Friday, February 22, 2008

Snakes on the plains?

The morning got off to a nasty start for ophidiophobians in Oklahoma City when they opened Friday’s newspaper to see a headline sprawled atop page one warning: “Big snakes could slither into state.”

The problem with the alarming spread in The Oklahoman – replete with the headshot of a frightening-looking Burmese python – is that the danger of a snake invasion is really quite remote, as the newspaper's own story makes clear.

So, why did the Oklahoman play this non-story in the sensational fashion it did? I left a phone message for editor Ed Kelley and, so far, haven’t heard back.

But I did have an interesting conversation with zoologist Gordon Rodda of the U.S. Geographic Survey, one of the scientists whose research formed the basis for the story. Here is what he said:

The USGS undertook a study of what climates in the United States theoretically could support the spread of a growing population of non-indigenous Burmese pythons that have taken up residence in the Florida Everglades. The areas warm and humid enough to support the non-poisonous constrictors could include Oklahoma, depending on how global warming shakes out over the next 100 years.

“But, if the implication in the newspaper story is that it is going to happen next Thursday, that’s irresponsible,” said Gordon. “It is a very dramatic way they portrayed it.”

The particular irony of the Oklahoman's story is that it was so thoroughly reported by staffer Josh Rabe that no reasonable editor could have inadvertently misconstrued its significance.

In but one example, Josh quotes a local snake expert as saying it is “just absurd” to fear a Burmese python invasion in Oklahoma. “If you put one out in the front yard on a day like today,” said snake breeder Bob Clark in a week when low temperatures were in the mid-20s, “you would have a snake-sickle by the end of the day.”

To be sure, an onslaught of Burmese pythons would terrifying. The snakes can grow to lengths of 20 feet and become as fat as a telephone pole, says Gordon. Although the creatures are not poisonous, they instantly wrap themselves around their prey, squeezing the life out of the victim before gulping it down.

Although the snakes are capable of traveling as far 20 miles in a day, Gordon can't imagine them bellying all the way from Florida to Oklahoma City. “It is unlikely they would keep moving long enough in the same direction, given the randomness of their movements,” he explains.

If the danger is negligible of telephone poll-sized Burmese pythons slithering 1,500 miles from the Everglades to Oklahoma City, then why would the newspaper have played the story in the way it did?

“With newspapers,” says Gordon, “it’s their business to make a big deal out of things.”

Is it any wonder why four out of five people don’t trust the media?

Thursday, February 21, 2008

Stonewalling won’t cut it

Bill Keller and Len Downie owe their readers the full details about the timing and circumstances that caused them to publish today's innuendo-rich and fact-lite exposes on John McCain.

With blogs and pundits chattering about the possible motivations and machinations behind the New York Times article suggesting an improper political and/or personal relationship between McCain and lobbyist Vicki Iseman, it is not enough for Bill to kiss off thousands of critics by saying, “The story speaks for itself.”

In fact, as discussed more fully in a moment, it doesn’t.

And Len is on even shakier ground when he acknowledges that his matching story was rushed onto the web only after the NYT cleared the way. “We had elements of the story in story form,” Downie told Editor and Publisher. “When the Times story appeared on their website last night, we were able to talk to sources who gave us further information that made it able to be published today.”

Not only has the story itself been kicking around for a long time, but the story about the story has been making the rounds since before Christmas.

Back on Dec. 20, 2007, Matt Drudge reported that McCain “has been waging a ferocious, behind-the-scenes battle with the New York Times…to mount a bold defense against charges of giving special treatment to a lobbyist.” In reporting then that NYT reporters were arguing for publication of the piece at Christmas time, Matt said “editor Keller expressed serious reservations about journalism ethics and issuing a damaging story so close to an election.”

In a fascinating online article today that purports to provide the back-story of the McCain expose, New Republic correspondent Gabriel Sherman suggests that one of the reasons the Times finally decided to run the piece is because his magazine was about to publish an article questioning the whereabouts of the long-pending investigation.

