Tuesday, May 23, 2006

Inky's not quite in the pink

It has been a long time since a group of investors got together to buy a local newspaper in a town as big as Philadelphia, so you gotta love it when the home team wins.

The Philadelphia Inquirer and Philadelphia Daily News are being purchased for $562 million by a local public relations luminary and a few wealthy investors, who, in turn, are being backed by a syndicate of banks.

The Wall Street Journal reported that its sources said the Philly papers this year will produce about $62 million in earnings before interest, taxes, depreciation and amortization (EBITDA). If so, the papers were sold at 9x EBITDA, as compared with the 9.5x EBITDA McClatchy is paying for all of Knight Ridder and the 11.5x EBITDA that MediaNews and partners are paying for the four papers divested earlier by McClatchy.

The price the buyers are paying in Philadelphia is roughly 10 times greater than the $55 million the papers fetched when they were sold in 1970 to the Knight family (so McClatchy faces a substantial tax bill on the gain). The Knights later merged with the Ridders to create the fabled newspaper chain that’s now in the final stages of liquidation.

It will take more than the pride of local ownership, however, to put the Inky and the News back in the pink of health.

Like all metros, the Philly papers have been suffering from declining circulation, shrinking ad share and the migration of readers to the suburbs, the electronic media or both.

Like many metros, the Philly papers have hefty operating costs, owing to classic, if not to say anachronistic, big-city union contracts that prescribe high wages, generous benefits, stringent manning requirements and complicated work rules.

Here’s one example of union-imposed inefficiency: Even though both the Inky and News come off the press at approximately the same time, the papers must be hauled to the same distribution points by two separate trucks piloted by two well-compensated Teamsters.

In the days when newspapers enjoyed near-monopoly command of their markets (and gasoline was 25 cents a gallon), publishers could afford to go along with featherbedding practices like these. In the face of low-cost print and online competitors today, the Philly papers – and many others like them – need to improve their economics or face extinction.

One potential casualty of union intrangisence could be the Daily News. In the run-up to the sale of the Knight Ridder papers, some Wall Street analysts argued that tens of millions of dollars could be saved instantly by shutting the financially struggling Daily News.

It appears the new owners are committed to trying to turn the Daily News into a going concern , based on their decision to invest much more equity in the deal than a financially-oriented buyer would have. A financial buyer, such as Yucaipa and several of the runners-up in the deal, ordinarily would put up approximately 25% of the equity in the deal and borrow the rest. In this case, the local buyers are kicking in $200 million, or roughly 35% of the purchase price. They are financing the rest, to the tune about 5x EBITDA vs. the 7x or more that a financial buyer would desire.

Because this deal is less leveraged than it might have been, management potentially will have more resources to invest in building the business than if the papers were owned by a financial buyer. (A highly leveraged business has to earmark more of its profits to repaying debt, instead of, say, upgrading the mailroom, boosting marketing or launching new targeted auto or real estate publications.) But neither the investors, nor their lenders, can afford to be infinitely patient.

Notwithstanding my earlier cautionary remarks, I want to make it emphatically clear that I am not anti-union. My father was a union printer, my mother was a union member and I was an active member of the Chicago Newspaper Guild for the first 10 years of my career. I appreciate what unions have done – and can do – for their members.

But unions need to understand that it’s no longer business as usual for the newspaper industry – and probably won’t ever be again. If unions don’t relax their demands and yield some of their prerogatives, they will cripple, or even fatally wound, the publications that employ their members.

You can be sure this subject will come up when the new owners meet with union leaders to renegotiate the key labor contracts expiring this summer.

Even as labor has to step up to a new level of responsibility, the new owners, for their part, will be wise to demonstrate that they respect the traditional division between the newsroom and the countinghouse.

Bruce Toll, the home-building billionaire who is taking the largest individual stake in the Philly papers at a reported $25 million, said he wants to own the papers so the Inquirer will publish more stories in its business section. I trust he doesn't mean that he wants the paper to write more stories about his friends and favored interests.

Brian Tierney, the well-connected Philly PR wizard who led the local group, has a number of prominent business clients, has been a strenuous advocate for the Catholic Achdiocese and has been active in Republican Party politics. I hope he means it when he says he intends to "beat the crap" out of anyone who doesn't respect the sanctity of the news.

If both men follow through on thier promises to play it straight, they will surpass the last local owner of the Philly newspapers, the irrascible Walter Annenberg.

