$7.5B sales plunge forecast for newspapers

Unless the global economy miraculously turns around on a dime, newspaper advertising revenue may plunge some $7.5 billion in 2008, according to a new projection attempting to assess the impact of the meltdown on the industry.

Should this forecast prove to be correct, sales would tumble by 16.5% to $37.9 billion from last year’ s depressed level and the industry will have lost a staggering 23.4% of its revenues since producing a record $49.4 billion in sales in 2005.

Prior to the historic collapse of the worldwide financial markets, I projected on Sept. 5 that print and online sales would drop about $5.4 billion to $40 billion from the 2007 level, barring “unforeseen events.” Given the ferocity of the ensuing unforeseen events, my revised forecast now shows the industry this year could shed an additional $2.1 billion in sales, bringing the total estimated decline to $7.5 billion.

The true number could come out higher or lower, depending on further developments. But it will be difficult to undo much of the damage the credit crisis already has done.

Even if all the leaders of the all the world’s governments uncharacteristically adopted a well conceived and well orchestrated rescue plan to jump-start the credit markets, it would take a substantial amount of time and effort to mend the mangled finances and rattled psyches of millions of households and businesses.

The credit crunch will hit newspapers hard, because nearly three-quarters of their ad sales come from such vulnerable accounts as:

:: Retailers who are seeing consumer demand dry up at the same time they are struggling to borrow the money they need to make payroll and stock their shelves.

:: Auto dealers who can’t sell cars because many potential buyers are postponing purchases and the customers who try to buy cars often can’t get loans. Meanwhile, dealers are scrambling to finance the fleets of unsold vehicles clogging their lots.

:: Real estate agents who can’t find buyers because no one knows what anything is worth and, owing to a paucity of transactions, can’t afford to buy ads to sell homes that no one wants to buy. The few brave souls stepping forward to buy homes generally have found mortgages difficult or impossible to obtain.

:: Employers who aren’t buying help-wanted ads because their businesses are shrinking, not expanding. Many report difficulty borrowing the working capital they need to buy raw materials or make payroll while they await payments for goods and services they already have provided.

In an effort to translate the effects of these grim circumstances into a revised sales forecast, I assumed that third-quarter sales performance would be only slightly worse than it was in the in the first half of the year, because the credit markets didn't seize up until mid-September. But then it gets ugly.

As detailed in the table below, I trimmed classified revenues in the fourth quarter to half of the prior year’s level in the auto, realty and recruitment categories, because each would be affected most directly by the credit collapse.

I was more conservative in cutting the expectation for retail advertising for the fourth quarter, because I believe merchants will do everything possible to sustain their ad schedules during the holiday period that determines the profitability of their businesses for the year. If there is not a sharp turnaround in the economy after the first of the year, the sales in this category could collapse in 2009 in a tide of bankruptcies and desperate cost cutting as the surving merchants strive to remain viable.

In light of the 2.3% drop in online ad sales in the second quarter, I projected a modestly accelerating decline in that category for the balance of the year. Although most newspapers generate two-thirds or more of their online sales from the three major classified verticals, I am assuming publishers will push as much of the remaining classified revenue as possible to the online side of the ledger to preserve the impression – but not necessarily the reality – that the web remains a growth area.

While the publishing business (though not all individual newspapers) has survived every economic calamity in the nation’s history, this downturn could be uniquely catastrophic for an industry that has been struggling for the last three years to retain its relevance among readers and advertisers.

Even during the economically robust years of 2006 and 2007, newspaper advertising fell a total of $4 billion, or 8.2%, from the all-time peak of $49.4 billion achieved in 2005. A drop to $40 billion in sales this year would be equal to an 19.1% slide from the 2005 level. But the newly projected drop to $37.9 billion in sales this year would amount to a 23.4% decline from 2005.

Bleak as this immediate prospect is, the long-term outlook is not much better. It is not clear how the industry will recapture its former vigor when the economy rebounds, given that its revenue base was disintegrating well before the economy fell apart.

Macy’s has gobbled up many of the Main Street department stores that traditionally were among the best newspaper advertisers, substituting instead a national brand strategy relying more on television and magazines than newspapers. Between the economically expansive years of 2004 and 2007, Macy’s reduced its advertising spending at newspapers by $249.1 million, or 29%, according TNS Media Intelligence.

CompUSA, a major newspaper advertiser, absorbed the Good Guys, another major advertiser, and then went out of business at the beginning of this year. Circuit City is hanging on by a thread and manufacturers are being warned not to ship it merchandise because they might not get paid. If Circuit City, the penultimate national electronics retailer, goes away, will Best Buy keep buying Sunday inserts every week?

If General Motors merges with Ford or Chrysler, how many car dealers will shut their doors forever? Well before ordinary mortals ever heard of credit-default swaps and other financial weapons of mass destruction, auto classified advertising at newspapers fell by $1.8 billion, or 35%, between 2000 and 2007.