To support this thin but delectable premise, Gabriel quotes Mark Salter, a McCain operative who told Time Magazine that the Times decided to publish the investigation “because the New Republic was going to run a story that looked back at the infighting there. [The Times] decided that they would rather smear McCain than suffer a story that made the New York Times newsroom look bad.”

(UPDATE 2.22.08: Gabriel today distanced himself further from Mark's theory. “That is the McCain campaign spin and we never set out to force the Times' hand or preempt the Times' piece,” Gabriel told E&P. “We were curious why the Times came close to publishing it and sat on it. We didn't try to force anything.”)

Although I happen to be more of an Obamocrat than a McCainiac, I found the NYT article, while explosive, to be fairly lightweight, as exposes go.

The Times story is crafted to lead the reader to the unmistakable, but unspoken, conclusion that the senator was having an affair with the lobbyist. But the article provides no more support for this notion than the fear of certain unnamed McCain aides that the relationship was “romantic.”

The Times story does a better job of demonstrating here that the senator was perhaps too vigorous in his advocacy for some of the lobbyist’s clients.

But the juiciest and best-documented part of the expose is its reprise of the senator’s shameless support of Charles Keating, the 1980s savings-and-loan figure who pleaded guilty to fraud. Although that happens to be old news, the episode is perhaps well worth remembering as McCain stumps for the White House.

Notwithstanding whatever illumination the Times and Post articles may provide, the circuitous and mysterious journeys the stories took prior to publication raise questions about how – and how well – two of the nation’s most prestigious newspapers report, edit and evaluate such potentially explosive articles.

Above all else, the timing of the publication of the articles during the election cycle demands a full explanation. Was the NYT piece ready before McCain clinched the nomination, as Drudge suggests? If so, why was it held? If it was not ready until now, what new information emerged since Christmas to qualify the Times article for publication? (We already know the Post published because the NYT did.)

With nothing less than the credibility of the Times and Post on the line, the editors of these newspapers owe the public the story behind their stories. Readers have a right to know.

Monday, February 18, 2008

The ‘eyes’ have it

More than three-quarters of the readers of this blog think two or more people should edit an article before it goes in the newspaper, according to the poll asking how many editors it takes to vet a story.

Of the more than 400 respondents to the survey as of this evening, 55.2% favored two editors per story, 21.9% advocated three or more editors per story, 20.4% said a single editor was sufficient and a mere 2.5% said reporters didn’t need anyone looking over their shoulders. So, those favoring lots of “eyes” on a story handily carried the vote.

Anecdotally, the comments to the post below produced a general – and well founded – consensus that I am a lousy typist, as demonstrated by the frequent typos appearing herein. The suggestion that I hire a copy editor to safeguard my work, while thoughtful, is not going to be economically feasible, inasmuch as this is a volunteer undertaking and I am the only volunteer.

A fair number of reactions to the post cast me as an evil guy because I identified the obvious problem that newspapers bear awesomely higher production costs than the websites building substantial businesses by reusing their valuable content for free.

Take aim at the messenger if you like, but please understand that the staggering level of economic inequity is a real and indisputable problem threatening the long-term survival of newspapers as we know (and love) them. Those responding emotionally to my observations aren’t doing themselves, their colleagues or their readers any favors.

I share everyone’s commitment to quality journalism. But that’s not the issue.

The question is whether newspapers can afford to continue producing quality content in the traditional fashion at a time when sales, profits and the underlying business model are facing unprecedented and alarming challenges.

That’s what we ought be worried about, not my lousy typing.

Sunday, February 17, 2008

Can newspapers afford editors?

Now that pending layoffs at the New York Times and Los Angeles Times have made newsroom cutbacks all but unanimous, some managers eager to maximize the feet on the street at their newspapers are wondering if they really need all those editors.

“How many people have to read a story before it goes in the paper?” asked a senior editor at a major metropolitan daily who is struggling to sustain the quality of his news report in an era of shrinking resources. “If we have to economize, the editing process is the place. Why do we have all these people processing stories after a reporter writes it? They are not producing anything that will get us traffic on the web.” VoteWhat is the minimum number of people necessary to vet a newspaper story?

