Friday, January 30, 2009

How well endowed should you be?

Don’t worry. This isn’t spam about Viagra. It is a serious attempt to run the numbers to determine how much it would take to endow a newspaper as a sustainable, non-profit organization.

The issue of replacing profit-oriented corporate ownership with public-spirited newspaper publishing foundations became the flavor of the week this week among those rightfully concerned about the future of American journalism.

The author of an op-ed in the New York Times suggested the Times could carry forward on a $5 billion endowment generating $200 million a year to fund its news operations. The author of this article in the New Yorker theorized that the Washington Post could publish in perpetuity on a $2 billion grant to support a $120 million-per-year newsroom. And the Nieman Journalism Lab took the concept to the next level by projecting that it would take $114 billion to subsidize all of America's newspapers.

In each case, the idea is that the endowments would be conservatively invested to generate incomes of about 5% per year.

Apart from the not-so-trivial issue of who would provide all those billions, there is the question of whether the proposed endowments would be sufficient to support these journalistic institutions as we know them today.

And the answer, as so often is the case in complicated hypothetical discussions, is: It depends.

The $200 million budget suggested for the New York Times probably would cover the payroll for the publication of an online-only version of the paper with a staff comparable in size to the present complement. However, the project would cost more than just the salary and benefits for the journalists working on the website.

A more realistic budget would be $400 million to cover such expenses as administrative staff, rent, telecommunications, utilities, insurance, travel, entertainment, desks, computers and other equipment.

A doubling of the estimated operating budget would require a doubling of the endowment to $10 billion.

If the idea were to continue publishing the print editions of the Times in substantially the same form they exist today, then an even larger endowment would be required. How big? It depends.

Based on the company’s 2008 financial statements, it probably costs about $1.2 billion to print and distribute the physical incarnation of the New York Times.

A substantial portion of that expense, of course, could be offset by advertising and subscription sales. The question is how much would be.

Newspaper circulation is as low today as it was in 1946. Only 18% of households last year subscribed to newspaeprs, which is half the number who took them 63 years ago. Advertising is down by nearly 25% from its record sales high of $49.4 billion in 2005.

To generate sufficient income to protect the paper against future shortfalls in those key revenue categories, a prudent foundation would have to add several billion extra dollars to the endowment to fill any prospective gaps.

How many billion? It depends on when, where – and whether – you think the newspaper business will stabilize.

Thursday, January 29, 2009

Small publishers barely feel the pinch

Recession? Secular decline? Not here, say the publishers of small-fry newspapers.

Although sales for the newspaper industry as a whole fell an average of 15% in the first nine months of 2008, revenues fell an average of 2% for papers under 100,000, according to data just published by two trade associations representing smaller publishers.

The survey of small and medium newspapers is the first ever undertaken by the trade groups, which are the Suburban Newspapers of America (SNA) and the National Newspaper Association.

“Local advertisers continue to value the hyper-local news and desirable local audience provided by community newspapers,” said SNA president Nancy Lane in a press release. “Community papers are affected by the current economic downturn but they are not in a crisis. In fact, there are some that are showing growth.”

The reasons for the disparity are clear. While metros face stiff competition from competing electronic and online media for readers and advertising dollars, smaller papers often are the only vehicles for news and advertising in the communities they serve.

Because it would not be cost effective for interlopers to compete in the compact and typically isolated markets served by small-fry publishers, they have greater advertising market share and more control over their rates than metros.

Unlike their big-city cousins, which have been ravaged by staff cuts in efforts to make ends meet, the SNA says “83% of the reporting companies had no planned staff reductions in 2008.”

The ability of most small papers to sustain their coverage will be a major factor in helping them preserve the strength of their franchises, putting them in a position for future growth that the big guys will surely envy.

Wednesday, January 28, 2009

Strapped publishers skip NAA dues

In another sign of the growing stress on the newspaper business, four publishers are not paying their dues this year to the Newspaper Association of America, the industry’s principal trade group.

