Newspaper shares slid $23B in 6 months

The value of 11 newspaper companies traded on the public market since 2005 dove a combined $23.7 billion in the first half of this year, falling almost as much in six months as they had in the three prior years put together.

Wall Street’s intensifying repudiation of the industry means that the companies in the group have lost a cumulative $49.7 billion in market capitalization in 3½ years, vaporizing 51% of shareholder value since Dec. 31. 2004.

To date, the decline in newspaper shares has not had a commensurate impact on the compensation (details here) enjoyed by the chief executives of several of the affected companies.

As you can see in the table below, Journal Register Co. and the Sun-Times Media Group (nee Hollinger) suffered the worst losses in the 3½-year period, respectively shedding 99.1% and 96.9% of their value.

Journal Register is deemed to have a 72.9% chance of defaulting on its crippling debt, which in all likelihood would render its shares valueless. Sun-Times, which has a legacy of tax and other issues resulting from the criminal mismanagement of former chief Conrad Black, has been for sale all year, with no takers identified at this writing. Both publishers were booted off the New York Stock Exchange earlier this year, because their shares fell below the minimum price required for listing. They now trade on the Pink Sheets under the symbols JRCO and SUTM.

While the stocks of Lee Enterprises (LEE) and McClatchy (MNI) remain in good standing at the Big Board because their shares trade above well above the required minimum price of $1.10 apiece, their performance was not much better than that of the two publishers exiled to the Pink Sheets. Their market caps respectively have plunged 91.2% and 90.2% since Dec. 31, 2004.

MNI this year wrote off $2.8 billion, or 70%, of the $4 billion it spent to buy the bulk of the Knight Ridder chain in 2006, because the acquired assets were overvalued under the accounting rules described here. Required to undergo the same accounting exercise as McClatchy, LEE in May wrote off $862 million in the book value of its publishing assets, including nearly 53% of the $1.46 billion it paid for the Pulitzer newspapers in 2005.

Although they did not entirely escape the drubbing occasioned by the accelerating declines in advertising and circulation at most newspapers, the shares of the most broadly diversified publishers fared the best of the group. The value of Scripps (SSP), which is spinning its non-newspaper assets as of July 1 into a separate company called Scripps Network Interactive (SNI), fell a cumulative 12.4% in the 3½ years. Next best were the Washington Post Co. (WPO, down 23.5%) and News Corp. (NWS, off 32.5%).

In addition to Knight Ridder and Pulitzer, two other publishers that were publicly traded in 2004 have disappeared from the market. They are Dow Jones and Tribune Co., which respectively were acquired in late 2007 by News Corp. and a private transaction helmed by Sam Zell on behalf of the company’s employees.

Beyond the 11 publishing companies that have been continuously traded since 2005, the list below includes the performance of two relative newcomers. GateHouse (GHS) has lost 72.0% of its value since its initial public offering in November, 2006. A.H. Belo (AHC), the pure-play newspaper spin-off created by Belo (BLC), has slid 68.7% since its debut in mid-January, 2008.
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Mere words cannot do justice to the carnage. You can click on the image to make it bigger, but the numbers won’t get any better.

Disclosures: I own shares of JRC, MNI and SSP and consulted for SUTM in 2007.

S.J. Merc staff gutted by 62.5%

The lightning-round layoffs due to cut the newsroom of the San Jose Mercury News by another nine employees by tomorrow night means the staff will have been pared by fully 62.5% from its peak strength in 2000.

The newspaper was perhaps the primary beneficiary of the Internet Bubble, when aggressive competition for dot-comers pumped its want-ad revenues to stratospheric – and, as it proved – unsustainable highs. By some accounts, the paper dropped $100 million a year in recruitment sales when the Internet mania collapsed as the new millennium dawned.

During the giddy boom in Silicon Valley, the staff of the Merc swelled to some 400 journalists. But the crew will be reduced to 150 by close of business tomorrow, dropping headcount 62.5% from the all-time high.

(UPDATE 6.26.08: A Merc insider says the latest informaton since last night is that the stafff will number 155 after the cuts vs. an all-time high of 420. At that rate, the staff will be 63% smaller than at its peak.)

Apart from the entire staffs idled at newspapers that have gone out of business, the Merc looks, on a percentage basis, to be taking the worst hits in an industry that has taken plenty of them.

Little ado over Orlando's redo

Fewer than 0.05% of the readers of the Orlando Sentinel are fussed about the bold redesign of their newspaper, according to statistics provided by management three days after the debut of the new look.

The response could mean any of the following:

:: 99.95% of the readers like the colorful overhaul, which would be great news for the newspaper.

:: 99.95% of the readers didn’t notice, which not only would insult the Sentinel’s editors but also put in place the industry kibitzers (including me) who have been second-guessing the project for the last week.

:: 99.95% of the readers don’t care, which would be the most alarming outcome of all.

