Saturday, May 19, 2007

Staff cuts won't cure S.F. Chron woes

As deep and traumatic as the pending cuts may be in the newsroom of the San Francisco Chronicle, the savings will make only a dent in the growing losses at the increasingly troubled newspaper.

When the Chronicle completes the planned termination of 100 members of its 400-person editorial staff by the end of the summer, the resulting headcount will be nearly 35% lower than the 460 journalists working for the paper two years ago.

Although the staff reductions will save an estimated $8 million a year in payroll, the amount will cover barely a third of the approximately $25 million that industry experts believe the Chronicle lost in just the first four months of 2007.

The operating deficit is significantly higher than the roughly $18 million the paper is believed to have lost in the same period a year ago.

The estimated payroll savings are based on the wage scales in the collective-bargaining agreement between the newspaper and the Northern California Media Workers Guild.

The escalating deficit at the Chronicle comes on top of the more than $330 million the paper has lost since Hearst Corp. bought it for $600 million in 2000. The purchase price doesn’t count the additional $66 million that Hearst paid a local family to continue publishing its former Bay Area flagship, the San Francisco Examiner, to settle a suit trying to block the Chronicle purchase.

Thus, Hearst has invested more than $1 billion in an asset that would be on track to lose $75 million this year, if its current burn rate weren’t arrested.

The Chronicle’s losses result from the usual combination of weakening circulation, declining revenues, rising expenses and increased competition for the available advertising in the market from rival traditional and digital media.

While most other metro papers are struggling to sustain their typical robust operating margins, the Chronicle is one of the few big-city dailies that actually loses money every day it continues to publish.

The Chronicle’s year-to-date deficit of $165,563 per day is roughly equivalent to the annual pay and benefits of two journeyman reporters. If the paper continued losing money at the same rate every day for the rest of the year, it could fire every journalist in the joint and still not break even.

With continuing uncontrolled losses of this magnitude, the Chronicle, if it were a standalone company, would be going out of business.

The only reason the Chronicle is still around is the continuing forbearance of the Hearst Corp., a family-owned, $7 billion-a-year media conglomerate whose other newspaper, magazine and broadcasting interests are sufficiently profitable to effectively subsidize the struggling newspaper.

Controlled by the descendants of buccaneering publisher William Randolph Hearst, the company’s board includes individuals who have deep personal connections to the Bay Area and a pride of ownership in the Chronicle that transcends pure dollars-and-cents analysis. As such, Hearst may continue to support the newspaper indefinitely. Or not.

But the deteriorating economics of the business already have encouraged Hearst to take a number of radical steps to restructure it.

For one thing, the newspaper has conceded its former circulation dominance in Northern California. Although the Chronicle once boasted the largest circulation in the market, it has slashed its distribution footprint to eliminate unprofitable vanity circulation in distant counties.

The paper’s average daily circulation of 387,533 in the six months ended March 30 is a far cry from the pre-Internet era. During my time at the paper between 1984 and 1988, for example, circulation peaked at an average of 618,621 copies per day during the week the pope visited San Francisco in 1987.

The Chronicle’s circulation today is less than half that of MediaNews Group, whose nearly 800,000 papers per day encircle it on all sides.

In another unprecedented move for an industry infatuated by its thundering presses, the Chronicle has signed an agreement to outsource its production to a third-party printer. The deal will cost 230 unionized press operators their jobs when the new plant opens in 2009.

What’s left? Perhaps the sale of the Chronicle’s office building in a once-seedy neighborhood now gentrified by the likes of Nordstrom’s, Bloomingdale’s, a Marriott Hotel and a Sony entertainment complex. If the Chronicle sold this valuable real estate, which no longer contains any production facilities, the down-sized, white-collar work force could be relocated rapidly to a less-elegant part of town.

The plans for the Chronicle staff cut were revealed less than a month after a suit brought by a local civic activist scuttled plans by Hearst and MediaNews to collaborate on certain advertising and distribution initiatives. The two publishers hoped to raise revenues and cut expenses through the planned collaboration.

With that prospect seemingly off the table, the two publishers may go their separate ways in the Bay Area, notwithstanding their joint publishing investments in other parts of the country.

Or, they may consider trying to combine the Chronicle and the MediaNews properties in the type of joint-operating agreement that linked the Chronicle and Examiner until the papers were separated in 2000.

A joint operating agreement is a federally sanctioned exception to the antitrust laws that permits competing newspaper companies to combine their ad sales, production and circulation operations while maintaining independent editorial staffs.

JOAs, as they are called, are permitted under the Newspaper Preservation Act of 1970, when the petitioning publishers can demonstrate (i) that circulation sales and ad revenues are falling, (ii) that one newspaper has disproportionately less circulation than another and (iii) that at least one of the publishers is losing money.

Hearst and MediaNews each participate in JOAs in places like Denver, Detroit and Seattle, so the idea is not alien to them. On the other hand, they just settled a legal challenge to a less-ambitious co-operative venture in Northern California, so they may not want to go down that path again.

Because both companies have the financial capacity to stay their present parallel courses, nothing has to happen imminently. If the Chronicle can’t fix its business, however, it seems only fair to conclude that something’s got to give.


Blogger Lou Alexander said...

Although there is not much to disagree with here I do think your analysis of the potential savings of the newsroom cuts at the Chronicle is understated.

In the fall of 2005 a senior Knight Ridder exec confirmed to me that the average employee at the San Jose Mercury News cost more than $100,000 a year for wages and benefits. This is an average number, across all unions and pay grades.

The top Guild scale in the newsroom at this time was about $55,000, with benefits adding about 25%, another $13,750, for a total of $68,750. This means a great many newsroom employees were paid over scale. Because newsroom professions were generally acknowledged to be the highest paid people at the newspaper it is likely the average for journalists and their managers was well above the $100,000 mark.

The Chronicle generally paid better than the Mercury News, so I am guessing the average newsroom job being eliminated is worth at least $100,000 in wages and benefits. Add is some overhead saving for the jobs being eliminated and I think the savings from eliminating these newsroom jobs is closer to $12 million to $15 million a year.

Regardless of which number is correct—your $8 million or my $12 million—your assessment that this will not solve the Chronicle’s problems is correct.

I think Hearst is likely to give the folks running to Chron a while yet to show some progress, but it is hard to imagine they are willing to let the bleeding continue forever. The Chron has no significant circulation penetration outside of San Francisco and Marin Counties. My forecast for sometime has been that the Chron will eventually become a “city tabloid,” competing head-to-head with the Examiner by offering free distribution at newsstands and saturation home delivery in high income zip codes in “The City” and Marin County.

Lou Alexander
San Jose, CA
Long-time SJ Mercury News ad manager and web blovator

4:29 PM  
Anonymous Anonymous said...

This is a great explanation, and thank you for it. But what I don't understand is, why do the other newspapers in the country still make money and the Chronicle doesn't? or can't?

7:13 PM  

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