None 1 2 3 or more

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This question is bound to provoke spirited discussion in every newsroom where it is broached. You can add your two cents to the debate by taking the poll at left. Before you vote, consider this:

The issue of how many editors it takes to put a story in the paper not only strikes a raw journalistic nerve but also exposes a major and growing economic disadvantage faced by newspapers, which is this: Newspapers have awesomely higher operating costs than the online publishers who are siphoning away their audience and advertising revenues.

As you can see from the chart below, a half a dozen reasonably well compensated people – or more – are likely to lay hands on an ordinary story bound for the pages of the typical metropolitan daily.

In the event the article is uncommonly sensitive – involving a matter of taste, an investigative piece or the shenanigans of a major advertiser – then untold additional eyeballs could be brought to bear, ranging from assistant, deputy and managing editors to outside lawyers and even the publisher. Beyond those worrying about the words, most routine stories also are likely to pass through hands of gatekeepers on the photo, multimedia, graphics, Internet and design desks, too.

By contrast, Google, Yelp, Everyblock and myriad other major competitive online sources for news and information collectively employ exactly zero people to author content. The bitter irony for newspapers, of course, is that publishers pay the entire (and high) cost of creating the content that these and thousands of other websites freely scoop off newspaper sites to build their own traffic, sales and highly profitable businesses. (Bloggers like yours truly, of course, are one-man operations producing more poop than scoops and no profits whatsoever.)

With print sales falling far faster than newspapers can replace them with web revenues, publishers trying to sustain their operating profits in the face of the huge embedded costs of pressrooms, real estate and delivery fleets – not to mention satisfying their creditors – are under extreme pressure to do more with fewer people.

Headcount is one of the few major operating costs publishers can readily control. And newsroom headcount is the most elastic, because the paper theoretically can be filled with wires, press releases and user-generated photos of kittens.

With the fat (if ever there were) long since trimmed from most newsrooms, the choice for many metros now may be coming down to whether to rein in news coverage or relax their traditional standards by editing out some of the editors. In some ways, this already has begun.

While it would be heretical at most major news organizations to “railroad” stories from a reporter’s keyboard directly into print, several publications, including a few surprisingly large ones, are allowing reporters to point, click and post words and images directly to the newspaper's website. If the work is good enough to slap on the web without further human intervention, why isn’t it good enough to go directly on a web press?

On the other hand, a compelling case can be made that newspapers would debase themselves journalistically, commercially and, perhaps, even fatally by abandoning the disciplined reporting and professional editing that makes their content uniquely valuable in an age of frequently impulsive, often repulsive and usually unverified Twittering.

On yet another hand, the most elaborate editing process in the industry did not save the New York Times from the embarrassment of Jayson Blair's counterfeit dispatches and Judith Miller's off-base stories about Iraq's non-existent WMDs.

All things being equal, everyone would vote for giving newspapers sufficient resources for both gathering news and checking their work closely. But things aren’t equal. Newspapers are operating at an increasingly unequal disadvantage against their online competitors.

While there is no doubt about the value of the industry’s traditional values, the question is whether the industry can continue to afford them.

Now, you may vote.

Reactions to this post

:: "Dear writer, Lord knows I’m aware that you think that I’m a supercilious twit, but you could probably be pressed to concede that I am on your side," says John McIntyre, chief of the copy desk of the Baltimore Sun in his blog here and here.

:: "A typical print story should be read by two editors," says John Robinson, editor of the Greensboro (NC) News-Record in his blog. "Online stories are different."

:: "Old-line news outlets are full of career employees who've 'earned' an editor's chair," says Gawker. "Make those people start writing again!"

:: "The only way we can realistically continue to operate as newspaper journalists is to show how what we offer is better than what someone else offers," says David Sullivan in his blog. "That means operating behind a brand. That brand has to stand for something. Quality is a good thing to stand for."

:: Editors "are saving your ass from getting it sued off," says Nancy Nall in her blog. "Also, from becoming a laughingstock. Also, from having your bargain-basement, straight-out-of-college reporting staff embarrass you in print by misspelling the mayor’s name." She also points out, as did several other sharp-eyed readers, the typo in the chart below.