In all likelihood, the actual answer is a combination of the above.

But the evident equanimity inspired by the revamp suggests that harried consumers may be more personally detached from their newspapers today than ever before, regarding them as no more than another fleeting blur in the ever-accelerating cascade of media. Thus, a fresh splash of pink on the front page may have no more impact than an incoming Twitter, a new text message, a hot Digg, a Facebook poke or the latest Fox News "Alert!"

As of the close of business today, 106 of the readers of the Sentinel called, emailed or otherwise expressed their dissatisfaction with a widely watched makeover that was billed as a precursor of the revamps planned for each of the newspapers owned by Tribune Co. With 220k in daily circulation, the critics amount to 0.0482% of the Sentinel’s total audience.

The complaints, which of course reflect only the subset of readers motivated enough to speak up, outpaced by nearly six-fold the 18 congratulatory comments recorded by the newspaper, according to Bonita Burton, the assistant managing editor who directed the redesign. She adds that eight subscriptions were canceled because of the remake and two were acquired.

Assuming no major delayed reaction to the new look materializes in the coming days, the most logical working hypothesis has to be that you can radically remake a newspaper overnight without generating anything more than a mild or indifferent response.

While the Sentinel’s managers can take comfort in knowing they evidently have done little harm, a corollary conclusion appears to be that reskinning a newspaper, in and of itself, is not likely to boost business, either.

Last and most unsettling, the casual reaction in Orlando suggests that newspapers may have far less passionate constituencies than we would like to think.

How close to default is your paper?

The newspaper industry shuddered last week when Bloomberg News warned that several publishers are in danger of default. And some are. But there are many degrees of defaultness and not all publishers are in equal danger of going down the drain.

So, I have created not only the word “defaultness” but also a simple tool called the “Default-O-Matic” to help you see at a glance the degree of financial peril faced by 10 of the largest publishing companies. I will update it from time to time, as events warrant.

The Default-O-Matic predicts a company’s risk of default by using ratings provided by Moody’s Investors Service, one of the three independent agencies hired by bond issuers to assess their ability to repay the money they borrow.

Journal Register Co. is the shakiest in the group of 10 publishers, with Morris Publishing in second place and a tie for third between MediaNews Group and Tribune Co. We’ll explain the findings in a moment. First, some background:

Failure to fulfill the conditions of a bond is called a default. But not all defaults are equally severe.

Default could be as simple as a company making less money than it had hoped to make but still being able to pay its interest payments on time. That is considered a technical default, which may trigger certain consequences like financial penalties or higher interest rates. But the company would go on to fight another day.

At the other extreme, the word “default” also describes the situation that occurs when a company lacks the money to pay some or all of its obligations at the time they are due. In that event, the company could be taken over by its creditors and either reorganized, sold or even shut down. Click here for a full discussion of bonds, bond ratings and how they increasingly are affecting the American newspaper business.

Moody’s and its competitors use confusing alphabet-soup nomenclatures to express their confidence in a company's abilty to fulfill its obligations. Based on the statistical analysis described here, Moody’s rates the probability of default by percentage for categories ranging from Aaa (the best, with zero chance of default) to C (the risk is deemed to be 100%, because the company already has defaulted).

While considering the credit ratings, bear in mind that Moody's and its peers at Standard and Poor's and Fitch issued triple-A ratings on many subprime mortgage portolios right up until that business cratered. They also rated Enron's paper as investment-grade securities until four days before the company collapsed and filed for banruptcy.

As you can see from the blue bar on the Default-O-Matic (click the image below to enlarge), Journal Register, which remains in my personal portfolio because its two-bit shares would cost more to sell than they are worth, is theoretically the closest of any of the publishers to default.

Its rating of Caa3, which indicates a 72.9% probability that it will fail to meet its obligations, was cut in mid-May from Caa1, which carried a 35.7% risk of default. Not long before that, the company was rated B1, which signified a 15.2% risk. If conditions don’t turn around for the company, the next stop would be C, which would signal the company is in a hard default, not a technical one.

The next-weakest credit among the publishers is Morris Publishing at Caa1 (35.7% risk). And then come MediaNews and Tribune, which both are rated B3, representing a 26.4% chance of default.

The Washington Post Co., which derives the majority of its revenues from things other than newspaper publishing, is the strongest credit at A1, representing a default risk of just 0.2%. Scripps, which also is highly diversified away from newspapers, is the second-strongest credit. And Gannett, which has lots of newspapers but comparatively modest debt, is the third-strongest.

Apart from the fact that six of the 10 publishers are deemed to be in junk-bond territory, the other distressing phenomenon revealed in the Default-O-Matic is that the ratings of seven companies have been downgraded in the three months since I published the last list of bond ratings on March 18.

If this proves to be the “worst year on record” for newspapers, as a growing number of analysis predict, then updating the Default-O-Matic could become a real chore.