“Annenberg had numerous detractors during his regime at The Inquirer,” the newspaper reports delicately on its web site. “The most pervasive criticism was that he used his newspaper as a personal vehicle for rewarding those he favored and inflicting punishment on those in his disfavor.”

Here's hoping we don’t pass that way again.

Tuesday, May 16, 2006

Macy's ad buy: Going bye-bye?

Newspaper advertising by the nation’s largest traditional department store chain may be cut in half by 2008, costing the industry some $425 million in sales, or nearly 2% of total retail revenues, according to one Wall Street analyst.

The drastic drop in newspaper ad spending could result from a new approach to marketing by Federated Department Stores, says Paul Ginocchio, a securities analyst at Deutsche Bank who has completed a comprehensive look at how the 866-store chain plans to promote its Macy’s and Bloomingdale’s brands in the future.

Federated and the newly acquired May Department Stores last year spent a combined $1.2 billion on newspaper advertising, making them, by far, the industry's largest retail account.

When Federated absorbed May, most analysts believed the consolidated chain would trim ad expenditures by 10% to 20% by closing redundant and unproductive stores, as well as by adopting a common name for most of its outlets. By fall, Federated will change to "Macy's" the names of such legendary local retailers as Famous-Barr, Filene’s, Foley’s, Hecht’s and others.

With the majority of the Federated stores operating as Macy’s, the merchant can begin marketing the common brand through such relatively efficient media as broadcast and cable television, magazines and the Internet, according to Paul.

He speculates that a national branding approach likely would commit only 25% to 40% of Federated's ad dollars to newspapers in the future, as compared with 70% today. At that rate, Federated would be spending $407 million on newspaper advertising in 2008 vs. $831 million in 2005 – a 51% reduction.

In Paul’s hypothetical analysis, he estimates $254 million of the money pulled from newspapers would go to additional TV advertising, $22 million more would fuel online advertising and $40 million would be left to fatten Federated’s bottom line.

Paul says the operators of major metro papers – the New York Times Co., Tribune Co. and Washington Post – are the most vulnerable to a potential shift in Federated’s media mix. Chains in smaller markets not served by Macy’s or May – like Lee, Gannett and Media General – have less to lose.

Paul bases his projection on the way such national chains as Wal-Mart, Sears and Target spend their advertising dollars. But there may be a reprieve for newspapers.

Rather than buying advertising to generically tout its stores as great places to shop, Macy’s historically has used its ads to promote individual products to drive sales. To date, newspaper advertising has proven to be the best “call-to-action” medium for Macy’s, Kohl’s and other merchants employing this strategy.

So long as newspapers keep pulling in the customers, Paul believes the industry may be able to hang on to more advertising than suggested in the worst-case scenario described above. If Macy’s continues to emphasize promotional advertising, then papers may be able to hang on to about half of the $425 million Paul fears they otherwise might lose.

Whatever the magnitude of the erosion, publishers should be worried. “We see few categories," says Paul, "that can replace lost department store revenue.”

Monday, May 08, 2006

Something completely different

Instead of rehashing the hash otherwise known as the latest plunge in newspaper circulation, let’s talk about something completely different, as the Monty Python gang used to say. Growth.

It’s happening Chicago, where the Tribune notched a 2.1% gain in daily circulation and 3.3% rise on Sunday. It’s also happening, in a more modest way, in San Francisco, where yet another free daily debuted last week in a market awash in giveaway papers.

But let’s not get irrationally exuberant. Not all the news is good.

Circulation this spring dropped an average of 2.5% for daily newspapers and 2.6% on Sunday in the six-month period ended in March, according to the Audit Bureau of Circulations, the industry-funded entity that independently validates the numbers.

This compares with a daily drop of 2.6% in the six-month period ended in September, a slide of 1.9% in the prior six months and a stumble of 0.9% in the six months before that. In the same periods, average Sunday circulation fell, respectively, 3.1%, 2.5% and 1.5%.

The lower circulation reported by several of the largest metro dailies represents to some extent a strategic, if not entirely graceful, retreat from numbers that were too high in the first place. As discussed here earlier, newspapers in the last couple of years have been busy eliminating expensive and not particularly desirable discounted circulation and scrapping delivery to remote corners of their turf that was costly to maintain and also not warmly received by advertisers.

The light at the end of the tunnel, assuming there is one, may be exemplified by the circulation gains achieved at the Chicago Tribune. The Trib appears to have exited its exercise in circulation retrenchment and moved in the last six months to the more pleasant and fruitful task of building its home-delivery base by a solid 3.3%.