If the self-employed real estate agents and mortgage brokers who buy newspaper ads can’t make a living during the extended housing downturn, they will exit the business, as many already have. Real estate advertising at newspapers in 2007 fell by $1.2 billion, or 22.6%. In the first six months of 2008, the category slid another $681.9 million, or 35%. If consumers in the future can buy and sell homes on their own at Zillow – or use a cheaper fixed-price agent like Redfin – will real estate advertising as we knew it come back?

Craig’s List, Monster, Simply Hired and many others have eviscerated the one-time newspaper monopoly in recruitment advertising since the tech bubble burst, resulting in a loss of $4.9 billion, or 56.3%, of classified revenues between 2000 and 2007. Will the employers who were buying newspaper ads before the economy cratered still use them when the economy recovers? Will they be around to consider it?

The newspaper industry’s unwillingness or inability to diversify its revenue base since the start of this century has hitched it to the fates of the retailers, car dealers, real estate brokers and employers who are struggling to keep their heads above water in the worst business conditions since the Depression.

If those accounts succumb, who will replace them?

Yahoo! for Yahoo? Maybe not.

The jumbo online revenue gains at Yahoo’s newspaper partners may be transitory and short-lived, say publishers struggling to sustain initial lifts they fear they can’t replicate in the second year of the agreement.

While online sales increased in the neighborhood of 50% for some publishers who began cross-selling Yahoo’s HotJobs along with their traditional recruitment products, executives on the eve of the one-year anniversary of the partnership say it will be difficult in the second 12 months to equal its first-year success.

The Yahoo newspaper consortium, which launched in November, 2006, was forged by Belo, Cox, Scripps, Hearst, Journal Register, Lee Enterprises and MediaNews Group. Although publishers hailed the deal at the time as “transformational,” executives now are worried about maintaining the encouraging early momentum.

“We aren’t anywhere near matching the initial gains,” says an online executive at one of the earliest publishers to partner with HotJobs. “We are struggling and I don’t see how we are going to make it.”

If this experience proves to be commonplace, it would throw cold water on the idea that hefty, double-digit advances in online sales in the next few years could help Yahoo’s newspaper partners offset an appreciable portion of their declining print revenues.

As previously reported here, one Wall Street analyst hypothesized that the newspapers teaming with Yahoo could boost their online sales by a large enough amount to achieve positive over-all sales gains as soon as 2009. Paul Ginocchio, the Deutsche Bank analyst, premised his forecast on newspapers being able grow online sales by no less than 40% annually for a period of three straight years.

While year-to-date online ad sales at a publisher like Lee Enterprises are 56% stronger in 2007 than they were prior to the HotJobs deal, some executives are worried that the year-to-year numbers after the first anniversary won’t grow at anything close to the original pace.

Industry-wide, print newspaper classified revenue fell nearly 16.5% in the half of this year to $1.97 billion, according to the Newspaper Association of America. Although the NAA does not report online revenues by category, total newspaper online revenues gained 20.3% in the first six months. In the same period, Monster.Com, the leading independent online job site, reported a 22% gain in sales.

Even though Monster seems to be growing at a respectable clip, online newspaper sales can’t help but be dragged down by the eroding print side of the business, which historically was the reason help-wanted advertisers came to the newspaper in the first place. If advertisers are migrating to online vs. print recruitment, it doesn’t necessarily follow that they will stick with newspapers, especially since Monster often is cheaper than newspapers and Craig’s List is free in all but a handful of major markets where its top price for a help-wanted ad is $75.

In addition to the above challenges, newspapers face two additional hurdles in their pursuit of back-to-back years of 40% or 50% gains in their online-recruitment sales.

First, newspapers entering the second year of the Yahoo partnership won’t have the one-time infusion of new revenues they got when they initially added HotJobs to their existing recruitment efforts. A restaurant serving only lunch and dinner can boost its sales quite a bit by opening for breakfast. But it can’t add other meals in the second, third and fourth years to match the first-year bonanza.

Second, help-wanted advertising seems to be declining in concert with a real, or perceived, slowdown in the economy. Employers are thinning their payrolls in response to tighter credit, the housing slump and a feared pullback in consumer spending.

In fairness, there’s more to the Yahoo partnership than HotJobs. The venture also includes mutual cooperation in the sale of national, local and search advertising. While some of those products already are reflected in the improved online numbers for newspapers, it is likely they can be developed further.

At the moment, however, HotJobs is the major factor driving the Yahoo revenue surge. And the outlook for that vertical isn’t auspicious.

“We think recruitment advertising will slow further, even if the economy avoids a recession in 2008,” says John Janedis of Wachovia Bank.