The case for a JOA in Miami

As odd a couple as they might be, Gary Pruitt and Sam Zell may want to buddy up to figure out how to reduce expenses to make the most of the sagging revenues at their struggling newspapers in south Florida.

If they can modify their loan covenants, appease federal antitrust-regulators and navigate the myriad other details associated with an undertaking of this sort, the heavily leveraged owners of the Miami Herald and Sun-Sentinel have a chance of improving the performance of two newspapers foundering in one of the most toxic markets created by the real estate bust.

Who knows? Relief might be spelled J-O-A.

The real estate meltdown has slammed South Florida harder than just about any other metro region in the country. Zillow.Com says real estate values in Miami have fallen 23.7% from their Bubblicious peak. Further, Economy.Com predicts that prices won’t hit bottom until the end of 2009. That’s right, 2009.

Only two other major markets in the United States are worse off than south Florida. Ironically, they are Orlando, where the perilously financed Tribune Co. has another major operation, and Sacramento, which is McClatchy’s hometown. Tribune, of course, owns the Sun-Sentinel and MNI owns the Herald.

The glum outlook in south Florida means more pain almost certainly lies ahead for two metros competing in close quarters in a contracting market where advertising sales are twice as bad as the depressing national average.

While neither McClatchy nor Tribune Co. details the sales of individual properties, MNI reports that revenues at its Florida papers through May were down 22.6% from the prior year. That’s double the decline of 11% that a growing number of analysts are predicting for the industry as a whole in 2008. (MNI’s results in Florida also include its paper in Bradenton, but the title is so small that it couldn’t materially offset Miami’s performance even if it were doing significantly better – which it probably isn’t.)

The troubles in south Florida are but one of the many geographically dispersed challenges faced by McClatchy and Tribune, including sales swoons at their respective California properties that rival the downturn in Florida. But the two publishers have something special in south Florida that they don’t have anywhere else: side-by-side metros in neighboring counties that represent ample opportunities to boost efficiency by combining ad sales, production and distribution.

For starters, the daily circulation of both papers is roughly the same. The circulation of the Herald, which is headquartered in Dade County, is 256k. The Sun-Sentinel, whose home base is 31 miles to the north in Fort Lauderdale (Broward County), sells 215k papers per day. If the publishers drew a Mason-Dixon line between their turfs, they could agree to axe inefficient circulation and save the cost of marketing against each other in any formerly disputed territories.

(UPDATE 6.19.08: As noted in Comments below, the papers have some shared some distribution. A thoroughly integrated operation would enable the partners to fully consolidate many duplicative marketing, billing, delivery and customer support functions. )

Each of the newspapers operates a five-press printing plant that individually is capable of producing both papers on the morning cycle, assuming deadlines are shortened to assure timely delivery across a combined distribution footprint that runs more than 100 miles from end to end.

Although this sort of thing would have been unthinkable even months ago, neither Tribune nor McClatchy seems reluctant now about co-operating with competitors. The Chicago Tribune has begun delivering papers for the rival Chicago Sun-Times, and McClatchy plans to outsource the printing of two of its titles to neighboring newspapers in Idaho and Washington.

If one or the other Florida property could qualify as “failing” under the terms of the Newspaper Preservation Act, the publishers might be able to go all the way and enter into a joint operating agreement.

A JOA, which represents federal permission for pubishers to collaborate in ways normally forbidden by the antitrust laws, would enable the complete combination of all sales and operating functions, except for preserving two separate and independent editorial staffs. Each publishing company would cover its own editorial costs and they together would split the profits generated by the consolidated aspects of the operation.

If this came to pass, it wouldn’t be the first JOA in Miami.

An earlier operating agreement between the Herald and the late Miami News was dissolved in 1988, with Knight Ridder, the former owner of the Herald, agreeing to pay Cox, the owner of the News, a portion of its profits until 2021. A spokeswoman for McClatchy confirms that her company has been continuing the payments to Cox since buying KRI in 2006.

If a new JOA were created, McClatchy would be the first publisher in history to be party to two separate JOAs in the same town at the same time.

Another possibility would be for one paper to purchase the other, so as to move forward as a single, consolidated entity. This would give the seller after-tax cash to pay down some of its debt and enable the buyer to achieve maximum efficiency by wringing all duplicative costs out of the business. This seems a less likley outcome for two reasons:

:: A straight-out sale might be harder to clear with the Justice Department than a JOA.

:: MNI and Tribune probably won't be able to finagle much more money out of their lenders until they can show gains in their anemic sales and profits.

Any form of collaboration in south Florida would unhinge the proud staffs of the Herald and Sun-Sentinel, who have competed fiercely against each another forever. But things are getting so grim that there may be no other choice.

Shared presses will squeeze deadlines

Plans to print two McClatchy titles in the plants of neighboring newspapers almost certainly will force earlier deadlines in the newsrooms of all four papers, which could compromise the quality of their coverage.

