to predict how the next nine months will unfold. Second, newspaper sales have been in distinctly uncharted and hostile territory since 2005, when all the major advertising categories began a downward trajectory they have been unable to reverse. Wth no precedent to draw on, there's no way to guess how low they might go.

Every print category ended 2007 lower than it began. Retail fell 5.0% for the year to $21 billion, auto classified skidded 18.3% to a bit less than $3.3 billion, recruitment slid 19.8% to $3.8 billion and real estate – the lone bright spot before the housing bubble popped – plunged by 22.6% to $3.8 billion. Each of these categories continued eroding in the early months of 2008.

The one comparatively bright spot for newspapers in 2007 was a brisk 18.8% increase in online revenues to just short of $3.2 billion. But even this advance fell well below the 31.5% annual interactive gain that cheered the industry in each of the two prior years.

Despite the repeated promises of publishers to recast their struggling franchises as signficiant online entitites, last year’s interactive revenues amounted to no more than 7% of total newspaper industry sales. This meager performance was achieved in spite of the fact that print sales, which represent the vast bulk of the denominator in this ratio, fell by 9.4%.

Further, the 18.8% jump in online revenues at newspapers was only three-quarters of the size of the 25% annual sales increase that powered over-all online sales to a record $21.2 billion in 2007. So, newspapers are trailing considerably in online market share at the same time their traditional print advertising business is melting down.

With the contraction in newspaper advertising apparently accelerating for the third year in a row, publishers would be hard pressed in even a robust economy to reverse the trend. But these are far from the best of times. Continued shocks and uncertainty have created one of the worst, if not the worst, business climates since World War II. Even Alan Greenspan, whose misfeasance helped put us where we are today, says so.

Absent a turnaround that seems beyond immediate prospect, the depressingly inescapable conclusion is that the economic crisis for newspapers will continue to mount as their sales limp to ever-lower lows.

No hoax is a joke

With the Los Angeles cousins of the merry pranksters at the Chicago Tribune victimized by an embarrassing hoax, does deceiving a newspaper seem as funny today as it did last week?

That’s what I would ask those who branded me a dour, old fuddy-duddy for criticizing the Tribune for deceptively entering a video in a contest sponsored by the Chicago Sun-Times. Adding injury to insult, the Tribune deliberately misled the Sun-Times reporter seeking to confirm the bona fides of the purported creator of the video.

The shoe was on the other foot today, when the Los Angeles Times, a corporate cousin of the Tribune, had to apologize for a false story that was based on phony FBI documents evidently fabricated by a federal prisoner, an oops discovered and brilliantly reported here by The Smoking Gun.

The discredited Times story, which was based in part on the apparently phony documents, suggested that two associates of rap impresario Sean (Diddy) Combs were behind an unsolved 1994 attack in which rapper Tupac Shakur was pistol-whipped and shot several times. The story, which was vigorously denied at the time, has been topped at latimes.com with an apology, but the original is cached here on Google.

To be sure, the damage caused by inducing a newspaper to erroneously accuse someone of attempted murder is far more serious than misrepresenting the source of a light-hearted video about potentially changing the name of Wrigley Field to Viagra Park. But the transgression – deliberately misleading a newspaper, and, by extension, the public – is the same in both cases.

For some twisted reason, the fellow who evidently created the phony documents that duped the L.A. Times sought to implicate himself in the Tupac assault. I can’t fathom his motivations.

But I would think that journalists fortunate enough to work at a newspaper like the Chicago Tribune would be committed, first and foremost, to fully, fairly and faithfully informing the public. Misleading the readers of a competing newspaper, no matter how amusing the stunt might have seemed to the pranksters, is a violation of the public trust that all respectable newspapers are supposed to serve.

While it is painful to see a proud newspaper like the Los Angeles Times embarrassed by some flake, it is downright depressing to see journalists at one publication conspiring to plant false information in another.

That’s not an amusing prank. It’s unethical behavior. And it’s wrong.

The public trust, an increasingly scarce commodity these days for newspapers, was violated in the cases of both the Tupac story and the Tribune’s stealth video. The only difference between the two cases is that the Los Angeles Times was the victim and the Chicago Tribune was the perpetrator.