So, publishers counting on Yahoo to rescue them may want to consider some alternative juju, too.

‘Private’ time for GCI, LEE, MNI and NYT?

The shares of Gannett, Lee Enterprises, McClatchy and New York Times Co. have fallen so low that the companies have become candidates for transactions that could convert them to private ownership.

The companies could do it themselves, do it in partnership with private-equity funds — or potentially face unwanted takeovers from investors attracted by the bargain prices of their stock.

A public company taking itself private almost surely would face suits from shareholders angry about the monumental trading losses suffered in the last few years. Shareholders could argue that the companies were being sold too cheaply because management had been misfeasant – or worse.

But the ability to escape the pummeling of the public market – and focus wholeheartedly on rescuing their troubled businesses – could encourage the brass at Gannett and Lee and the families at McClatchy and NYT Co. to look into going private.

While these four companies theoretically could go private on their own, they might welcome cash infusions from compatible private investors to fund the strategic initiatives that newspapers ought to be making to salvage their relevance, readership and revenues before it’s too late.

But, as my buddy Mark Potts noted here, the historic selloff of newspaper stocks also makes them vulnerable to unwanted overtures from daring investors seeking to buy the companies at historic low prices in the hope of turning them around.

Although newspaper stocks have been beaten to smithereens, not all companies are candidates for either a going-private transaction or even an unwanted takeover. One key to determining a company’s likelihood of going private – or being targeted by a raider – is the amount of debt it has in relation to its operating earnings.

If a company’s current obligations are light, there may be room to borrow the money necessary to buy its stock back from public shareholders. If the company has fully utilized its borrowing capacity, it most likely wouldn’t be able to get enough money to purchase its shares.

The easiest way to measure a company’s borrowing power is by dividing its current debt by its operating earnings, which also is known as EBITDA (earnings before interest, taxes, depreciation and amortization). Here’s an example of how it works:

In the case of Gannett, its debt of roughly $4 billion is two times the $2 billion in EBITDA that it generated in the last 12 months. To buy its outstanding public stock at a 20% premium over its current price, the company would have to borrow another $4.5 billion, bringing its total debt to about 4.3x earnings. By abolishing its dividend payment, a common practice in a going-privtae transaction, the company would add another $366 million to its EBITDA to bring the so-called leverage ratio down to an even more conservative 3.6x.

A little more than a year ago, lenders were willing to give Sam Zell more than 9x EBITDA to buy the Tribune Co. But the upper limit today for this sort of deal probably is no more than 6x earnings – and maybe less.

In assessing the prospects of going-private transactions occurring among the various publishers, I am assuming any deal requiring more than 6x earnings will not fly. Beyond Gannett, here’s how the others stack up:

Lee Enterprises is the easiest call, because a private transation would not change the ratio of its debt and cash. If Lee stopped paying its annual dividend and added those funds to its operating earnings to finance the purchase of its shares for a 20% premium over their price of $150 million, its debt-to-EBITDA ratio would be the same after the deal as it is now (5.3x).

The story would be roughly similar at McClatchy and NYT Co. If you add the dividend payments for MNI's common stock to its cash flow, its leverage ratio would be 4.7x after going private vs. 4.4x now. Following the same formula at NYT, the post-transaction ratio would be 5.3x vs. 2.3x today. The before-and-after difference is greater at NYT, because the Times would have to borrow $2 billion to buy its outstanding stock while McClatchy needs only $467 million to acquire its shares.

Given the depressed value of their shares and the relative ease of financing a potential transaction, companies like MNI and NYT could be on the radar of hostile takeover specialists. Although an unsolicited bid theoretically could be repulsed by the dual stock structure that gives the founding family at each company a veto over any unwanted overture, Rupert Murdoch demonstrated in his successful acquisition of Dow Jones that a clan’s resolve can be worn down with a sufficient amount of cash.

The Washington Post Co. would be less appealing to raiders because someone would have to borrow a prohibitive 10x earnings to take it private. The hefty financing would be needed because its common shares are worth $5.5 billion and its 16.5% profit margin is lower than the historic industry norm. WPO could go private by accepting additional equity from a friendly investor like board member Warren Buffet, but the Graham family would have to agree to the dilution of its holdings, plus a potential reduction in its preferred dividends.

A.H. Belo (AHC) could be taken private rather easily. It has no debt but sufficient cash flow to fund the loan that would be necessary to buy its shares. If management didn’t act, these characteristics would seem to make the companies vulnerable to an unwanted overture.

Scripps would have to take on too much debt to take iself private. In the initial version of this post, I stated that SSP could take itself private as the result of relying on erroneous information posted at Yahoo Finance.

The going-private route probably is not in the cards for Journal Communications (JRN) and Media General (MEG), because each would have to assume more than 6x debt. They could generate extra cash to de-lever themselves by spinning off assets, but this is a less than ideal time to be trying to sell newspapers.