In a development likely to become increasingly commonplace among publishers eager to reduce operating costs, MNI and privately held Pioneer Newspapers announced plans to shift the production of two McClatchy papers to nearby plants operated by Pioneer.

Printing of Boise’s Idaho Statesman (circulation 63k daily) will move 20 miles to the Idaho Press-Tribune (circ 20k) in Nampa. MNI also is finalizing negotiations to move its 23k-circ daily in Bellingham, WA, to Pioneer's slightly smaller one in Mount Vernon, which is 30 miles south.

While consolidated production economically makes all the sense in the world (except for the pressmen and mailroom workers who lose their jobs at the McClatchy plants), it will force a speedup in the production cycle at each affected paper, so as to assure papers come off the press in time to hit the doorsteps of subscribers no later than they do today.

This will require earlier deadlines at every point in the production schedule, starting with the newsroom. In most cases, this will not be a big issue, especially because the papers are operating on West Coast time. But it could matter a lot in the case of late-breaking local news, coverage of important evening meetings, election-night squeakers and, of course, late sports scores.

The McClatchy papers probably will have to deal with earlier deadlines than the Pioneer papers, as they will have to get off the press earlier -- especially on snow days -- to begin the journey to their respective destinations.

Although the earlier deadlines make perfect economic sense, they will make the newspapers somewhat less competitive than they are today with such instantaneous media as cable news and the Internet.

The trade-off may be unavoidable and, for the most part, benign. But news staffs will have to step livelier than ever to minimize its impact.

MNI cuts may not be deep enough

The savings McClatchy hopes to achieve by trimming 10% of its work force will not save enough money to offset even a quarter of the likely drop in the company’s advertising revenues this year, suggesting that more cuts may lie ahead.

Barring an upturn in the newspaper business in the second half of this year that no one foresees, MNI’s ad sales for 2008 are likely to be $295 million lower than they were in the prior 12 months. Thus, the $70 million the company hopes to save by eliminating 1,400 positions would offset only 23.7% of the anticipated revenue shortfall.

If sales fail to improve, the company could be forced to thin its ranks more deeply than the planned reductions announced today. The plan would eliminate 250 positions, or 17% of the staff, at the Miami Herald, and 123 jobs, or 11% of the force, at the Charlotte Observer.

The new cuts would come on top of a 13% reduction in force that occurred at McClatchy via “attrition and selected job eliminations through outsourcing” between the end of 2006 and April, 2008, according to the press release announcing the down-sizing.

My forecast of a $295 million drop in MNI’s sales for 2008 is based on the fact that the company’s combined print and online ad sales fell by $126.2 million in the first five months of this year to $691 million, or 15.4% below the comparable number a year ago.

Given that MNI booked approximately 42% of its sales in the first five months of 2007, a little sixth-grade math puts the projected revenues this year at $1.6 billion, or $295 million less than in 2007.

Advertising revenues represent a bit less than 83% of the company’s total sales. The balance is provided by circulation, which has been down by 5% in the first five months of this year, and “other,” which has been off by 17% as of the end of May.

In addition to the pending staff cuts, MNI intends to identify $25 million to $30 million in additional operating savings “over the next four quarters.” Savings will come from such things as the newly revealed plans to outsource the printing of the Idaho Statesman in Boise and Bellingham (WA) Herald to two competing newspapers located some 30 minutes from each of the MNI plants.

Assuming the company quickly implements $30 million in savings, however, the belt-tightening would make up for only a third of the looming revenue shortfall.

If the company hopes to sustain something approaching its hisotric profit levels, still more cuts would have to be found.

Disclosure: I own shares of MNI stock.

Jocks plan shock for Trib Co. readers

Thanks to a terrific new blog published anonymously by someone who identifies herself or himself as an employee of the Los Angeles Times, we have the first reported sighting of the radical new format planned for the Tribune Co. newspapers. And it’s scary.

Not because it represents an abrupt change, though it does. And not because it is unconventional, though it is. But because the combination of abrupt and unconventional change is almost certain to unsettle the valuable core of loyal subscribers who obviously think their newspapers are just fine.

While there are few absolute rules in the wild-and-crazy realm of marketing, one of them, to paraphrase Hippocrates, is to do no harm. Based on some direct experience discussed below, I fear the inelegant introduction of the radical new format evidently planned by Tribune Co. may do more far more harm than good.

The purported new look for the Orlando Sentinel, the first of the Tribune properties scheduled for an extreme makeover, was previewed this weekend by TellZell.Com, a blog published by someone who has taken the clever nom de Net of Sam Izdat. (Samizdats were hand-typed, underground missives surreptitiously shared among dissidents during the Cold War repression in the Soviet-bloc countries. To get around the modern repression of the Russian media, dissidents today can blog, but only at considerable personal peril.)

