Tuesday, September 27, 2005

Nobody’s dancing a jig

As accustomed as they are to dealing dispassionately with mayhem affecting other folks, even the hardest-bitten newspersons are unhinged when calamity strikes at their own places of business.

As more than 100 newsroom jobs per day vaporized last week from the New York Times to the Birmingham (AL) Post-Herald to KSWB-TV in San Diego, many journalists evidently took the developments as an insult to their profession and, by extension, a repudiation of them as individuals.

In their understandable anger and dread, most of them failed to recognize that the cutbacks are but one manifestation of the most profound restructuring of the economy in more than half a century.

Everyone, especially their readers, viewers and listeners, needs to understand this story. Instead, we are getting simplistic sound bites from people who ought to know better.

"Wall Street appreciates cost-cutting and improving margins and increased profitability," John Morton, the ordinarily perceptive dean of publishing analysts, told the New York Times. "Those are the things that make them dance a jig at night."

Much as I respect John, he is dead wrong in this case. Nobody is dancing a jig about a tectonic shift in the economy that is forcing businesses of every type to become lower-cost producers -- or die.

This upheaval is bringing a sobering new reality to such once-mighty companies as Delta Air Lines, Hewlett-Packard and Sony, to name but a few. Each recently has announced major work-force cuts, reductions in pay and benefits, plant closings and other once-unthinkable economies.

So, let's get a grip and get some perspective:

Ups and downs in the business cycle aside, American workers gained unimaginable levels of wealth and economic security in the industrial boom that followed World War II. (To be sure, not all shared equally, with persons of color statistically more likely to be left behind.)

The growing post-war economy helped everyone from social workers to electricians gain unprecedented job security, along with generally increasing wages, health insurance, pension plans and the ability to take vacations, buy a home and purchase an average of 2.4 TVs per household.

Amid all this prosperity, a "buy now, pay later" mentality emerged. Companies agreed to historically generous pay and benefits programs for both current workers and future retirees. Governments at all levels accepted ever-larger deficits. Consumers shouldered growing amounts of debt.

But that was then and this is now. After more than half a century of expansion, the economy is restructuring with a vengeance to favor low-cost producers -- and to penalize sharply the businesses that developed high cost structures during the 50-plus years of prosperity.

A large part of this pressure, of course, comes from the fact that modern technology and logistics makes it possible to operate call centers more efficiently in India and the Philippines, or to make steel, computers, running shoes and Happy Meal tchotchkes more cheaply in China, Pakistan or Central America. This, of course, has cost huge numbers of Americans their jobs.

At the same time offshore production has become more efficient, the sales of many of our most prominent companies, as well as lots of smaller ones, have not been robust enough to cover the substantial un- or under-funded commitments they incurred in the last half century.

Ford and General Motors haven't been able to develop new models or cut their costs fast enough to compete with overseas competitors, because they are locked into union contracts that require high wages and benefits for current workers; make it enormously expensive to reduce force at underutilized plants, and mandate generous health care and pension benefits for retired workers who, thanks to modern medical science, are living longer than anyone thought they would.

Despite the pressure on profits caused by the high (and in many cases rising) fixed costs of raw materials, labor, shipping and pension obligations, auto markers keep discounting prices to preserve their dwindling market share and, they hope, to generate enough cash to feed their struggling businesses. Their eroding profitability does not augur well for their future.

None of this is to say union agreements or commitments to retirees ought to be summarily scrapped. But the fact is that a whole lot of big-name companies are locked into cumbersome commitments they can't afford to keep. Something has to give. Companies and unions either will have to work things out (with perhaps the assistance of the federal government?) or they will implode. Companies like GM are on the ropes and the AFL-CIO started blowing apart this summer.

The success (or tyranny) of the low-cost providers is illustrated best by the airline industry, where travelers recently have enjoyed incredible bargains at the expense of the traditional companies. The legacy airlines trace their roots to the days when the federal government regulated routes and rates to assure operators of hefty profits regardless of their costs.

Although the legacy airlines have tried to slash fares as much as possible to keep up with the discounters, they have not been able to reduce their costs fast enough to keep revenues ahead of expenses. As a result, half of the seats available to travelers today are owned by bankrupt airlines, a rather chilling thought.

As but one example, the once-proud Delta Air Lines, which considers itself the nation's second-largest carrier, is losing billions and teetering on the brink of oblivion because its steep conventional cost structure makes it impossible to compete with such low-cost, yet profitable, providers as AirTran, JetBlue and Southwest.

The low-cost providers benefit not only from more efficient fleets and cherry-picked routes, but also from lower labor costs. The bargain carriers don't pay union wages and benefits, because they have no unions. They have no pension obligations, because the companies are too young to have have any retirees.

After filing for bankruptcy earlier this month, Delta last week put out a remarkably candid plan for turning itself into a lower-, if not to say, low-cost provider. The steps include cutting expenses by $8 billion by the end of 2007 (51.6% lower than they were in 2002), trimming its work force by 9,000 jobs (17.3%), reducing pay for remaining employees (including a 25% cut for the CEO) and curtailing health and other benefits.

Just as Wal-Mart has driven down the price of pillows and peanut butter through superior logistics, aggressive purchasing and the even more aggressive management of its labor costs, every manufacturer, retailer and, yes, newspaper must chop its operating costs to compete successfully with low-cost challengers.

The traditional media companies have it even tougher than most other businesses. In addition to carrying the type of legacy labor commitments faced by automakers, airlines and others, they face three additional burdens:

:: First, they are challenged by low-cost competitors that can deliver faster, cheaper and as-good, if not sometimes better, content.

:: Second, they are battling to save advertising market share being grabbed by the encroaching interactive media, which not only efficiently deliver highly targeted audiences with great precision but also can verify that the message was received.

:: Last but not least, the legacy media companies have high fixed costs that can't be trimmed easily. Traditional companies have to build and operate expensive broadcasting or publishing infrastructures, regardless of whether they serve an audience of one or a million. Print publishers also face the formidable costs of paper and distribution.

Because most of the overhead for a media company is inescapable, the only place to significantly reduce costs when times are tight is in headcount. The newsroom, unfortunately, is where staffing is most elastic, for it can be expanded when times are good and contracted when business is soft.

Media companies act at their own peril if they cut too deeply in the newsroom, however, because it is the efforts of these women and men that draw the crowds that the advertising department sells for money. Weaker content equals smaller crowds and smaller crowds equal less money. If the company loses enough money long enough, it will close its doors forever, as happened last week at the Birmingham Post-Herald and KSWB in San Diego.

In an era of profound upheaval for nearly all American business, it is unreasonable to expect that media companies, which rely on the success of other businesses for their advertising revenues, could be exempt from the squeeze. Like their counterparts across a broad array of industries, senior media executives today are trying to navigate through a period of profound, rapid, uncharted and inexorable change.

Yes, they are dancing as fast as they can. But no one is dancing a jig.