Lee Enterprises, MediaNews Group, Copley Press and Omaha World Herald each told the NAA they cannot afford to pay their dues for 2009, officials of the association confirmed today.

The NAA promptly stripped the publishers of their rights to receive email newsletters, participate in online forums and partake of other services designed to encourage best practices among members.

The association said lapsed members would receive member discounts if they already have registered for the marketing and technology trade show the association is hosting in March in Las Vegas. The decision to extend discounts to the lapsed members probably has less to do with accommodating them than with trying to boost attendance for a conference whose attendance is seriously lagging.

The trade show, which is called MediaXchange, is a one-stop conference that combines a marketing conference and the old Nexpo technology show. The events have been scheduled for a single time and place in the hope of making it less expensive for newspapers to send representatives.

So far, it’s not working. Registration for MediaXchange is down 40% this year from where Nexpo was in 2008, said Sheila Owens, the vice president of media relations for the NAA. Nexpo attracted 1,588 participants in 2008, or 24% fewer visitors than the 2,088 who attended in 2007.

The problems being experienced by the NAA are not unique. The World Association of Newspapers, a European-based trade group, “postponed” a conference it had scheduled for March in Hyderabad, India. The organization said it hopes to move forward with the event in December.

The belt tightening in the industry has affected the NAA, too. Recognizing the straitened circumstances of the industry, said Sheila, the NAA last year “reduced revenue from dues by 25%, costs by 30% and staff by 40%.”

Tuesday, January 27, 2009

MNI halts dividend amid default fears

Amid concerns among some analysts that the McClatchy Co. could default on its $2.1 billion debt in the second half of this year, the company today announced that it would cancel its dividend after the first quarter.

MNI cut its dividend in half in September, but even the reduced 9-cents-per-share quarterly payout apparently is more than the company can afford in the face of increasingly steep debt hurdles in the most dire economy in years.

The scrapping of the dividend, along with the 93% dive in MNI’s stock in the last 12 months, are the sorts of things that ordinarily would put a company in play – or perhaps inspire a bid by the controlling family to take it private.

But the dearth of interest in newspaper acquisitions – and the difficulty almost anyone would encounter in refinancing $2.1 billion in debt in this environment – suggests that the company in the near term will stay the course it has been on: chopping expenses and hoping for an uptick in sales in order to generate enough cash to satisfy its lenders.

Noting that McClatchy in the fall of 2008 negotiated generous – and costly – concessions to the terms of its $2.1 billion in debt, securities analyst Alexia S. Quadrani of J.P. Morgan Securities said last week that she believes the company “still faces a threat of default” in “the back half of 2009, if trends remain weak and absent further credit amendments or successful asset sales.”

As is customary in most financings, McClatchy later this year must pass various tests that compare the level of its cash flow to the size of its debt. Failure to meet the prescribed ratios would constitute a default of the terms of the loans, triggering a number of potential consequences. In the some cases, the company could be forced to seek protection from its creditors in bankruptcy court. That is what happened recently to the Tribune Co. and the Minneapolis Star Tribune.

A “telling sign” of MNI’s distress, said Quadrani in her recent report, “is its reported efforts to sell one of its flagship newspapers, the Miami Herald, in a market in which interested buyers are scarce and industry assets come up for sale seemingly every day.”

In November of last year, analyst Tom Corbett at Morningstar said MNI’s stock “could be worthless,” telling Editor and Publisher: “We think the combination of McClatchy’s exposure to the decline in print ad revenue, high fixed costs, and substantial debt burden, is such that the firm will eventually have to be managed to satisfy its obligations to its creditors at the expense of its equity shareholders.”

The upcoming dividend cancellation certainly qualifies as an event that will come at the expense of stockholders. And the largest group of affected shareholders is the members of the founding McClatchy family, who control 41% of MNI’s stock.