Although the shares of GateHouse Media have been battered to the point that its market value is just $59 million, the company is unlikely to be able to go back to the private ownership it enjoyed until it went public in October, 2006. Because it already has borrowed 10x its operating profits, GHS could not qualify for a refinancing unless its existing lenders wrote off something like half of its debt.

Journal Register Co. is leveraged too far to borrow even the $5.5 million it would take to buy its shares at today’s closing price. JRCO already is out of compliance with its current lenders and an investor who recently made a tentative offer to help the company seemed to have backed off.

The Sun-Times Media Group (SUTM) is not a candidate, because it is losing more money than it makes.

Going private has several advantages over being a public company for an industry facing the sorts challenges affecting newspapers.

The public markets demand predictable and sustainable increases in sales and profits, or they punish a stock the way they have been spanking newspapers for the last few years.

Because newspapers have not found a way to reverse the accelerating deceleration of their sales, they have been cutting the heart out of the core product in an unavailing, self-defeating effort to reach high enough profitability to please Wall Street. But that has not been working, as the relentless pummeling of newspaper stocks attests.

In going private, newspapers can arrange the financings in a way to let them lower their profits for a specified period of time. During that respite, they could invest the resulting extra cash in reinvigorating their core print products and developing the interactive enterprises and niche print publications necessary to rescue their rapidly wasting franchises.

To be clear: Going private is not a panacea. It only works if sales rebound and profits grow in the fullness of time. Deteriorating revenues and profits will result in the sort of drastic budget cutting that has thrown the egregiously over-leveraged Tribune Co. into a state of utter turmoil.

A well-conceived going-private transaction (unlike Tribune’s) would give harried newspaper workers an opportunity to turn their full attention to the business of saving their businesses, instead of battling to sustain unsustainable profits. And they would be working for happier bosses, too, because going-private transactions typically result in significant bonuses for the executives who execute them.

So, everybody would win. Readers, advertisers, newspaper employees, publishers and the lawyers, investment bankers and lenders who engineered the deal.

Everyone, that is, except the former shareholders.

Disclosure: I own shares of JRCO, MNI and SSP.

Why media must charge for web content

First of two parts

Desperate to pump fresh revenues into their struggling businesses, Hearst Corp. and Newsday said last week that they intend to start charging for at least some of the content on their websites.

Judging from the terseness of the announcements, the statements seemed to be more aspirational than the result of lengthy and detailed strategic planning. But they’re a start. As Lao-tzu said, the journey of a thousand miles begins with the first step.

It’s a journey publishers absolutely have to begin. After years of giving everything away for free on the web, it won’t be easy for them to start charging for at least some of the content they spend small fortunes to produce. But there is no other choice.

If the news media don’t start getting paid for at least a portion of what they produce, some outlets simply aren’t going to be around to provide it. It’s already too late to save the Rocky Mountain News and probably too late to save the Seattle Post-Intelligencer and Tucson Citizen, which each face shutdown unless last-minute buyers emerge to rescue them.

So, free is not a business model that will support journalism produced by professional news organizations.

Because I have no faith in the blogosphere to replace the vital work of the professional (though admittedly flawed) press, I sincerely hope the traditional media will put a major effort into finding ways to get paid for at least a portion of their valuable content.

Emotions on this subject run so high that it is difficult for some people to have a rational discussion about it. So let’s talk about chocolate for a moment, instead.

Specifically, I have in mind the complimentary, foil-wrapped squares you get at the Ghirardelli store at Fisherman’s Wharf in San Francisco. The candy is free for a very sound business reason: The management hopes you will like it so much that you will buy several pounds to take home.

Judging from the long lines of tourists waiting to shell out $39.95 for gift-wrapped boxes of candy, it works. But I am sure even the most ardent advocates of free web content would agree that Ghirardelli would go out of business quickly if it let visitors consume all the candy in the store at no charge.

Now, let’s get back to the media business. While it would have been perfectly sensible in the early days of the Internet for newspapers to give consumers a taste of some content to encourage the purchase of more of it, it made no sense then – and makes even less sense now – to give away all of that expensively produced content for free.

As lovely as it would be if all the best things in life were free, the news media, if they are to survive, have to get paid for at least some of what they produce. That’s because the model that classically subsidized the production of journalism is irretrievably broken.

If it doesn’t get fixed, journalism as we know it will die off. While there are those who can hardly wait for that to happen, that’s not something I want to see.

Before pondering the way forward, let’s take a look at how we got to where we are:

The high cost of producing original content historically was subsidized at newspapers and other media by the sale of subscriptions and advertising.

With a few exceptions like Consumer Reports, which accepts no advertising and relies entirely on subscription sales, most of the media that sell advertising charge nominal subscription rates to build the largest possible audience.

