Wednesday, January 23, 2008

Don’t shoot the messengers

Chris Harte and Brian Tierney aren’t enemies of newspapers. They are just messengers reporting the danger the industry will face if it doesn’t adjust its economics to the new realities of the marketplace.

Sniping at them won’t change the message. So, hold your fire and listen closely to what they have to say:

Newspapers like the Philadelphia Inquirer and Minneapolis Star Tribune are getting dangerously close to defaulting on their debt – a development that would require far more draconian layoffs and expense reductions than anyone has imagined to date.

Worst case, and no one is saying the worst case is upon us, some newspapers could go out of business. Then, where would we be?

In the interests of saving as many jobs and as much quality journalism as possible, it’s time for journalists – and their colleagues in the sales, production, circulation and other departments – to stop whining about the glories of yesteryear and start thinking of creative ways to make or save more money.

The deteriorating economics of the industry were underscored for the third day in a row this week when publisher Brian Tierney told union representatives of the two Philadelphia dailies that their company will face “a dire situation” by summer if it he cannot cut operating costs by 10%, according to a Newspaper Guild press release.

The Philadelphia meeting was reported the day after Chris Harte, the publisher of the Minneapolis Star Tribune, issued a strikingly similar warning to his staff.

Two days earlier, editor Jim O’Shea departed the Los Angeles Times after excoriating the evidently modest reductions in the $120 million newsroom budget that had been requested by his publisher, David Hiller.

At each newspaper, the story was the same. Profits are being sapped to an unimaginable and alarming degree by rapidly declining advertising revenues and rising expenses for everything from newsprint to payroll.

Tightening cash flow is a particular problem for the Philadelphia, Minneapolis and Tribune Co. newspapers, because each company has been bought within the last two years with vast sums of borrowed money. As such, a great portion of the operating profit at each company is earmarked to pay interest and principal on the newly acquired debt.

But an unprecedented and sustained deterioration in newspaper ad sales has brought profits in Philadelphia and Minneapolis dangerously close to the point that the new owners won’t be able to remain current on their loans. Purchased little more than a month ago, Tribune has more runway than the other two companies, but a steady decline of its profits, if unabated over time, could put it in a similar position.

Because all three companies are private, they don’t have to publicly discuss their finances. But it is possible to piece together the situation in Minneapolis, based on Chris’ comments and certain public pronouncements by his financial partner, Avista Capital Partners. And here’s the chilling picture:

The Strib’s operating profits fell by 50% in one year’s time to approximately $41 million in 2007. As recently as 2002, profits would have been more than triple that amount, according to knowledgeable sources, who asked not to be identified.

Chris declined to comment on these calculations, saying the newspaper does not publicly discuss its finances.

Based on what I estimate to be the structure of the financing that enabled the Strib to be bought from McClatchy in late 2006, I would put the annual interest on the debt at about $33 million.

If I am right, this would have left the Strib a scant $8 million last year to cover the costs of everything from website initiatives and new video cameras to replacement vehicles and updated pressroom equipment.

While the interest costs would remain essentially the same in 2008, weaker sales or higher costs could quickly erode the $8 million cushion. If the company could not fully pay its interest payments, it would default on its loans and the bankers would step in to restructure the business as rapidly and pitilessly as possible.

In the worst case, Chris and his partners at Avista could lose some or all of the $125 million that I estimate they invested in the newspaper.

Like Chris and Avista, Brian Tierney (plus his investors) and Tribune’s Sam Zell have put hundreds of millions of their own dollars at risk to try to save a few newspapers at the most perilous time in the history of the industry.

Who among us would have been willing to do that?

10 Comments:

Anonymous Anonymous said...

From your repeated use of "Chris" rather than "Harte," it's clear you feel chummy and side with the private-equity profiteers who might have gotten in over their heads in this deal.

If all these guys are such smart businessmen, don't they do projections of the worst-case scenarios to make sure that they can handle rocky times? I thought defaulting on loans is something that ne'er-do-well, low-life, blue-collar workers do, rather than these captains of industry. I'm guessing that Harte and his Avista partners will still be able to afford their yachts and club memberships after they run the Minneapolis paper into the ground and stop paying off their debts, right?

Do not buy what you cannot afford. Pay your obligations. Plan ahead. Be creative with solutions. And stay the heck away from journalism, if all you're interested in is dollars and cents -- for everyone's good.

Jackass moneymen figure everything they touch turns to gold, and news gathering is no different from (or more important than) widget making. We all suffer.

6:02 AM  
Blogger roddy stinson said...

finally -- an intelligent commentary on the state of the newspaper business and the whining journalists who are partly responsible for creating the dire situation that confronts broadsheets today.
thank you, thank you, thank you.

roddy stinson, columnist
1974-2007
san antonio express-news

7:08 AM  
Anonymous Anonymous said...

Of ocurse, you have only calculated using interest-only scenarios. What happens when principal comes due, as well?

Rather than guessing on these private enterprises, why not run the numbers for McClatchy or Journal Register? How close are they to defaulting???

7:48 AM  
Anonymous Anonymous said...

Had these newspapers not been purchased with suicide loans as if they were McMansions in a Las Vegas subdivision, the selling prices would have drifted down to the point where prospective owners could have purchased with cash or at least made a substantial down payment to protect his new business from an economic downturn and industry transitions. These newspapers are worth far less than what they sold for. The availability of cheaply borrowed money inflated the valuations. Now they must return to true market price.
The ability to sign your name on a loan document does not make you a business "owner" or mean you understand anything about journalism. Just another sub-prime scam artist.

12:36 PM  
Blogger Michael Josefowicz said...