That’s significant, because the readers who pay full price for home delivery are the Holy Grail for advertisers. Assuming the Trib didn’t rely too heavily on discounting to recruit its new subs, the paper not only has increased the quantity of its circulation but also has improved the quality of its reader base.

The home-circulation push at the Trib is but one of several initiatives its management took to optimize the classic, big-city newspaper model. It also improved entertainment coverage, added more color pages and emphasized hard-hitting investigations. To the degree the Trib can sustain future growth and profitability in this fashion, other publishers eagerly will emulate it.

The other path to growth is exhibited in San Francisco. Although the traditional newspaper business is downright dismal for the Chronicle after daily circulation dropped a staggering 25.6% in six months to 398,246, the City by the Bay is the site of a freebie newspaper war.

In addition to the presence in the market of more alternative weeklies than a mere mortal can count, San Francisco now has two competing free daily tabloids. The Examiner, a plucky tab published by Denver billionaire Phil Anschutz, last week gained head-on competition from a newly launched San Francisco daily called, well, the San Francisco Daily.

The S.F. Daily, whose initial press run was a mere 5,000 copies, is noteworthy, because it is being produced by the publishing duo who built the Palo Alto Daily News into such a formidable force that the San Jose Mercury paid a handsome price to acquire the free paper a few months before Knight Ridder was put up for sale.

Can a city that seems to have forsaken its traditional paper successfully support a dueling pair of free dailies? Potentially, yes, because the two freebies are pursing different strategies.

The Examiner has endeavored with some success to pry mainstream retail and automotive advertisers away from the Chronicle by touting tightly focused circulation and far lower ad rates that the Chron can afford to charge. The SF Daily, reprising the Palo Alto formula, is going after small, neighborhood retailers who have limited budgets to reach a limited trading area. It's tricky to recruit the Mom and Pop advertisers, but, if the S.F. Daily is successful, it will own this rich, underserved market.

Both giveaway papers keep costs low by employing small editorial staffs who cover strictly local news, as well as commission-only sales people who eat only what they catch. Free circulation eliminates most marketing costs and requires only a minimal infrastructure of contract-delivery folks. While the Examiner has its own modest production facility, the SF Daily uses contract printers. In contrast to the high degree of unionization at metros like the Chronicle, workers at the free papers are not organized and work for leaner paychecks and limited, if any, benefits.

Thus, it appears that the future of the industry is shaping up as a classic battle between the forces of “Full Bodied” and those of “Less Filling.” Please drink your Kool-Aid responsibly.

Thursday, May 04, 2006

Opaque transparency

In the good, old days, imperious publishers and unrepentant editors seldom explained their editorial judgments and rarely retracted mistakes.

Today, the media are falling all over themselves to provide unprecedented transparency to the sausage-making process otherwise known as reporting the news.

In the interests of accountability, most newspapers are giving ever more precious space to corrections, clarifications, editor’s notes, ombudspersons, reader advocates, public editors and the like. This is a good thing, when it works as intended.

But the transparency proffered by the New York Times sometimes is so opaque that you wonder why the sausage-makers bother at all.

Consider the case of the fascinating page-one story on April 25 that discussed a proposal by Airbus to create standing-room “seats” for air travelers as a means of boosting revenues.

It was a good story. Everyone was talking about it. But there was a problem with the 1,512-word yarn. It wasn’t exactly true.

According to a one-paragraph correction that ran on page two of the Times on May 2, Airbus “researched the idea in 2003” and “has since abandoned it.” The article was written anyway, because the questions posed to Airbus in reporting the story “were imprecise,” the Times imprecisely explained.

Two days later, the Times was moved to correct the correction in an editor’s note. The earlier correction, said the NYT, “should have acknowledged that if The Times had correctly understood the history of the proposal, the article would have qualified it, and [the story] would not have appeared on Page A1.”

Sorry, but this makes no sense. If the reporting had been more “precise” and the Times determined there was no active proposal for standing “seats,” would there have been a story at all? I think not.

Absent the standing “seat” angle, the balance of the story prosaically discussed the indefatigable, but not particularly newsworthy, efforts of airlines to cram more seats into their cabins.

It was not enough to say the article was unworthy of page one. In light of what the NYT has told us, the story really wasn’t fit to print at all. The Times should have said so.

It goes a long way toward enhancing the credibility of the media when a publication or broadcast comes clean on an oversight or error. But good intentions are perverted when transparency is obscured by half-truths and doubletalk.

If the Times wanted to play it straight with its readers, it would have admitted forthrightly that the premise of this story didn’t fly.