This worked quite well in the pre-Internet era, when publishers for the most part were able to charge sufficiently high ad rates to subsidize the cost of content and make a handsome profit.

When the Internet emerged, most publishers committed the Original Sin of thoughtlessly giving away their content for free in the hopes of attracting millions of page views where they could sell the sort of high-priced ads that had built the value of their print franchises. This monumental strategic blunder resulted in three major unintended, and unfortunate, consequences:

:: By giving away their content on the web, publishers made it unnecessary for consumers to subscribe to the publications that generated the high advertising revenues that subsidize the cost of producing content. When advertisers saw audiences begin to shrink, they cut back their advertising. That’s why many newspapers have gone from typically being more profitable than Wal-Mart and even some oil companies to hanging on by a thread.

:: Publishers devalued their once-powerful franchises by letting anyone link freely to their content on the web. In so doing, publishers inadvertently subsidized the rise of any number of aggregators that have done quite well by selling low-priced advertising next to the expensive content that the publishers kindly let them have for free. The low price of the advertising on those websites is attracting ever-greater shares of the ad dollars formerly spent at the traditional media companies. At the same time, virtually unlimited ad inventory at competing online venues has driven down the rates newspapers can charge for both print and online advertising.

:: The wide availability of free content on the web quickly convinced consumers, who didn’t need much persuading, that content should be free. Apart from crossword fanatics like my brother in law who has to have a newspaper on which to write the answers, most consumers saw no particular reason to pay for a paper when the same information could be obtained more quickly and conveniently on the Net or an iPhone.

With the global economy in the worst shape since the last Depression, the industry finds itself having to undo the effects of its Original Sin at the worst possible time.

Can publishers do it? Dunno. Do they have to try? Yup.

Next: How to charge for content

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Why feds won’t bail out newspapers

If a federal bailout for General Motors might be good for America, how about one for newspapers, too? Ain’t gonna happen. Here’s why:

Like the Big Three domestic automakers, most newspapers are suffering from weak customer demand, falling sales, suffocating fixed operating costs and shrinking profitability that together are eating into their financial reserves. But the similarities end there.

Unlike the auto industry, the failure of any or all of the newspapers in our country would have a negligible impact on the greater (or lesser, as the case may be) economy. If economic stimulus is what bailouts are all about and scant impact would be gained by slipping publishers a few billion bucks, then there’s no point in doing it.

Beyond pure economic considerations, of course, there is the emotionally persuasive argument that the press needs to be saved so it can fulfill its unique role as the watchdog for the oldest democracy in the world. The problem is that it is difficult to imagine how the vigor and independence of the press would be maintained if the industry depended on the largesse of the very government officials it is supposed to be watching.

Let’s examine the economic issues first.

After numerous layoffs in recent years, newspapers today at best employ 325,000 individuals, or 0.2% of the nation’s labor force. It would be a tragedy for any of those folks to lose their positions, but, to put this in perspective, the total employment of the publishing industry is equal to just 1.3 times the number of jobs that were lost across the entire country in the month of October. The liquidation of the newspaper industry would be a minor blip in the unemployment statistics.

With newspaper ad and circulation revenues this year likely to be no greater than $50 billion, the industry represents about 0.36% of the gross national product of $13.8 trillion. The auto industry argues fairly convincingly that it produces 4% of the GDP, making its contribution to the economy some 1,110% bigger than that of newspapers. It is far from clear that even the auto industry deserves to be rescued after decades of indolence, extravagance and unwarranted self-satisfaction. If big, ol’ Motown isn’t worth saving, are newspapers?

The combined market capitalization of all the publicly held newspapers has tumbled to $26 billion, or 0.2% of the value of all the stocks traded in the U.S. markets. If you factor out News Corp., which single-handedly represents three-quarters of the consolidated market cap, the combined value of all of the remaining publicly traded publishers is $7 billion, or a mere .05% of the total U.S. equity float. Shareholders on average lost 83% of their newspaper investments in the last 12 months. What's a few more bucks, either way?

Because the shutdown of the entire newspaper industry would have a nearly imperceptible impact on the nation’s economy, there is no reasonable commercial case for bailing it out.

The next-best argument for rescuing newspapers would be that they serve an indispensable role as guardians of our democracy. Notwithstanding the great and small failings of newspapers over the years, the absence of an inquiring press would be at once unprecedented and frightening.

Unfortunately, the idea of government-subsidized newspapers is pretty frightening, too.

Unlike the relative ease with which the feds can make a loan, investment or guarantee to the likes of AIG, American Express, Fannie Mae or Wells Fargo, it seems difficult to see how the government could help a newspaper without running afoul of the First Amendment stricture that bars the government from “abridging” the freedom of the press.