Just a question. Has anyone in the newspaper world considered looking at high school education as an opportunity?

High School ed is pretty broken. There is lots of money floating around looking for a solution.

Given the new technologies that allow micro runs at a profit, maybe it's time for someone to look at a 21st century version of the Weekly Reader, but written for High School kids?

While there is still money left on the table with the legacy advertising model it only makes sense to take it and earn some breathing space for what's next.

But what if newspapers took on the task of creating intelligent context for breaking local stories of development, health, politics aimed at high School students and their teaachers and their parents?

Generation Google is much smarter and informed than any before, but it's the printed newspaper that is a unique tool for supply context and encourage thinking.

The High School kids have expressed a need for relevant intelligent stories. The school systems and the textbook publishers don't have the resources or skill sets to supply it.

So suppose some of the big textbook budgets were shifted over to local newspapers, on a contract as opposed to either a charity, feel good or pay per issue basis.

With only non profit advertising, it would probably pass the test to get into the schools. Or with no advertising, the amount of newsprint consumed would be a fraction of what it is now.

3:02 PM  
Anonymous Anonymous said...

What seems to be missing from this post is just how disconnected from the "Main Stream People" the news print world has become. As they move ever more into "advocacy" journalism, people get turned off by the centralized "We know what is best for you" attitude that has been emanating from the news print/TV cabal (particularly up here in Canada) for many years now.

Could it be people are tuning out and not turning the news print page because they are tired of being treated as morons to be preached at and indoctrinated, and it's not so much a failure of the business plan it's self.

I am one of those people that now gets 90% of his news and world information from the net and only goes to the TV and most news print to confirm they are wrong and I am on the right track getting the information I require to make an "informed" opinion.

The news media in North America has become it's own worst enemy by dumbing down/advocating it's position under the guise of news. If I tune into talk show radio 9 times out of 10 the host will divulge their leanings (other than the Canadian Broadcasting Corporation or Bill Good at CKNW ) thus allowing me to make a decision if that person will add anything substantive to my position of "getting" informed. Not so the print/TV media these days which has a very condescending opinion of it's viewers/readers.

2:14 PM  
Blogger Michael Josefowicz said...

The last comment describes the situation accurately, in my opinion. But there is an implication that newspapers and journalists have the power to act differently.

My take is that what has changed is the communication ecology that now allows the process of compare and contrast.

Until the internet, the single media channel earned it's authority because there was nothing to compare it to. That's why it was such a good business. In retrospect, Walter Cronkite and the New York Times got it very wrong on the War in the Vietnam. But at the time, it was hard to compare them to anything else. Today it's easy and thus the inescapable bias is more obvious.

If people are right that we are moving from "one to many" to a "many to one" communication ecology, the opportunity for newspapers is to select from the complexity of reality to connect the dots for a particular well defined collection of readers.

I believe that the physical form is still the best to be able to communicate context. Everyone needs context to get meaning. Creating the meaning is a hard job that regular people would prefer not to have to do. That's the job of editors and journalists.

Many of the best of them are doing it remarkably well in the form of books.

The problem for newspapers is how to make money doing what they are good at doing. In my opinion, aggregating readers to sell to an advertiser is not going to work going forward.

But given the global mass market for meaning and the new newspaper edition technology, it's hard to believe that some smart people aren't already figuring this out.

3:14 PM  
Anonymous Anonymous said...

Walter Cronkite and the NYT got it "very wrong" on Vietnam? Please back up that statement with facts.

5:56 AM  
Blogger Michael Josefowicz said...

Dear Anonymous,
That's a fair request. But since this is not part of my day job, perhaps the following will suffice.

It seems fair to say that in retrospect the gains to the US from the War in Vietnam were not worth the investment in lives, disruption and money. I haven't read McNamara's memoirs, but based on TV interviews that seems to be his view.

One event that might be useful to focus on is the Gulf of Tonkin resolution.

Wikipedia says,
The Gulf of Tonkin Resolution was a joint resolution of the U.S. Congress passed in August 1964 in direct response to a minor naval engagement known as the Gulf of Tonkin Incident. It is of historical significance because it gave U.S. President Lyndon B. Johnson authorization, without a formal declaration of war by Congress, for the use of military force in Southeast Asia. The Johnson administration subsequently cited the resolution as legal authority for its rapid escalation of U.S. military involvement in the Vietnam conflict.

In retrospect, I think it's fair to say the vote set a dangerous precedent and was not what President Johnson said it was at the time.

It would have been neat if the NYT could have put the vote in that context at the time.

If you search the NYT archives for the those dates, the stories didn't seem to get it right. ( I didn't want to pay to get full texts so I'm only going by the free three line summaries and the dates)

Unfortunately, Walter's videos are not on YouTube, so it's impossible to go through the same exercise. But based on my memory, it wasn't until about 1967 that the conventional wisdom started to change about Vietnam.

From my point of view, the job of a great newspaper of record, albeit very difficult, is to give the right context fast enough so that citizens can do something about it.

The fact that they got it very wrong on Iraq may just be more of the same.

3:01 PM  
Anonymous Anonymous said...

I find a complete lack of sympathy with an owner using a leveraged buyout to aquire an asset,finding that having no actual equity in an item of decreasing value and relevance is a painful situation. Tough having to repay loans eh? Just ask joe average how he feels about banks & credit card companies raising interest rates just because they can. How is it that an alleged smart person can borrow and not look at profit loss statements and a decades long trend of decreasing circulation & add revenue and think lets pay the maximum entirely on borrowed capitol. Stupid is as stupid does. Enjoy the ride idiots.

3:28 PM  

Post a Comment

<< Home