:: "Scrap the AP Stylebook...give reporters some responsibility" and "train them to write headlines," says Josh Korr in his blog. "If we’re asking journalists to become increasingly multifaceted technologically — giving reporters video cameras, making copy editors post to the Web — I think we can ask for some basic journalistic multitasking."

:: "I love to hear copy editors and their supporters talk about quality and all the battles fought, some won, some lost," says Doug Fisher in his blog. "Then, I walk away and mutter something like, 'Those poor souls; they'll never see it coming.' And they haven't, and now it is here."

:: "I didn't realize Web traffic was the only goal of a newspaper," says Bill Walsh, author of the blog called The Slot. "If that's the case, I have a one-word solution: Porn."

:: "The real question is: can newsrooms afford to continue to employ editors who operate within a traditional print-first box and have the we-know-what-are-readers-want mentality?" asks Jason Kristufek in his blog.

:: "Večernjakov ekran, Afera 'Sanaderov intervju', krah novinarstva i drugi jahači," says the headline in Zivot 2.0, a blog apparently originating from Hungary. If you know what it means, please let me know.

Sunday, February 10, 2008

Help wanted. Desperately.

Newspapers have lost more than half of their print recruitment revenues since the category hit an all-time high of $8.7 billion in 2000, the peak of the Internet bubble.

Though final numbers aren’t in for 2007, print recruitment revenues will be lucky to hit $4 billion for the year, making for a sales drop of about 54% in the seven-year period.

This is a big deal, when you consider that recruitment revenues accounted for nearly 18% of all newspaper sales in 2000. In 2007, they will generate approximately 11% of the industry’s depressed sales.

This is an even bigger deal when you consider that the $4.7 billion in vaporized sales is equal to the combined revenues over the last 12 months of the McClatchy, Lee, Media General and Journal Register publishing companies. It’s as though those companies had been wiped off the face of the earth.

The sad state of the recruitment advertising business provides an instructive look at how the tradition-bound newspaper industry copes (or doesn’t) with change.

To explore the subject more fully than space permits here, I have prepared a new white paper that reviews not only what went wrong, but also, significantly, how newspapers can begin to get ahead of the continuing evolution in this key market segment. Get the free white paper by emailing me at alan [dot] mutter [at] broadbandxxi [dot] com.

You already know where recruiters and their ad dollars have gone since 2000: the Internet.

By the conservative estimate of Peter Zollman, the founder of the Classified Intelligence consulting group, some $3.5 billion in recruitment ads were sold in 2007 by such online entities as Monster, Hot Jobs, Dice, Ladders, 6FigureJobs, Craig’s List (which charges a nominal price for help-wanted ads in the largest metro markets) and scores of small sites like Gas Work, which specializes in positions for anesthesiologists.

Gordon Borrell, who heads a research firm bearing his name, believes the total online expenditure for recruitment last year was a much larger $6.7 billion. His estimate includes not only money spent on sites ranging from Monster to Gas Work but also the funds that companies spend on the recruitment environments they build on their own websites.

Either way, newspapers at best are getting half of a highly profitable business that used to be all theirs. How could this have happened?

The simple answer is that newspapers – blinded by their utter dominance of the recruitment advertising market for as long as anyone can remember – were oblivious to the major shift that took place in the last decade in how employers recruit workers and how individuals look for jobs.

Thanks to the power of the Internet to precisely match employers and job seekers through a vast array of targeted websites, there no longer is a need for job seekers to squint at the teeny type in the newspaper to find a job. With newspapers carrying far fewer listings than ever, there’s not much to squint at, either.

As you can see from the graph below, the beginning of the end of newspaper supremacy in want-ad advertising coincides with the twin traumas of the tech collapse in late 2000 and the 9/11 attacks in 2001. When want-ad bookings evaporated between 2001 and 2003, most newspaper executives viewed the problem, though unwelcome, as a cyclical setback that would resolve itself as the economy regained its strength.