Because a reasonably strict level of accountability presumably would be associated with any government payment, would newspapers suddenly find themselves having to defend to government bureaucrats their decision to spend money investigating bridges to nowhere? Would Congress ding newspapers if they stopped covering future out-of-the-running presidential hopefuls like Ron Paul or Dennis Kucinich? Would publishers be called to account by the White House for emphasizing the number of civilians accidentally killed in Afghanistan, instead of the number of terrorists ostensibly taken out of action?

Although the federal government covers approximately one-fifth of the budget supporting public broadcasting (the balance coming from foundation grants, sponsorships and viewers like you), the system historically has not been immune from political pressure – especially during the last eight years.

The Bush administration in 2005 installed a partisan operative as the chief executive of the Corporation for Public Broadcasting (CPB). He lost no time in policing the perceived politics of broadcasters and their guests, going so far as to brand Republican Chuck Hagel a “liberal” in spite of the Nebraska senator’s favorable ratings from such conservative organizations as the Christian Coalition and the Eagle Forum.

Although this chilling brush with Big Brother-ism ended in fairly short order, the administration’s assault on public broadcasting continued this year, when the White House proposed cutting by half the $820 million federal contribution to the CPB.

Even if someone could figure out a way to give newspapers a few billion without compromising their editorial independence, it’s not clear how much good it would do. Federal handouts are not enough to rescue a business losing customers because it has failed to objectively assess its shortcomings, understand the strengths of its competitors, capitalize on new technology and adapt to new market realities.

Newspapers don’t need a bailout. What they need is to get real about their problems and then get busy solving them.

Non-profits can’t possibly save the news

An amazing number of smart and sophisticated people continue to harbor the fantasy that philanthropic contributions can take over funding journalism from the media companies that traditionally have supported the press.

In the interests of moving discussions about the endangered outlook for professional journalism back into the realm of realistic thinking, we’re going to do the simple math today to prove conclusively why this never will happen.

The math, as detailed below, shows that it would take $88 billion – or nearly a third of all the $307.7 billion donated to charity in 2008 – to fund the reporting still being done at America’s seriously straitened newspapers.

If you want to cover magazines and commercial broadcasting – not to mention the myriad journalism start-ups responding to the meltdown of the mainstream media – it would take billions more in philanthropic support. But the number is so big and unapproachable that I gave up counting when I saw how comparatively little – $141 million – was raised in the last four years to fund non-profit news ventures.

To be sure, a few boutique non-profits like Pro Publica, the Texas Tribune and the Center for Independent Media (recently renamed the American Independent News Network) have been funded generously to date to provide specialized reporting on select topics. But they make no pretense of providing the ongoing and intense beat coverage that historically were the meat-and-potatoes of quality local journalism.

The sharp contraction in recent years in the sales and profitability of for-profit media companies has led to dramatic and traumatic staff reductions in almost every newsroom in the land. As the economy tanked in 2008, even philanthropically supported public broadcasters had to cut staff when contributions declined from not only foundations but also viewers and listeners like you.

Rick Edmonds, the estimable media economics expert at the Poynter Institute, calculated that American newspapers are spending $4.4 billion today on news-gathering, or about 29% less than the $6.2 billion that funded newsrooms as recently as 2006. That’s a drop of $1.8 billion.

If you wanted to sustain the current level of newspaper coverage by replacing for-profit funding with non-profit dollars, the typical approach would be to raise an endowment that would be invested conservatively to produce an annual return of 5%. The investment income would be distributed each year to provide the operating budgets for non-profit news organizations.

The endowment necessary to provide $4.4 billion in annual newsroom funding would be $88 billion. This happens to be 29% of the entire $307.7 billion contributed to charity in 2008, according to data published by the Giving USA Foundation, the non-profit arm of an organization of professional fund-raisers.

Given the downturn in the economy since 2008, it is a safe bet that charitable donations dropped in 2009 and probably will be less than $307 billion in this year, too.

The decline in donations is not the biggest challenge for those counting on charity to rescue the press. The infinitesimal amount of support to date for non-profit news projects suggests that philanthropists have other long-standing priorities.

As reported recently in the annual State of News Media study by the Pew Project for Excellence in Journalism, Jan Schaffer of the J-Lab at American University estimated that only $141 million (not including public broadcasting) of philanthropic support has gone into non-profit journalism efforts in the last four years. The sum is less than 0.05% of the $307 billion given to charity in 2008 alone.

In light of the above objective facts, it is clear that there are only two ways to establish a substantial philanthropic base to preserve journalism:

Either (1) vast new sources of charitable funding would have to be identified or (2) existing philanthropists would have to be persuaded to abandon their traditional commitments (see chart below) to religious, educational, social service, cultural, environmental and other organizations.

While there is a pressing need to save the press, a major shift in the philanthropic paradigm seems unlikely, especially in an era in which most folks – with the notable exception of a fortunate few – seem to be tightening their belts.

