Thursday, November 13, 2008

Newspaper profits swoon, more cuts likely

Relentless expense reductions at America’s newspapers this year have failed to stay ahead of falling sales and uncontrollable fixed costs, eviscerating the industry’s profitability and suggesting that more drastic cuts may lie ahead.

The average profitability of newspapers tumbled 18½ times faster than sales fell in the third quarter of this year, according to an analysis of a dozen companies that segment their financial statements in sufficient detail to isolate the performance of their newspaper divisions.

In a three-month period when advertising and circulation sales among the 12 publishers dropped by an average of 10.3% from the prior year’s level, the average operating profits of the group in the third quarter plunged by a staggering 198.3%.

The term “operating profits” refers to what is commonly called EBITDA, a newspaper’s earnings before interest, taxes, depreciation, amortization and one-time events like severance programs or accounting adjustments to write down the value of acquisitions that in retrospect are deemed to be overpriced. The respective sales and earnings drops at each of the 12 companies are presented in the table below. Click the image to read the fine print.

The steep plunge in profits suggests that the industry may have to be more aggressive at cutting expenses in the future, if it intends to either halt or reverse the earnings collapse.

The need would be seem to be particularly acute for the companies that borrowed heavily in recent years to finance acquisitions. Because GateHouse Media, Journal Register, Lee Enterprises, McClatchy and Tribune Co. are committed to steadily increasing principal and interest payments to satisfy their debts, they would appear to be candidates for some of the most draconian expense cutting.

But they are not alone. Heavy cutting may lie ahead, as well, for three companies that suffered not just earnings declines in the third period but outright losses.

They are A.H. Belo, whose operating loss of $12.8 million represented a 189.9% drop in earnings from the same quarter in 2007; the newspaper division of the Washington Post Co., which lost $10.6 million for a 220.6% drop from the prior year, and the Sun-Times Media Group, which lost $7.8 million, representing a 1523.5% decline from the prior year.

The losses at these three companies significantly skew the average earnings performance of the dozen companies covered in this analysis. Even when you back out the trio's losses, however, the average drop in operating profits at the remaining nine companies is 51.8%, or five times greater than the 10.3% decline in sales.

Among the nine companies that did post operating profits in the quarter, several reported enormous drops in their margins. EBITDA skidded 91.2% at Tribune, 87.7% at Journal Communications and 78.7% at New York Times Co.

Every publisher covered in this analysis has been cutting expenses throughout the year, concentrating notably on headcount and newsprint consumption. In some markets, ad production, customer service, printing or delivery have been outsourced in the face of disintegrating ad sales and sharply rising costs for newsprint, energy and health care. A few papers have eliminated print editions on some or all of the days of the week. Other publishers are talking about shutting down newspapers altogether.

Notwithstanding these efforts, not one publisher in the group of 12 was able to prevent its profits from falling faster than its revenues.

As discussed previously here, many publishers until now had been more profitable than many Fortune 500 companies. If the deteriorating economy leads to a further ad sales decline in the fourth quarter and beyond – which seems increasingly likely – publishers will have only two alternatives: Cutting significantly more expenses or accepting lower profitability.

With profits already seriously pinched, publishers may have no choice but to take up their hatchets before the year is out.


Anonymous Anonymous said...

I read about this financial armageddon, and yet still can't shake the nausea I feel when my newspaper is about to cut 20 jobs after sending over half million dollars in profits to the parent corporation this past month. The corporation got more than $500,000 right out of this community in a month, and it's going to reward the community by sending 20 of its residents to the unemployment rolls because the profit wasn't big enough. Where's the leadership that says: these are tough times, but we're standing by our communities and our employees even though we're only making 20% margins instead of 25%?

3:28 AM  
Blogger Tim Windsor said...


What I appreciate about your posts is how you 1) do original reporting and 2) often base that reporting on numbers.

Numbers may prompt emotion, but they're not emotional themselves. They tell an ugly story, but there's little doubt that the story is true.

For at least a year, if not longer, it's been clear to anyone who would look at the numbers that the old cliche is especially true now: Newspapers can't simply cut their way to profit. There needs to be a reset of the business, a fresh look at the business model and the cost structure.

There will be more cuts, but if they're not strategic cuts, executed as part of a rebuilding process, the blood will be wasted and, like Tribune's payday loans to itself, merely forestall the inevitable.

But if the business (or just one lousy paper) doesn't heed the warnings of such events as the recent CUNY summit on business models or (one would hope) this week's API summit, then the circling of the drain is only going to accelerate once the advertising money starts drying up in Q1.