Although bookings seemed to follow a classic recovery trajectory in 2004 and 2005, ad sales began eroding despite a solid economy in 2006 and then utterly collapsed in 2007. With the economy in the midst of an apparent slowdown in 2008, recruitment advertising, like almost all other categories, appears to be headed this year for a new modern-day low.

In hindsight, it is easy to see that the problem with the recruitment market wasn’t caused as much by economic fibrillations as it was by a fundamental, or secular, shift in the marketplace.

Though the shift proved to be earth shaking, most publishers never felt the vibrations until it was too late. Worse, the overwhelming amount of the industry’s thought and energy to this very moment has gone into desperately and, as it turns out, fruitlessly trying to preserve a business spurned by a growing number of readers and advertisers alike.

Notably, it was only last month that the Chicago Tribune became the first major newspaper to concede the seemingly inevitable demise of print reecruitment advertising by limiting help-wanted listings to two days a week. The Tribune is using its remaining print ads to essentially refer readers to its online partner, CareerBuilder.Com.

The irony of the Tribune's new strategy is that CareerBuilder itself has a questionable future, given that it is nothing more than an online emulation of the anachronistic and increasingly broken print model.

Career Builder, which is owned by the Tribune Co., Gannett and McClatchy, is built on the premise that job seekers will flock to a single source – sort of like the Sunday newspaper of yore – where they conveniently can find all the jobs in town. The corollary premise, of course, is that someone who wants to hire a truck driver will pay handsomely for the privilege of reaching a crowd of workers ranging from nannies to machinists to insurance salesmen.

But that’s not how people look for jobs – or employers fill them. Kids today can apply online for jobs at Wal-Mart.Com, anesthesiologists can list their resumes on GasWork.Com, and software engineers can go directly to Dice.Com, an all-tech job board, or the Hewlett-Packard website, which lists every position in the company in the world.

If those choices are too much work, you can put a widget on your computer’s desktop, tell it the sort of job you would like – and wait for it to let you know when SimplyHired.Com, turns up a suitable position as it crawls and indexes jobs from every nook and cranny on the web. A competing classified-aggregator, Oodle.Com, scrapes listings not only from job boards and corporate websites, but also from the sites of newspapers and their partners, Career Builder, Hot Jobs and Monster.

Is that still too much work to do to look for work? NotchUp.Com says it has more than 1,000 companies (from Google on down) interested in paying you hundreds of dollars to sit for an interview with a recruiter. In the slickest viral marketing launch since YouTube, NotchUp lets you seamlessly and speedily add your LinkedIn listing to its database and then invite all your contacts to do likewise. After I registered, I watched with amazement as several of my well-employed LinkedIn contacts joined NotchUp within minutes.

While it remains to be seen whether NotchUp – or something smarter, faster, cheaper or better – will catch on, it is clear that the recruitment market is evolving farther and faster than ever from the traditional, one-size-fits-all model pursued by newspapers and their fellow Media 1.0 partners, Career Builder, HotJobs and Monster.

As this market hurtles irretreivably down the path of dynamic change, the big question for newspapers is not whether they should try something different but whether they can react quickly and wisely enough to save the half of the business they haven’t lost.

Thursday, February 07, 2008

R.I.P, PM newspapers

Like canaries in a coal mine filling with methane, the few remaining afternoon newspapers in competitive metro markets are gasping their last.

Only six weeks into the year, the toll has begun:

:: The presses were silenced forever on New Year’s Eve at the Cincinnati Post (last reported circulation 42,000).

:: The Madison Capital Times (circulation 17,000) announced today that it will be cut to a two-day-a-week insert in the Wisconsin State Journal.

:: The historic Albuquerque Tribune (circulation 11,000) is living on borrowed time after plans to sell it to local businessmen evidently fell through.

For all that ails newspapers – and there is quite a lot – afternoon newspapers in competitive markets have been feeling the industry’s pain even more acutely than AM titles for more than 25 years. And there is nothing to suggest anything is going to reverse that.

It wasn’t always so. In the post-World War II period, the number of afternoon papers in the United States hit an all-time high of 1,453 in 1948 vs. only 328 morning properties in the same year, according to the Newspaper Association of America. At the end of 2006, by contrast, there were 833 morning and 614 afternoon papers, representing a decline of 344 publications.