As you can see from the “before” and “after” images below, the purported prototype for the Orlando Sentinel will look nothing like its conventionally formatted predecessor. And that’s just the idea, from the standpoint of Sam Zell and the aging shock jocks leading his turnaround team.

“We are going to roll out a different look and feel in each market, emphasizing what people are telling us they want in the research – charts, graphs, maps, lists,” said Randy Michaels, the former radio personality who is the company’s chief operating officer. “The first paper is the Orlando Sentinel on June 22nd. All will be rolled out by the end of September.”

As part of their research, the Zellistas would be well advised to look into what happened after the radical revamp of the late Chicago Daily News in the mid-1970s, a misadventure I witnessed first hand as a young journalist.

In what proved to be a fruitless effort to save a distinguished publication that folded after running out of readers, revenues and ideas in 1978, a nationally renowned designer was brought in to shake up the look of the newspaper, which he most assuredly did by imposing an imponderable design grid that rigidly bisected and trisected and quadrisected each page with half-inch thick black rules. (Owing to technical limitations, the comic color evidently in store for Orlando was not an option in those days.)

When the new design was sprung on the readers with no advance market testing and no prior warning, they went berserk, phoning and writing to ask what the hell we had done to their newspaper. The actual number of canceled subscriptions has been lost to mists of time, but, rest assured, there were plenty. Even worse, the redesign didn’t attract enough new readers or advertisers to save the publication, as the audience for afternoon newspapers melted away.

Why would the 30-year-old tale of a failed redesign be relevant? Because modern consumers have even more alternatives to newspapers today than they did back then.

If readers in Orlando, Baltimore, Chicago or Los Angeles wake up one morning to find a radically different creature on their doorstep than the newspaper they know and love, they are going to give strong consideration to making some radical changes of their own – as is giving up on it. This goes double, if the Zellistas follow through on their un-plan to reduce content by trimming staff and squeezing the newshole.

This is not to argue against significantly changing newspapers to make them more relevant and more compelling in an era when Wikipedia is scooping (see also here) the Associated Press on major breaking stories. Sam Z is right that newspapers need to profoundly change. And his co-owners would be wrong to stubbornly resist progress for the sake of resisting change.

But changes in products as personal and familiar as a newspaper should be undertaken slowly, cautiously, incrementally and thoughtfully. In other words, a shock-jock approach to newspaper marketing is almost certain to backfire.

Discerning readers – and most of the remaining readers are discerning – will be quick to detect any false and cynical moves. If they don’t like what they see, they will vote with their mouses. And they won’t look back.

A high-water mark in crisis coverage

The staffers of the Cedar Rapids Gazette brilliantly rose to the occasion this week when record flooding inundated not only much of the city but also the very building where they work.

Resisting pleas from city officials to evacuate their downtown office, the staff produced an amazing body of multimedia work while cobbling together a generator grid that powered everything from laptops to bilge pumps. Because there wasn’t enough juice to power the air conditioning, the staffers worked around the clock in a sticky, dimly lit newsroom.

The continuously refreshed Gazette Online website presented textbook coverage, including service-oriented stories; hundreds of staff and reader photos, and dramatic video. The print edition on Friday featured a dramatic panoramic photo (below) that was played to maximum effect by running it sideways.

Steve Buttry, who joined the paper as editor in chief only one day before the floods arrived, provided the story behind the story:

In the first day after the floodwaters arrived, “the website posted 57 different story files, 453 updates, 437 staff and user-submitted photos and four videos,” says Steve. “We did our first live webcast and sent out 19 breaking news text alerts and two e-mail newsletters to subscribers.”

Amid continuing problems with power and Internet connectivity, the site served up 1.5 million page views in a day, or some 15 times the typical load.

The pressroom was not affected, becasue it is located in another part of town. But the paper put out several thousand extra copies (some to sell later as souvenirs), as well as printing the neighboring Waterloo-Cedar Falls Courier, whose plant was flooded out.

“A new editor pretty much has to play the hand he is dealt in terms of the staff’s ability to cover a story that is already unfolding,” writes Steve. “I was dealt several decks worth of aces.”

ROP ads poised for a comeback?

In a potential bit of good news for newspapers, run-of-paper advertising may be making a comeback after a sustained period of decline.

Large national retailers like Macy’s and Best Buy, which had shifted much of their budgets to free-standing color inserts over the years, are taking a fresh look at in-paper advertising as a way of eliminating the growing cost of producing the ad inserts they pay newspapers to deliver for them.

If the shift catches on, it would bring some additional heft to America’s incredible shrinking news pages and possibly deliver higher advertising rates to newspapers, which have been repeatedly downsizing as the result of double-digit increases in the cost of newsprint and double-digit declines in ad sales.

In just the last four months, the price of 30-pound newsprint has climbed nearly 14% to $701 per metric ton, according to PaperAge.Com. Meantime, as reported here, industry ad sales for the year are projected by to fall by $4.7 billion, or a record 11%, to $37.5 billion.