The elimination of their dividends may cause them to take a closer look at the management of the company by Gary Pruitt, the chief executive who engineered the $6.5 billion acquisition of Knight Ridder in 2006 that saddled MNI with much of the debt that now clouds its future. MNI subsequently was forced by accounting rules to declare approximately half of the value of the Knight Ridder deal as a loss.

After serving for years on the four-person board that manages the family stock holdings, Pruitt quietly resigned from the family board in September, citing a conflict between his role as CEO and a director of the trusts.

With Pruitt no longer attending the trust meetings as the dividends dry up, who knows where the conversation might go?

Monday, January 26, 2009

French-style aid for U.S. press would cost $8B

In case you were wondering, French-style assistance for the American newspaper industry would cost Uncle Sam about $8 billion.

Even though it’s a safe bet that a government bailout of U.S. newspapers ain’t gonna happen, the French government last week decided to spend $767 million to prop up its nation’s press, according to my friend Frederic Filoux, who served on one of the committees of the government commission that crafted the plan.

The French rescue package is equal to 15% of the $5 billion in revenues generated by the country's newspapers in 2007. Applying the same ratio to the $54.5 billion in advertising and circulation sales booked by U.S. newspapers in 2007, then the price tag for a like-sized package here would come to $8 billion.

Inasmuch as total ad and circ sales for U.S. papers probably were $38.5 billion in 2008, an $8 billion handout from Uncle Sam would cover barely half the shortfall.

Courtesy of Frederic’s blog, here’s a detailed look at les goodies in the French plan:

:: Tax-breaks for newspaper delivery services and news agents.

:: A “huge but still undisclosed” amount of aid for restructuring newspaper production facilities.

:: A doubling of government spending on advertising in newspapers .

:: Free subscriptions for 18 year olds, with “the publisher providing the paper and the government paying for the delivery.”

:: A tax deduction that treats an investment in a newspaper company like a gift to a non-profit organization.

:: A request to the European Union to cut the value-added tax on online newspaper ad purchases to 2.4% from the current 19%.

Frederic isn’t exactly proud of the plan.

“This is not a stimulus package,” he wrote. “This is a Band-Aid to an ailing industry that has a shown a tremendous resistance to change at every level.”

Déjà vu all over again, non?

Friday, January 23, 2009

Sun-Times jinx: Fading to Black

Second of two parts. First installment is here.

The Chicago Sun-Times, the most jinxed newspaper in America, already had suffered through a decade of bad luck by the time Conrad Black bought it in 1994. But the worst was yet to come.

Black was the chief executive of Hollinger International, which operated a global network of newspapers including the National Post in Canada, the Jerusalem Post and the Daily Telegraph in London.

Though born in Canada, Black was so self-involved that he was determined to buy a peerage in the United Kingdom. After a bit of finagling, he got his wish. But the honor was issued on the condition that his title would incorporate the name of Tube stop outside the Telegraph’s office. Thus, he became Lord Black of Crossharbour.

Black was more than your average wealthy egomaniac. His lordship also turned out to be a crook who now resides in a federal penitentiary in Florida.

On his way to the pokey, Black did a world of damage to the Sun-Times, which the paper may be hard pressed to survive. But he didn’t do it alone. He got help from his long-time henchman, F. David Radler, whom he installed as the publisher of the Sun-Times shortly after buying the paper for $180 million.

Merciless slashing

Radler, a tight-fisted manager who was convicted with Black in 2007 for stealing millions from Hollinger, often told people that his ideal newsroom would consist of three editors, two of whom kept busy selling ads.

In merciless slashing, Radler cut the Sun-Times staff to barely half of the more than 300 journalists who worked there in the pre-Murdoch era (the number since has been thinned in the outsourcing and cost cutting that eliminated nearly 19% of all the jobs in the company 2008). Radler turned off the escalators to save money and cranked editorial policy so far to the right that the traditionally conservative Chicago Tribune emerged as “the city’s moderate voice,” according to Chicago Magazine.