4:11 AM  
Blogger 10ksnooker said...

Failed strategy, pimp one side of the political spectrum and hope for a bailout. Not going to work.

Customers have already abandoned newspapers for not having any shred of truth left.

5:15 AM  
Anonymous Anonymous said...

I have been reading ad forecasts from department stores, and the cutbacks of big spending this Christmas makes for truly dismal reflections. I agree with you, and think the New Year will bring even more devastating cuts. The chains have already made all the savings they can from consolidating publishing plants, and trimming staffs. I think the gloves will really come off in 1Q when the poor results of Christmas ad sales will become clear. I think it will hit first and hardest at the debt-encumbered companies like Media News and Tribune. But everyone is going to feel it in 2009 and the jobs of middle managers and editors will evaporate in droves.

6:48 AM  
Anonymous Anonymous said...

I've been following the doom-gloom stories about the newspaper industry for some time now, and must confess your blog does a good job at reporting that.

I know the internet is impacting the industry, and circulation is dropping. But, take a closer look, the declines have mostly been in evening editions. In the last 20yrs, morning edition circulations have gone up.

Also, free newspapers have benefited. That trend will increase, after all what the internet has done, is making us used to the idea of not paying for content. It's not that we don't want to read news, we just don't want to pay for it.

As for declining revenues, take a look at the past economic downturns, 1991 saw a decline of 6% in market, and 2001 was 9%, so it's natural that 2008-09 will also have declines.

But like any other industry, the players will have to adapt and evolve. It doesn't by any means mean that the industy is dying.

9:11 AM  
Blogger tgd said...

Actually, 10ksnooker, people a) haven't *completely* abandoned newspapers, and b) to the degree they've done so, it's because the audience now has essentially limitless choices for all types of news and information, not a tightly limited pool such as one or two newspapers and three television networks (and local affiliates) that produce news.

I know it's a popular notion among commenters on both extremes of the spectrum to say "you've lost relevance because you don't disagree with me!" But the numbers tell a vastly different story: Newspaper circulation (and especially penetration) declines date to the rise of other mass media, such as broadcast TV. Broadcast TV's ratings declines date to the rise of cable. In other words, the decline of large media organizations (regardless of their distribution method) has everything to do with audience fragmentation (a result of technology) and not so much to do with your perceived notion of bias.

Sorry if that isn't popular in the echo chamber of Fox News, Pacifica News service and other "let's talk only with those who agree with us!" outlets.

11:25 AM  
Anonymous Anonymous said...

I'll buy everything you say, and think things are even going to be worse with a recession that ends only in 2010. So what will the industry look like once the downturn ends? I think I can see viable and very successful, profitable newspapers coming out of this process. They will have much smaller staffs, perhaps run by one exec editor, two editors and six reporters for a 40,000 circulation paper. The printing operations will be jobbed out, as will delivery. Business/commercial operations are all sent to India. Some news gathering operations will also be contracted out to former reporters and retirees who still want to work on a piece-rate basis. The family's legacy office building will either be rented out or sold off, and the staff will operate from suburban rented space. Ad sales will be commission-only. No pension plan, but a 401K program, and scaled-back health benefits unless employees want to pay for more. Web presence, but only archival. It will be wildly profitable.

11:29 AM  
Anonymous Anonymous said...

..Mr. Mutter, I don't see News Corp or the Wall Street journal on your graph. News Corp reports a 38% improvement from last years 3rd qtr newspaper revenues and the WSJ say's their newspaper profit was flat. Any reason they were left off ?

4:49 PM  
Blogger Newsosaur said...

My response to the previous comment:

News Corp. is not included because it reports the performance of its newspaper operations on a worldwide basis and my post was concerned only with U.S. publishing operations.

5:47 PM  
Anonymous Anonymous said...

tgd, I would note that it's networks like Fox News, which tend to show all sides of a story, that are growing.

It's the one-sided, left-wing political media who you support that are overwhelmingly represented in Mr Mutter's excellent graphs-o-doom.

News Corporation's WSJ isn't going to need a bailout anytime soon, but the New York Times with its front page lies is heading down the tubes very rapidly indeed. It couldn't be the quality of the content that's driving consumers to one product and away from the other, could it? Nah ...

5:59 PM  
Anonymous Anonymous said...

What are the actual operating profit margins for these newspapers and companies now?

11:43 AM  
Blogger rknil said...

But Tribune nutcase Lee Abrams says those papers are turning things around!

Great design! ALL IS WELL!!!

10:10 AM  

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