An uptick in ROP advertising could help restore some of the physical presence that newspapers have been losing each year since 2003.

Owing in part to reduced advertising volume and in part to the increasingly stringent economies undertaken by publishers to shore up their sagging margins, the size of American newspapers has been wasting steadily since 2003, according to statistics kept by the Newspaper Association of America.

As you can see from the graph below, newsprint consumption tumbled by more than 27% to some 1.5 million metric tons in the fourth quarter of 2007 from where it stood in 2003. In April, 2007, newsprint consumption fell 13.7% from the prior year to 483,000 metric tons.

Inserts gained popularity among merchants not only because of the perceived high impact of the colorful, magazine-like circulars but also because inserts could be targeted to selected Zip Codes in a newspaper’s circulation footprint. By carefully selecting which copies carried their inserts, advertisers maximized the efficiency of their expenditures.

But the rapidly escalating cost of producing and distributing free-standing inserts is giving some advertisers second thoughts, according to newspaper executives. “We can print more efficiently than retailers,” said one publishing executive. “They are starting to talk to us about buying more ROP.”

Where advertisers are continuing to publish standalone inserts, they are getting stricter about the places publishers can distribute them, banning them in some cases from copies distributed in schools or sold at newsstands.

Even though the cost of newsprint may rise as much as 25% this year because mills have throttled capacity in the face of declining demand, major newspaper publishers consume paper in such large quantities as to command better discounts than most retailers. At a time of soaring fuel costs, it is vastly cheaper to email a digital image of an ad to a newspaper than to have paper reels shipped from a mill to a commercial printer and then have the finished product loaded on a second truck to be hauled to their final destination.

While many retailers charge the makers of electronics, housewares or power tools a co-op advertising fee to appear in their circulars, an executive at one major chain told me a few years ago that the company lost $70 million a year on its insert operation. That was well before the current bout of inflation kicked in.

Newspapers like ROP advertising because it fetches a higher rate and eliminates the need to hire extra help in the mailroom to sort and stuff the circulars. The distribution of multiple sets of inserts to multiple locations is also a logistical nightmare.

Historically, insert advertising has represented about a quarter of a newspaper’s retail advertising business, though the number may have risen in recent years as other types of advertising declined. Nationally, the insert business probably generated about $5 billion to $5.5 billion in 2007.

A typical metro charges $25 per thousand copies to stuff inserts in its papers, as compared with $60 per thousand for an ROP ad. The difference is far from being all profit, because ROP rates have to cover the cost of the paper, ink and certain other costs.

Merchants who forsake freestanding inserts for in-paper advertising will lose the ability to zone the distribution of their circulars. But they may gain new customers among readers who previously didn’t fit their distribution criteria or among readers who ignore circulars but serendipitously discovers an appealing ad while perusing the paper.

Even if marketers begin to shift their dollars away from inserts and into ROP, the industry still faces the quickening flow of ad dollars away from newspapers to such targeted media as the Internet, magazines and cable TV.

In one chilling example, Macy’s reduced its ad spending in newspapers by nearly a quarter of a billion dollars between 2004 and 2007, according to TNS Media Services, an independent market research company. In the four-year period, Macy’s newspaper expenditures fell 23% to $609.7 million at the same time Internet outlays rocketed 840%, magazine buys climbed 34% and television schedules rose 27%. Significantly, however, Macy’s total ad expenditures fell 8% in the period to a bit over $1 billion.

The other worry for newspapers, quite bluntly, is whether some of their most faithful advertisers will stay alive.

CompUSA, a regular circular advertiser, absorbed the Good Guys, another major insert advertiser, before both companies succumbed as national advertisers at the end of last year. (The CompUSA brand was acquired by the parent of Tiger Direct and operates a website and a few stores in Florida, Texas and Puerto Rico.)

Circuit City, another insert regular, has been struggling against what one analyst called a “death spiral” of challenges to its business model.

If Circuit City were to join CompUSA and Good Guys in big-box heaven, would Best Buy think about trimming its long-time comitment to newspaper advertising?

Talk about potential death spirals.

Murdoch has a plan. Zell doesn’t.

While Rupert Murdoch has gotten busy building the Wall Street Journal into an even more powerful global brand, Sam Zell seems to have no plan at all for Tribune Co., unless you count flogging the hands until morale improves.

The two companies have gone down distinctly divergent paths in the six months since Mr. Murdoch bought Dow Jones and Mr. Zell almost simultaneously acquired Tribune. Dow Jones has a well-defined and apparently well-funded set of objectives, while Tribune is foundering amid declining newspaper sales, burdensome debt and a series of demoralizing cutbacks.