So, let’s stop dreaming about a visit from the Non-Profit News Bunny and get serious about discovering some realistic possibilities.

Will Murdoch be Zell's exit strategy?

Rupert Murdoch may be standing pat on his bid for Newsday, because he knows that Sam Zell knows that News Corp. is probably the only plausible acquirer if the highly leveraged Tribune Co. deal goes south.

Like a pair of masters plotting several moves ahead in a chess game, Rupe and Sam may be using the Newsday transaction to see how News Corp. could come to the rescue in the event the Tribune Co. can’t reverse the declining performance that threatens to plunge it into default on its $12.8 billion in debt.

With Tribune owing approximately $1 billion a year in interest payments and the company producing less than $1.2 billion in free cash in 2007, it is perilously close to being unable to satisfy its obligations within a couple of years. The skinny margin for error is why the major bond-rating agencies have dropped Tribune’s ratings deep into junk territory and have warned within the last three weeks that the rating could be reduced even further.

The bond agencies, and Mr. Zell, have reason to be concerned. As Sam and his CFO reported in a recent conference call for investors, publishing cash flow fell 16% in 2007 and newspaper ad sales, which historically have produced three-quarters of the company’s revenues, slid at double-digit rates in the first three months of this year.

While Plan A for Sam and his crew of Clear Channel alumni certainly is to reverse the declining fortunes of the company, they would be remiss if they were not at least considering Plan B. And the most likely one would be selling Tribune to News Corp., the only company with the financial capacity, the demonstrated appetite and the testicular fortitude in the person of Rupert Murdoch to heavy up on traditional media at a decidedly inhospitable time for such businesses.

Assuming the News Corp. acquisition of Tribune were blessed by the federal authorities (more on that in a minute), the combined company would possess, among other things, three television stations and three newspapers (including the Wall Street Journal) in New York; three television stations and the major newspaper in Los Angeles; three television stations, one cable channel and the major newspaper in Chicago; two television stations and the newspaper in Orlando, and one television station and one of the major papers in Miami-Fort Lauderdale.

This is not to mention such enviable assets as the WGN superstation carried widely on cable TV and Tribune’s shares of Cars.Com and Career Builder, the only successful online ventures produced by the newspaper industry in the last 1½ decades.

Careful readers, which may include certain federal antitrust authorities, will note that the rich collection of assets in these major markets would surpass the cross-ownership limits now in place. But that’s where the Newsday deal comes in. Rupe and Sam hope to convince regulators that massing mainstream media properties in a market is necessary to assure their survival in an age of competition from the likes of Google and myriad other web and mobile upstarts.

If Rupe and Sam are successful in pulling off the consolidation of Newsday and the New York Post to achieve new efficiencies in marketing, ad sales, news gathering, production and distribution, then how hard would it be to argue that there is no harm in combining WPIX, WNYW and WWOR to do the same thing on the broadcast side of the business?

Careful readers also might observe that Fox and Tribune both own CW affiliates in certain markets. But this is an opportunity, not a problem. News Corp. could use one of the spare CW outlets to air the Fox News Channel, the Fox Business Channel or perhaps something like a 24/7 interactive version of its wildly popular American Idol. In a regulatory pinch, News Corp. simply could sell off the third stations to mollify the feds.

The knowledge that he is the most realistic, if not the only, exit strategy for Tribune Co. is likely why Mr. Murdoch has been patiently letting the bidding for Newsday play itself out.

Mortimer Zuckerman, the publisher of the New York Daily News who stands to lose the most if Newsday goes to News Corp., essentially has matched the terms of Mr. Murdoch’s offer in the hope the government will block the combination as anti-competitive. Although Cablevision reportedly has bid $70 million more than the $580 million that Mr. Murdoch and Mr. Zuckerman each has offered, the deal includes real estate that Mr. Zell , the consummate landlord, evidently is not disposed to sell.

If Mr. Zuckerman is right, then he presumably will get to buy Newsday and give the New York Post a proper run for Mr. Murdoch’s money. If Mr. Zuckerman is wrong, then his marginally profitable newspaper will be in the fight of its life.

Either way, the sale of Newsday will buy Mr. Zell a bit more wiggle room to pursue a profitable outcome for Tribune Co. If the wiggling goes badly, however, Rupert Murdoch is most likley the guy Sam Zell will call for help.

How to rescue magazine sales on iPad

It is no surprise that magazine sales on the iPad have fallen since the summer, as the novelty of pawing through a publication on the new toy wore off.

In the most extreme case of fatigue, Wired sold 100,000 copies of the first issue it put on the iPad in June but only about 22,000 in November, according to statistics culled from the Audit Bureau of Circulations and first reported at Women’s Wear Daily. The chart below is from Silicon Alley Insider.