Black and Radler were not just stingy with the staff. In addition to cheaping out on journalism, they also cheated the advertisers by faking circulation. When the fraud was discovered after their departure, the newspaper was censured by the Audit Bureau of Circulations and made restitution to a number of advertisers. Today’s daily circulation of 313,176 is about half of what it was when I left in 1984.

In the end, Black and Radler were exposed as not merely chiselers but also as out-and-out felons. After being bounced out of the company in 2003, they were convicted four years later in a federal court of looting the company for millions and each sentenced to a stretch behind bars.

Radler, who flipped on Black and repaid $63 million he stole from the company, was released earlier this month after a relatively short stint in jail. Black, who is in his 60s, is about one year into a 6½ term at a federal pen in Florida, where he recently told a Toronto paper that life is “safe and civilized.” Black was ordered to repay only $6 million to the Sun-Times.

Adding insult to injury, the Sun-Times was forced under terms of the employment contracts of both men to pay almost $64 million to defense attorneys for the sticky-fingered executives. The company reports that it has recovered all but $14 million of the money in the aftermath of the convictions.

Hollinger unravels

Hollinger was a mess in the years after Black and Radler were fired, forcing the company to sell all of its holdings except the Sun-Times and its sister papers in the communities surrounding Chicago. In an effort to protect the innocent, the name of the company was changed to the Sun-Times Media Group in 2006.

With the sole focus of the business in Chicago, the corporate office, naturally, was placed in fancy digs in New York. And the company was put in the charge of an investment banker named Gordon Paris, who was paid a staggering $2.87 million for his services in 2005, making him by far the highest-paid chief executive in the newspaper industry in relation to the size of his company.

In a rare stroke of common sense in late 2006, the corporate HQ was moved into the same offices as those occupied by the newspaper and a seasoned turnaround executive and Chicagoan named Cyrus F. Freidheim, Jr. was named the new CEO. Freidheim took the job for quarter of the pay hauled down by Paris and subsequently accepted a pay package last year that compensates him largely in almost worthless Sun-Times stock.

Freidheim found himself presiding over the company during the Black-Radler trial, the denouement of the circulation scandal and an unprecedented disintegration of the newspaper business that has been exacerbated by the worst global economic meltdown since World War II.

Along the way, Freidheim, who is the former CEO of Chiquita Brands International, had a legal problem of his own. It turns out that the banana company had paid $1.7 million over seven years to a Colombian paramilitary group to protect its workers from harassment. When the paramilitary group was designated a terrorist group in 2001, the payments became illegal under U.S. law but Chiquita kept making them.

As Freidheim tussled with all the problems of running the Sun-Times, he also spent the better part of 2007 trying to convince federal authorities that Chiquita made the payments without realizing they were illegal. He and his colleagues, who could have been subject to criminal prosecution, eventually were cleared of wrongdoing by the U.S. Justice Department.

With the value of Sun-Times stock plunging, Freidheim acceded to the demand of dissident shareholders to offer the company for sale in early 2008. But there were no takers, as there have not been for most of the dozens of other newspapers put on the market in the last year or so.

Under new management – again

Displeased that the entire market capitalization of the Sun-Times Group today has shrunken to an less than $7.5 million, the company’s largest shareholder launched a proxy fight in early December to oust not only Freidheim but also most of the other members of the Sun-Times board.

Now that the shareholders have succeeded, they have installed a board of new turnaround experts to somehow wring more value from the group. Freidheim was among the ousted directors but he will continue serving as the CEO as long as the new board permits.

That probably won’t be long, inasmuch as the new board includes Jeremy L. Halbreich, the onetime general manager of the Dallas Morning News who went on to build and sell the five-largest chain of community newspapers in the United States.

The new turnaround team will install new managers to bring new second-guessing, new cost cutting and new uncertainty to a company that has suffered almost unremitting turmoil for 25 years.