You may be surprised to learn (as I was) that afternoon papers outnumbered morning papers in as recently as 1999, when 736 titles were printed on the morning cycle and 760 papers came off the press in the afternoon.

But changing demographics, shifting commuting patterns and upstart media like TV (trends discussed more thoroughly here) have been whacking afternoon circulation since 1980 at a far more furious rate than experienced by morning papers.

As you can see from the chart below, a 7% decline in the average circulation of afternoon newspapers between 1970 and 1980 rose to an 18% drop in average circulation in between 1970 and 1980 and snowballed to a 36% plunge in average circulation in the 10-year period ended in 1990. While the average circulation of morning papers also began eroding in 1980, the decline was more moderate than the loss at PM titles until 2006.

As afternoon newspapers became increasingly unpopular among consumers, many publishers operating in single-paper towns migrated their production to the morning cycle. That’s one reason why the number of morning papers has overtaken the number of afternoon titles.

But there is no room for a second morning paper in a competitive market dominated by an incumbent AM property. And that leaves PMs in competitive markets with no place to go.

The owners of the Cincinnati, Madison and Albuquerque newspapers have an additional incentive to either downsize or forsake their franchises.

Scripps, the owner of the afternoon titles in both Cincinnati and Albuquerque, is a partner in each market in a joint-operating agreement with the owner of the morning paper. When the cost of propping up each weakened afternoon paper is stripped away, there will be financial benefits for both Scripps and the publishers of the surviving morning titles.

The Capital City Times is in a similar joint venture with Lee Enterprises that will enable both partners to achieve significant savings when they stop producing and delivering the free-standing, six-day-a-week afternoon product. [CORRECTION 2/13/08: In the original post, I stated erroneously that Lee owned both papers.]

With the economic pressures on the industry likely to mount for the forseeable future, it appears we are about to see a growing number of obituaries for PM papers, a feisty breed whose better days, unfortunately, are behind them.

Wednesday, February 06, 2008

MNI faces 50% writeoff of KRI deal

The McClatchy Co. could be on track to write off half of the $4.4 billion it paid for the Knight Ridder newspapers it proudly acquired in the summer of 2006.

The dramatic failure of the transaction – which took place in the early days of a catastrophic downturn for the newspaper industry that few foresaw at the time – is evident in McClatchy’s announcement today that it will have to take the second writedown in three months to reduce the value of the KRI assets it carries on its books.

McClatchy said it would take a still-to-be-determined accounting adjustment to reflect the $602.2 million drop in the price of its shares in the fourth quarter of last year. Since the end of 2007, its shares have plunged another $173.4 million to close today at $10.54 per share. Thus, the market capitalization of the company has fallen in five months by $775.6 million from $1.6 billion on Sept. 30 – a plunge of 51%.

Lest we forget, McClatchy’s shares were worth some $2.5 billion on the day before it announced its plans to buy KRI in March, 2006 – vs. $865.9 million today.

The deep drop in the value of the McClatchy’s shares in the fourth quarter of 2007 is forcing the publisher to take the second extraordinary charge against its earnings in as many quarters. In the third quarter of 2007, McClatchy wrote off nearly $1.4 billion of the value of the goodwill of the assets it acquired when it purchased Knight Ridder.

If you add the $1.4 billion writeoff in the third quarter to the $775 6 million drop in the stock to date, the sum is equal to a shade under $2.2 billion, or almost exactly half of what McClatchy paid to buy Knight Ridder in the summer of 2006.

Accounting rules require a company (like MNI) to take a charge against its earnings in the event the shares it issues to fund an acquisition (like KRI) fall below a certain level. The exact amount of the charge against earnings, also known as a writedown, remains to be calculated. It is possible that auditors will conclude the writedown should be less than the full drop in the price of the shares. If so, then the writedown of the KRI deal would be less than I have projected.

But the size of the writeoff is only one measure of how badly things have gone for McClatchy since 2006, when it bought 20 KRI papers – including the Miami Herald, Charlotte Observer and Kansas City Star – and divested a dozen other properties, including the Philadelphia Inquirer, San Jose Mercury News and Akron Beacon-Journal.