Since taking command of Dow Jones, Mr. Murdoch has been aggressively positioning the Journal to challenge the New York Times as the leading national newspaper, which includes taking aim at the wealth of advertising the NYT has attracted to its sumptuous food, fashion and travel magazines.

Whether you approve of the way he did it or not, Mr. Murdoch has installed like-minded editors and senior publishing executives to reshape the Journal in his image. And it is plain to see that he has the means, motive and opportunity to project the reinvigorated brand around the world in print, on the air and over the Internet.

In the same period Mr. Murdoch has put his stamp on Dow Jones, Mr. Zell has failed to articulate, let alone implement, anything approaching a strategy for growing the company he loaded with debt at the time its primary business, newspaper publishing, has been deteriorating at an unprecedented, incalculable and so far intractable pace. Diversified as Tribune may be in broadcasting and a likely-to-be-sold baseball team, nearly three-quarters of its sales are produced by its newspapers.

Far from leading and inspiring the employees he maneuvered into a co-ownership plan they neither wanted, approved nor can control, Mr. Zell has spent the last six months haranguing, insulting and terrifying the very people whose support he needs to salvage this troubled deal.

The absence of an effective strategy at Tribune became manifest last week when Mr. Zell announced that, for want of better ideas, he intends to make sweeping cuts in staffing, pages and news coverage that are bound to further erode the already-tottering franchises of some of the most esteemed newspapers in the country.

How sweeping?

:: “They are going to take 500 pages out a week” across the various Tribune newspapers, said an unidentified executive quoted by Editor and Publisher. “That is gargantuan.” Future tightening of the newshole would come on top of the reductions that made it possible in the first months of the year for Tribune to save 18% in newsprint expense at the same time the cost of this key commodity was rising by double digits.

:: As to staffing, “you can eliminate…a fair number of people while eliminating not very much content,” said Randy Michaels, Sam’s second in command, in a conference call last week. Future cuts in the publishing division would come on top of the 860 positions already scratched this year, an amount equal to 5% of the work force. “If you work hard or you are producing a lot of output for us, everything is great,” Randy told analysts. “But we think we have a way to right-size the paper and significantly reduce our costs.”

Notwithstanding Randy’s spin, these initiatives are likely to be perversely counterproductive, because they will undercut the very reason that people buy newspapers and that advertisers advertise in them: the content.

You can fool some of the people some of the time by slipping an ad on page one, running more wire stories, skinnying down the op-ed section or carrying recruitment ads only two days a week, but wholesale cost cutting (memo here) will diminish Tribune’s newspapers to the point that discerning readers (and most of the remaining customers indeed are discerning readers) will begin to ask themselves if the paper is worth buying.

In a growing number of cases, the answer may be “no,” potentially triggering a spiral of declining readership, falling revenues and deteriorating profits.

While this self-defeating strategy would seem to make no sense, it appears to be the only alternative available at this point to prevent the Tribune Co. from breaching the terms of its looming debt obligations. The longer Tribune can scrape up enough cash to remain current with its creditors, the more time the company will have to grope, albeit belatedly, for a way to turn around the struggling newspapers that generated 72% of the company’s $5 billion in annual revenues in 2007.

The problem is that no business can remain successful over the long term if the only way it addresses declining sales is by cutting costs. You not only begin to degrade the product but eventually run out of things to cut. Businesses must grow sales and profits to build value. If they go the other way for a sustained period, they will falter and potentially fail.

Desperate measures would not be required today if more diligence, discipline and foresight had been brought to bear when Mr. Zell was contemplating the Tribune purchase, a process that commenced more than a year ago.

Nothing has happened in the interim to blindside Mr. Zell. Apart from the precise velocity that advertising sales were to plunge this year, all the problems of the newspaper industry were known well before Sam inked the deal in December that saddled Tribune with a staggering $12.6 billion in debt.

Tribune’s debt requires the company to dedicate some $1 billion of its annual operating profits to interest payments. In the 12 months ended March 30, those profits, which have been shrinking as costs rose and sales declined, amounted to $1.3 billion, leaving scant margin for backsliding at a time of double-digit drops in newspaper revenues.

While it is unimaginable that Mr. Zell did not have a detailed and well-conceived plan to build the business when he bought it, it is even more amazing that the institutional lenders who funded this risky and highly leveraged transaction did not insist on seeing one.

In retrospect, it seems obvious that Sam did not buy Tribune because he had a brilliant vision or burning desire to transform this tradition-bound media company into an innovative, next-generation publishing power. Rather, he seems to have been attracted by the low price for an asset no one else wanted, as well as the handsome tax advantages that the employee-ownership plan delivers to him.

Caught flat-footed, Sam Zell and his cohorts now appear to be managing Tribune Co. by simply making things up as they go along. But they are playing with live ammo.

They are responsible for more than $12 billion in debt, the livelihoods of some 19,000 employees and major media outlets serving tens of millions of residents in some of the biggest cities in the land. If the Zellsters don’t get this right, those constituencies will pay a staggering price.