A sale of 22k issues isn’t all that bad, since it represents $87,780 in almost pure profit at $3.99 a copy, but publishers seeking to build iPad volume would do well to read the disappointing reviews of the Wired app on the iTunes page where the magazine is sold.

Fully 61% of those who bought the most recent edition of the Wired iPad app gave it the lowest possible score at iTunes. The complaints coalesce around four major themes, each of which it is in the power of Wired and other publishers to address:

:: Functionality. The app is little more than a digital dupe of the print product, with scant interactivity to leverage the power of this sophisticated digital platform. “That’s not Wired,” said an iTunes customer identified as byron246. “It’s tired.”

:: Technical glitches. Several reviewers complained of balky downloads, improper formatting and other issues that made it difficult and time-consuming to acquire and read the magazine. “Some issues have broken texts, so I tried ‘restore all,’” said someone called Bring Back My Money, who complained that only one of five issues reappeared after the attempted restore. “Everyone should know that ‘restore’ means ‘delete and throw away your money.’”

:: Price. The app is just too expensive for what it delivers. “I just paid $20 for two full years of the paper version,” said one customer identified as Christopher Fluke. “$3.99 per issue for some fancy reformat? I don’t think so.”

:: No subscription. Not only is the magazine costly to buy on a per-copy basis, but you have to remember to download it every month and fuss with the limitations, glitches and high price cited above. In other words, the hassle factor is too high. “Get this down to $20 per year,” said someone called Skrapmot, “and we’re talking.”

Credit rescue too late for many advertisers

The global effort to revive the credit market isn’t working fast enough for newspapers, which are losing many traditional advertising accounts as retailers and auto dealers go out of business.

Given the growing dominance of big-box merchants like Wal-Mart and Costco – which tend not to advertise in newspapers – it is highly doubtful that new merchants will emerge to replace the departing retailers when the economy improves.

Among the chains that have commenced the liquidation of their businesses in recent days are Whitehall Jewelers, which runs 373 stores in 39 states; Linens ’N’ Things, which owns 371 stores in 48 states; Mervyn’s, which operates 149 department stores on the West Coast, and Shoe Pavilion, which has 64 locations on the Wets Coast.

Boscov’s is closing 10 of its 49 stores in the Northeast in the hope of emerging from bankruptcy, while Circuit City, the No. 2 electronics retailer, is thinking about closing 15o of its 1,400 outlets in hopes of staying out of bankruptcy.

Auto dealers are shutting their doors from Connecticut to South Carolina to Omaha to Texas to California – and almost every point in between.

In every case, it’s the same story: Tight credit and weak customer demand.

While these grim circumstances eventually will pass, it is difficult to see how new retail and specialty stories will emerge to compete with the big-box merchants who have the sales volume, buying power, superior logistics and balance sheets to power through the recession – and perhaps grow even stronger.

As for auto dealers, the Big Three domestic factories each were planning to reduce the number of dealerships even before the economy hit the mother of all speed bumps. If General Motors can scrounge enough money to merge with Chrysler, then dealer consolidation will be even swifter and more severe.

Not even Tesla Motors – the upstart Silicon Valley car company that today announced layoffs of its own – will ever fill the advertising void.

Since there already is a celebrity-packed waiting list for its sole product – a $109,000, two-seat electric Roadster – it is not likley the company ever will be inclined to buy an ad offering free hot dogs, popcorn and pony rides for the kids.

Solstice on ice

Instead of the usual mumbo-jumbo gumbo, we are featuring today a cool statistical gazpacho to celebrate the summer solstice. No slurping, please.

:: Consumers today encounter from 3,500 to 5,000 marketing messages per day, vs. 500 to 2,000 in the 1970s, according to a Yankelovich study reported in USA Today. "There are so many ads out there that consumers actively avoid commercials today to an extent never before realized," said Prof. Dan Howard of Southern Methodist University, as quoted by America’s newspaper. "No matter how many more ads we put out there, it's not going to work...because it's not registering." Huh? What? Did he say something?

:: In light of the above, perhaps it comes as no surprise that 72% of DVR owners zap as many commercials as fast as they can, according to Magna Global, the media-buying agency. This useful statistic initially was reported in November by my pal Howard Finberg at the Poynter Institute, so I thought I ought to use it before it went to waste.

:: Fully 73% of respondents to a poll for AP and AOL say they would rather stay home and watch a DVD than go to a movie theater. Not even Batman could rescue movie revenues last weekend from a record-tying 17-week slump in which ticket sales fell short of the same period in the previous year. Maybe they should bring back original-recipe Milk Duds and real butter.

:: With newspaper circulation already at historic lows, Nielsen/NetRatings learned that even 21% of the remaining newspaper devotees prefer to read the paper online instead of in print. Suit yourself, folks. Just remember that you can’t wrap a fish in a laptop.