“Opportunities like this come perhaps once in a company's lifetime, and we're thrilled to have this chance to extend McClatchy journalism and our proven newspaper operations to 20 high-quality newspapers in high-growth markets,” said Gary Pruitt, McClatchy’s chief executive, in announcing the transaction. “Combining the two creates a company particularly well-positioned to lead the way in a changing media landscape. It's truly a chance for McClatchy to do more of what it does best.”

Unbeknownst to Gary, he heavied up on newspapers in the early days of an unprecedented and precipitous decline in advertising sales that has accelerated in almost every quarter since the day the deal was announced.

Now, he sings a different tune. “The advertising environment in 2008 does not appear to be improving," Gary told investors today. “In fact, in January we've seen headwinds from a worsening national economy. We now expect advertising will likely be down in the low double-digit range in the first quarter of 2008.”

While all newspapers suffered from weak sales in 2007 that likely reduced total industry ad revenues by some 8% for the year, McClatchy was hit especially hard by the concentration of its properties in California and Florida, where revenues fell by, respectively, 16.3% and 15.7%. California and Florida together accounted for 35% of the company’s $1.7 billion in ad sales in 2007.

Ironically, McClatchy’s troubled portfolio resulted from its decision to cherry-pick Knight Ridder’s assets at the time of the merger and to jettison papers in places like Akron, Philadelphia and the Dakotas in favor of titles in what then were believed to be fast-growing Sun Belt markets. Real-estate busts on both coasts since have foiled the Sun Belt strategy.

(McClatchy also sold three Northern California newspapers to Media News in the belief, which turned out to be prescient, that those markets would not grow fast enough to outpace the publications’ high operating costs.)

In addition to evidently betting on the wrong geography in 2006, McClatchy also failed in the first year after the merger to build an effective new-media strategy. For reasons that remain inexplicable to this day (see this post), McClatchy’s $164 million in online sales in 2007 represented an increase of just 2.2% over the prior year at the same time industry gains likely averaged 20%.

Regardless of whether management could have done more to stimulate print or online sales, there are questions within the industry as to whether McClatchy acted rapidly enough to control costs to protect its margins as revenues eroded.

The company’s operating margin 0f 25.4% in 2007, while respectable, pales next to the EBITDA of 28.6% it achieved in 2005, the year before the KRI merger. (EBITDA stands for earnings before interest, taxes, depreciation and amortization.)

More significant than the drop in the company’s operating performance is that McClatchy’s debt climbed to more than $3 billion after the KRI transaction from $202 million in 2005. With McClatchy’s debt today 16 times greater than it was in 2005, a huge portion of its profits must be dedicated to interest payments, instead of investments to build revenues or control costs.

If McClatchy is to avoid defaulting on its towering interest obligations, it needs to bring its operating expenses in line with its lower (and seemingly falling) revenues.

So, it’s a safe bet that aggressive new cost cuts are on the agenda this week at the annual meeting of McClatchy’s publishers and editors.

Saturday, February 02, 2008

Yahoo! for Yahoo? New worries

The hundreds of newspapers counting on Yahoo to turbo-charge their online sales could suffer sputters instead, as their prime technology partner addresses a hostile takeover bid by Microsoft and a simultaneous internal reorganization to cut costs.

While there are too many moving parts at the moment for anyone to predict the future with certainty, the reality is that Yahoo’s newspaper partnership in the greater scheme of things is far more strategically significant to publishers than to Yahoo – or its potential new owner, Microsoft.

With all due respect to the newspaper alliance, it is hard to see how Yahoo’s share of the sales associated with the partnership could have amounted to even one whole percentage point of Yahoo’s nearly $7 billion in revenue in 2007. With far bigger lines of business and more momentous issues at stake for Yahoo and a potential acquirer, it is not hard to imagine how the newspaper project could be overlooked, sidetracked, or, in the worst case, scuttled.

Consequently, publishers would be well advised not to put all their eggs in Yahoo’s basket.

