Monday, March 14, 2005

Supersizing profits, squeezing the news

Amid dwindling circulation, receding advertising share and growing skepticism over credibility, newspapers took decisive action last year: They boosted profits twice as fast as they increased sales.

That's one of the findings in "The State of the News Media in 2005," a new, unvarnished study of the nitty-gritty economics of the news biz from the Project for Excellence in Journalism.

If you believe a healthy press is good for our democracy, then you won't find the report to be pleasant reading. But read it, anyway. Here is just some of what you'll learn:

Newspapers last year "increased their profits at double the rate (8%) that their revenues grew (less than 4%)," a "distinct sign of profit-taking," the study found. The emphasis on supersizing the bottom line produced average industry margins of 22.9% in 2004, according to Lauren Rich Fine of Merrill Lynch, a securities analyst.

The only way you can increase profits faster than sales is by cutting expenses, and the newsroom was a chief target. "At its annual meeting in April, the American Society of Newspaper Editors got the bad word that employment of full-time news professionals actually declined by 500 positions (about 1%) in 2003," said the study. "That more than wiped out modest gains of about 300 the year before. And that came after the deep cut of 2,000 jobs in 2001."

In addition to reducing newsroom headcount, stated the report, publications also squeezed more advertising into their pages, thereby cutting back "on the percentage of space devoted to news."

In light of the significant competitive threats to the long-term health of their business, why would newspaper companies emphasize profit growth instead of further investment in building new audiences through new media?

Because a company's success in the stock market, as Bernie Ebbers or Ken Lay will tell you, is a significant factor -- maybe the signficiant factor -- in a senior executive's compensation package, as discussed previously here. Unless compensation plans are changed, publishing companies will continue to prize short-term profts over the long-term health of their enterprises.

When it comes to raking in profits, newspapers can't hold a candle to local TV news. Margins of 45% to 50% are common in local outlets, where station revenues rose 10% in the first nine months of 2004, says the report. TV can get away with this behavior, because the semi-monopolistic local broadcast franchises are less vulnerable than print to new media.

Although the morning network news shows increased sales by 5% to 10% last year, business for the evening news programs went sideways. Profit-driven staff cutting slammed the beleaguered CBS news division. "The CBS Evening News had notably fewer correspondents than NBC or ABC (about 15% fewer) doing substantially more work in 2004," says the report.

Although sales gains ran between respectable and robust for the traditional mass media last year, the biggest proportional increases were in online media, where revenues grew some 30% in 2004 to approximately $10 billion.

Even though online sales today are modest in comparison to traditional newspaper, magazine, broadcast and cable TV ad revenues, you would think the dramatic online sales gains would inspire legacy media companies to invest heavily in this fast-growing business. Well, you would be wrong.

"There is more evidence than ever that the mainstream media are investing only cautiously in building new audiences," says the report. "That is true even online, where audiences are growing. Our data suggest that news organizations have imposed more cutbacks in their Internet operations than in their old media.... Where the investment has come, is in technology for processing information, not people to gather it."

At the moment, "traditional media brands still control most of where audiences go online for news, but that is already beginning to change," continues the report. "In 2004, Google News emerged as a major new player in online news, and the audience for bloggers grew by 58% in six months, to 32 million people."

In addition to Google, the word here in Silicon Valley is that Yahoo is revving up a major local news initiative. And Craig Newmark, founder of Craig's List, increasingly has been discussing his admiration for citizen journalism. "I really think a tipping point in journalism is happening, and I think it's time to get involved," says Craig.

Sum it all up, and here is what you have:

At a time when the dominant media companies should be strengthening their enviable franchises, they instead are pillaging them for profits. At the very moment media companies should be investing aggressively in new media, they instead are short-changing the initiatives most likely to produce significant, long-term growth.

That's the state of the news media in 2005, folks. And a sorry one it is.

5 Comments:

Anonymous Joe Zekas said...

Your arguments are corrrect. Your conclusions are correct. Your math is bad -- yet more fodder for the argument that journalists are math-impaired.

You say that the "only way you can increase profits faster than sales is by cutting expenses ... "

Consider the following not uncommon scenario: year 2003 revenues of 100, expenses of 80, profits of 20.

For 2004, increase revenues by 4% and expenses by 2%. Profits increase 3 times as fast as revenues.

7:37 PM  
Blogger Newsosaur said...

Guilty as charged, insofar as my being math impaired. But math isn't the issue here.

If a business is under the sort of competitive threat faced by newspapers, then the emphasis should be on investing in the business, not extracting profits from it.

If the rate of profits increases faster than the rate of sales, then you are exploiting, not nourishing, the enterprise. That is poor corporate stewardship.

11:58 AM  
Anonymous Joe Zekas said...

There's no shortage of poor corporate stewardship at newspaper companies.

The ratio of profit increases to sales increases is not evidence of poor stewardship. If it were, Google, Microsoft, and many other well-run companies would be guilty of poor stewardship.

8:56 PM  
Blogger Xpatriated Texan said...

Profits in newspapers tend to come more from advertising than subscriptions. This is especially true since subscribers tend to pay lower prices than those who buy at the newsstand.

However, the cut in news staff is a real problem. How can you provide adequate coverage of a growing world with a shrinking staff? Part of the answer is to rely upon the pre-packaged propaganda released from official government sources. Increasingly, "news" is actually only what is being said, not what is being done.

XT

8:42 AM  
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12:14 PM  

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