And, for the record, I am not old. Although I recently turned 59, most people say I don’t look a day over 58½.

Stealth journalism

Two events in the colorful annals of Chicago journalism will give you a sense of how undercover enterprise projects have evolved in the last 30 years. Sadly, it hasn’t been for the better.

The first event occurred in 1977, when the Chicago Sun-Times surreptitiously purchased a tavern riddled with building-code violations, so it could document how many city inspectors and fire marshals could be bought off with a stack of $10 bills.

The second event came to light last week, when reporters at the Chicago Tribune revealed that they had produced the winning entry in a Sun-Times contest for the best video opposing the idea of selling the naming rights to Wrigley Field, the ballpark owned by the Tribune Co. (Video here.)

While both projects required exceptional stealth on the part of each newspaper, that’s where the similarity stops.

The tavern investigation, which resulted in the sanction or conviction of several inspectors, as well as promises of improved integrity on the part of city officials, served a clear public interest. The Tribune video, though cleverly executed, was nothing more than a stunt designed to embarrass the Sun-Times.

The investigation at the tavern whimsically called the Mirage was denied a Pulitzer Prize by jurors who believed the Sun-Times had engaged in unethical deception to get the story. The editors of the newspaper, which I joined shortly after the series was published, argued that the story simply couldn’t be obtained without resorting to an elaborate undercover investigation.

By contrast, the Tribune video, which is unlikely to be considered for the Pulitzer or any other award, resulted from deception for the sake of deception.

Before the Sun-Times awarded the prize in the video contest, its reporter called the Tribune intern posing as the creator of the winning video. The Trib intern, who took the call from the Sun-Times while sitting in a conference room at the Tribune, stated that she was a graduate student at the University of Illinois, which is true.

But she left out the part about being an intern at the Tribune. And being dragged along to the taping of the video after it was conceived and scripted by a group of her colleagues, including the paper’s multimedia staff. “I didn't really know what was going on until we were in the car, driving to Wrigley," said Katie Hamilton in an interview with P.J. Hufstetter of the Los Angeles Times.

As a clutch of Tribune staffers listened to Katie shining on the Sun-Times reporter, Tribune features editor Tim Bannon said he felt a twinge of unease about not telling Katie to confess that she works for the Tribune, according to the L.A. Times. In fact, the Tribune didn’t come clean until after the Sun-Times published a page one story proclaiming Katie the winner of the video contest.

Kevin Pang, the Tribune features reporter who originally cooked up the stunt, had no regrets. “We can't underscore enough that we told the truth at every step,” he told the L.A. Times. “If they asked if we were reporters at the Tribune, we would have admitted it then and there.”

So, this enterprising journalist not only deceived the Sun-Times and, by extension, the public. He apparently has succeeded in deceiving himself, too.

Reaction to this post

"Alan Mutter's self-description as a 'Newsosaur' seems right on the mark, an antiquated, Ben Hechtian view of how newsrooms should operate," responds Kevin Pang, the creator of the Tribune video. "The idea that everything we do should have a FOIA request attached is journalism elitism at its most pretentious." His full post is at Poynter Online.

Hefty debt, sagging credit ratings

The continuing meltdown of newspaper stocks and bond ratings has provoked emails and calls from readers seeking a deeper understanding of the financial pressures facing publishers. This is the second of two posts (the first is here) answering the most common questions.

Q. The ratings on newspaper bonds keep falling. What are bonds, anyway? And why are ratings dropping?

A. Companies needing to borrow money to finance acquisitions, expansions and other normal business activities sell bonds, which are elaborate IOUs promising to pay lenders a certain rate of interest at prescribed intervals and to repay the loan in a defined period of time.

When a company issues bonds that will be bought and sold in the public market – as most are – they hire a private, for-profit rating agency to examine their finances and business prospects to independently assess the issuer’s ability to repay the obligation in accordance with the terms of the bond. In addition to rating a bond before it initially is sold, the agencies continue to monitor an issue through its lifetime and adjust the credit’s rating according to the company’s performance.

The major rating agencies are Standard and Poor’s, Moody’s Investor Services and Fitch Ratings. They rat