As discussed here, here and here, a dozen newspaper chains publishing more than 500 titles have entered into a multifaceted partnership since 2006 that would include jointly selling help-wanted ads on HotJobs, featuring Yahoo search on newspaper websites, enabling newspapers to tap into Yahoo’s banner ad network and providing newspapers with easy access to such technology as Yahoo maps.

While some publishers like Lee Enterprises achieved an initial lift as high as 56% in online sales in fiscal 2007 as the result of adding HotJobs listings to their want-ad inventory, other Yahoo partners fear such gains are unsustainable on an ongoing basis, especially with recruitment advertising shriveling as the economy stalls.

Further, publishers were disappointed recently to learn that Yahoo will be late in delivering the ad interface they had been expecting to beef up their banner inventories and fatten their effective ad rates. Sources say Yahoo told partner newspapers that the system would be delayed as the result of an internal reorganization occasioned by a plan to eliminate 1,000 positions to pare operating expenses at the 14,000-person company.

While the downsizing would be enough to distract any management team, Yahoo’s executives were handed a much larger challenge on Friday when Microsoft launched a hostile offer to acquire their company. As any company would be obliged to do in this situation, Yahoo now will go through the process of (a) trying to wriggle out of Microsoft’s embrace (perhaps with Google's help); (b) finding a higher offer from a competing bidder; (c) cutting a deal with Microsoft or an alternative buyer, or (d) all of the above.

To the extent Yahoo tries to fight what I would regard as its inevitable acquisition by Microsoft or a company like News Corp., Disney, General Electric or a financial buyer, Yahoo may elect in the near term to enhance its profitability as a free-standing enterprise by cutting expenses even more drastically than it had planned to do. If so, the newspaper project could be a casualty of Yahoo’s decision to focus on other, larger business segments.

(UPDATE 2.4.08: An example of Yahoo's desire to tighten its focus was the announcement today that it will turn off its paid music service, which has been a weak also-ran in comparison to competitors like iTunes. At the same time, Yahoo may consider outsourcing its core search and/or banner-ad business to Google, according to the Wall Stret Journal.)

In the event Yahoo and Microsoft (or some other company) agree to merge, two long and consecutive periods of uncertainty will ensue. The first period of uncertainty will be the lengthy review of the antitrust implications of a merger between Yahoo and the winning acquirer – a process bound to be complicated by Google's outspoken opposition to the deal. The second period, which would commence only after the first ended, would be the immensely complicated process of consolidating two enormous companies operating with two management teams in multiple locations with many overlapping lines of business.

Microsoft’s primary rationale for wanting Yahoo is to combine the search and advertising businesses of both companies to compete with you-know-whoogle. Search and advertising, of course, are two of the key areas where newspapers are looking for Yahoo’s help. While the eventual combination of Yahoo and Microsoft may produce stronger products and a more commanding market position for Microsoft, the time it takes to consolidate the two could cost newspapers months (years?) of revenue growth and hard-to-recover market share.

Taking the risk analysis to the next level, what if Microsoft decided not to support the newspaper alliance?

Many publishers still recall bitterly Microsoft’s ambitious, but ultimately futile, effort in the late-1990s to compete with newspapers by hiring local staffs to create elaborate news and entertainment portals under the Sidewalk brand (since subsumed by Citysearch).

While the Sidewalk debacle may have cured Microsoft of wanting to compete in this arena, a lot has changed in the last 10 years. Microsoft certainly could decide to take a run at the Yelps of the world with YahooLocal or any number of successor products that could be built from the vast array of search, mapping and other technologies the combined companies would have at their command.

In that event, newspaper publishers would be looking at the same problem start-ups face when deciding whether to deal with the 10,000-pound canary of the software business. “You don’t know if they want to mate with you or eat you,” goes the saying in Silicon Valley.

With far more formidable matters on the table at Microsoft in connection with the Yahoo deal, it is unlikely the folks in Redmond are thinking very deeply at the moment about whether they want to eat or mate with newspapers.

Even if the eventual answer is “mate,” however, the lengthy period of uncertainty that lies ahead could be a big problem for publishers.