Back to the chopping block
With economic harbingers pointing to recession-like conditions in 2008, many publishers are urgently recalibrating their budgets to reflect the growing concern that sales will decline more steeply this year than many of them had predicted as recently as the fall.
“Things are going further south than anyone anticipated,” said one glum publishing executive, echoing the thoughts of many others. “We weren’t optimistic to begin with. But, compared to where things are, it looks like we were too optimistic.”
A sales decline this year would come on top of the near-record ad slump that apparently took place in 2007 despite a comparatively robust economy. Based on the 8.6% sales decline reported in the first nine months of 2007, it is likely (as detailed here) that print advertising for all of 2007 will total $42.7 billion, give or take. The projected full-year drop would rival the all-time record sales decline of 8.9% in the aftermath of the terror attacks in 2001.
While the definitive reckoning of last year’s carnage won’t be available until publishers close their books for 2007, industry analyst Peter Alpert at Goldman Sachs projects that sales could fall as much as another 7.9% in 2008. If Peter is right, and fears are growing that he may be, then the publishers who thought they were being sufficiently cautious in forecasting a 5% revenue decline in 2008 would need to trim even more expenses than originally planned to achieve their profit targets.
How much would expenses have to be cut? Here’s the unpleasant math:
Assuming all other things were equal from last year to this, publishers seeking to make up for a 5% shortfall in print ad sales in 2008 would have to cut $2.1 billion worth of headcount, newsprint and other expenses to hold the line. If publishers needed to make up for Peter’s projected 7.9% drop in revenues, they would have to trim another $1.2 billion in spending, for a total of nearly $3.4 billion in budget cuts in 2008.
Any cuts this year would come on top of the more than $3.7 billion in reductions that publishers would have had to make in 2007 to sustain their margins. To put this in perspective, $3.7 billion is equivalent to the annual pay and benefits of approximately 15% of the employees of an industry whose payroll totaled 375,600 individuals in 2004, the most recent year employment statistics are available. (Without doubt, employment rolls have fallen to 350,000 since then.)
But all things will not be equal from last year to this one. A wide range of operating expenses – from rent to health insurance – will continue to increase in 2008. Publishers struggling to sustain their profitability will have to cut such elastic and discretionary expenses as newsroom payroll, marketing and newshole to ensure that they have the money they need to cover such unavoidable and unmanageable costs as fuel for their delivery fleets.
Speaking of unmanageable costs, several publishers this year will be forced to pay higher interest payments on the bonds they sold to finance their businesses. That’s because declining sales and profitability have caused the ratings on their bonds to be lowered by the independent agencies that judge their likely capacity to repay the debt.
The Tribune Co. owes annual interest payments of nearly $1 billion on the debt it shouldered to go private. If it fails to sustain the level of profitability it promised its lenders, the company could face even higher interest than the 9%-ish rates it pays today. Because McClatchy’s $1 billion in debt was downgraded last week, it will owe an additional $2.5 million in interest charges this year, or enough to cover the annual salaries of some three dozen journalists. Tribune and McClatchy are not alone.
If profits fell out of bed entirely for a publishing company, the consequences would be more dire than just higher interest payments. The company could face default. And a default in the case of Tribune could wipe out the value of the freshly minted stock its employees acquired a few weeks ago when Sam Zell helped them become part-owners of their company.
It is true that publishers will see some benefit this year from the likely increase most will experience in new media sales. But even a healthy 25% increase in online ad revenues – which last year was beyond the capability of a company like McClatchy – would produce only $800 million in fresh revenue for an industry that, on average, still derives more than 90% of its sales from print advertising. In any event, an $800 million uptick in online revenue would not be enough to offset even 25% of a $3.4 billion drop in print sales.
If the economy – or merely the newspaper industry – falters even more than people like Peter Alpert expect, then publishers will be forced to accept lower profits or implement steeper cuts than discussed above. A third, and perhaps most likely, alternative would be a combination of deeper cuts and lower profits.
Weaker profits are not a particularly desirable option, because they would lead to another beating for the publicly traded companies on Wall Street. The newspaper stocks, which shed $23 billion in value between 2005 and 2007, were hammered again in the first days of this year, driving them to 52-week lows.
With newspaper executives no wrestling for the third consecutive year with an unprecedented sales meltdown aggravated by an evidently decelerating economy, you can bet they will be considering aggressive new ways to cut costs that seldom, if ever, have been explored before.
Everything is going to be on the table. Or, more precisely, on the chopping block.