$4.7B ad drop feared for newspapers

Print newspaper sales this year appear to be on track to drop by some $4.7 billion to less than $37.5 billion, a level not seen since the mid-1990s.

The prediction comes from Paul Ginocchio of Deutsche Bank at a time of growing dismay among media executives who, for the most part, have watched sales weaken every month this year.

“We keep throwing more and more rope into the well, but we never seem to hit bottom,” said one sales executive.

With sales declining more deeply than publishers had expected when preparing their budgets for this year, repeated emergency cost cuts have become commonplace as newspapers attempt to shore up their battered margins.

“Every few weeks, I have to bring in a few more people to tell them they don’t have jobs,” said one publisher. “When is this going to end?”

If Paul’s prediction of a record 11.2% drop in print sales in 2008 proves correct, then the tumble would far surpass the unprecedented 9.4% revenue decline in 2007. The only comparable drop since World War II was a 9% swoon in sales in 2001.

A $4.7 billion drop in sales would be equivalent to wiping out the entire combined annual revenues of GateHouse Media (GHS), Lee Enterprises (LEE), McClatchy (MNI) and Media General (MEG).

The forecast annual print sales of $37.5 billion would put the industry back to a level not seen 1996, when sales totaled $38 billion. The 1996 sales were worth $53 billion in today’s dollars, according to the U.S. Bureau of Labor Statistics. So, it could be argued that newspaper sales are only 70% today of what they were a dozen years ago.

On the plus side, Paul believes interactive sales this year may climb some 20% to nearly $3.8 billion. But he cautions that his forecast for print sales could be overtaken by accelerating circulation declines, below-expectation job growth, weaker than hoped-for retail sales and higher than anticipated increases in newsprint prices.

While the year so far has not been kind to companies like CBS and Time Warner (TWX), newspapers, by far, are faring the worst, as illustrated in the comparison below from Fresearch.Com of the first-quarter sales growth of the top media companies and the largest newspaper publishers.

When you compare the drop in newspaper revenues with the positive performance of companies involved in other types of media, it becomes painfully clear that newspapers are suffering from a sea change in advertiser behavior, not merely a bad patch in the economy (though the poor economy certainly is contributing to the downturn in recruitment, auto and real estate advertising).

The only newspaper publishers reporting positive sales in the period were News Corp. (NWS), Scripps (SSP) and Washington Post (WPO), the three that have diversified most aggressively away from their traditional roots in the newspaper business. Coincidence? Nope.

Get me an ethnographer, sweetheart

Forget rewrite, sweetheart. Get me an anthropologist.

The crisis of confidence in the media business has gotten so bad that the Associated Press revealed today that it sent a team of ethnographers around the world to see if young folks consume news differently on their laptops and iPhones than their parents did in print and on TV. And, by golly, they do.

After months of research in such exotic locales as Hyderabad and Kansas City, the Polaroid-packing team came to the conclusion that Jon Stewart is the archetype of next-generation journalism. There’s a certain perverse logic to the findings, as nonsensical, impractical and non-starting as they may be. Here’s how they got there:

As anyone who has young people around the house knows, the first wired-from-birth generation is composed of multitasking, multimedia junkies who consume bits and bytes of buzz as fast as their thumbs can fly. The itch to twitch has abbreviated attention spans to the point that a 2½-minute video on YouTube seems longer to the average young person than the interminable “English Patient” was to me.

Far from being fulfilling, however, the incessant, obsessive consumption of low-calorie factoids has given rise, in addition to occasional instances of repetitive stress syndrome, to a condition identified by the AP’s anthropologists as “news fatigue.”

“Participants with news fatigue would try to ascertain whole news stories but they regularly were left unsatisfied,” reported the ethnographers in a 71-page report. “Ultimately, news fatigue brought many of the participants to a ‘learned-helpless’ response. The more overwhelmed or unsatisfied they were, the less effort they were willing to put in” to following the news.

“Adding to news fatigue among the participants was the widespread belief that ‘all news today is negative,’” continued the study. “Over and over again, the negativity of news – tragedy, crisis, war and terror – added to the desire to tune out.”

That’s where Jon Stewart comes in. “Satirical shows provided an antidote to news fatigue by creating an‘anti-negative,’” said the ethnographers. “Jon Stewart could take even the most serious news and spin it and make it palatable.”

Based on the above findings, forward-looking news executives would be advised to ensure that future stories report all the latest developments, contain all the facts, provide context, include in-depth explanation, forecast future events and, above all else, are upbeat and funny.

Although there is some modest academic value to the AP's research, the impractical and contradictory recommendations derived from it bring to mind a quote from another anthopologst, the legendary Margaret Mead. “Women want mediocre men,” she observed. “And men are working hard to become as mediocre as possible.”

Journalists shouldn't accept mediocre expectations.