At the same time, the Sun-Times, which relies heavily on single-copy sales, is facing the stiffest challenge yet from the rival Chicago Tribune. After eating into Sun-Times street sales for the last few years with its jazzy, free Red Eye tabloid, the Tribune this week launched a tabloid version of the main paper. Thus, two separate Tribune tabloids will squeeze the Sun-Times as it scrambles to eke out a sustainable share of the increasingly scarce readers and advertising dollars in the market.

Can the new team lift the jinx? I hope so, for the sake of the people who work there. After nearly 25 years of bad luck, you have to wonder how much more they can take.

Thursday, January 22, 2009

Sun-Times: The most jinxed newspaper

If newspapers were characters in comic strips, the Chicago Sun-Times would be Joe Bftsplk, the perpetually jinxed guy in the old Al Capp panels who walked around with a black cloud over his head.

Joe, whose last name is supposed to sound like a Bronx cheer, didn’t mean any harm. It’s just that bad luck followed him everywhere he went. Cars crashed. Pianos fell on pedestrians. Joe couldn’t catch a break. And neither could those around him.

In other words, he was just like the Sun-Times, which is about to enter its 25th year of colorful, sometimes criminal and almost always dysfunctional corporate governance. The big question is whether it will make it to its 26th year.

The latest twist in the paper’s quarter-century of unparalleled bad karma is that the board of directors of the parent Sun-Times Media Group today was ousted by dissident shareholders who are rightfully dissatisfied that the company’s stock – which closed at $15.58 on Dec. 31, 2004 – is now worth 9 cents a share. In that period of time, more than $1.25 billion in shareholder value went up in smoke.

Now, the company, which has been struggling with declining circulation, tumbling revenues and faltering profitability for more than two decades, is about to undergo another in a long, long, long line of tumultuous management turnovers.

Given the fragile state these days of the newspaper business, it’s hard to see how the dangerously depleted Sun-Times is going to get out of this alive, especially as the No. 2 newspaper in what, at best, has become a 1½ newspaper town.

The company has suffered $31.2 million in operating losses in the last 12 months on $331 million in sales. With the $99.8 million in cash the company had in the bank at the end of September, it theoretically could sustain three more years of such losses, assuming sales don’t weaken, expenses don’t rise and the company can extinguish some $600 million in assorted tax liabilities.

That is a lot of “ifs.” As an alumnus of the paper and loyal son of Chicago, I hope the Sun-Times makes it. If only it could get out from under that black cloud…

When the jinx began

I can tell you exactly when the spell of bad luck began, because I was there.

The year was 1984 and I stepped into the elevator near the newsroom for the short, four-story ride to the first floor. The only other person in the elevator was the then-publisher of the paper, Marshall Field V, who I, the mere city editor, barely knew.

“Don’t worry,” volunteered Marshall, who never had spoken to me in his life. “I would never sell the paper to Rupert Murdoch.”

That’s when I realized the paper was about to be sold to Rupert Murdoch. Within days, I proved to be right.

The staff was rooting for the purchase of the paper by our editor, the dashing James F. Hoge Jr., who pulled an all-nighter to come up with an eleventh-hour bid to match Murdoch’s $90 million price. But Marshall and his brother Ted evidently decided they would rather sell the paper to Murdoch than let their family treasure fall into the hands of the hired help.

It was on a wintry day in early 1984 that Rupert Murdoch came to town to claim his prize. He arrived in the company of an over-cologned guy named Robert Page, who not only carried the title of publisher but carried Rupert’s suitcase, too.

They appointed a couple of Fleet Street castoffs as co-editors, who rapidly turned our thoughtful, respected and reasonably prosperous tabloid into a scandal sheet with such headlines as this red, front-page screamer: “MEN CAN HAVE BABIES, TOO!”

The Fleet Streeters rapidly ran off not only readers and advertisers but about a fifth of the news staff, too. I was among them, soon venturing to San Francisco but leaving my heart in Chicago.

Meanwhile, there was never to be another dull moment back at the Sun-Times.

In a guru’s thrall

Within a couple of years of acquiring and plundering the Sun-Times, Murdoch decided to begin buying the national chain of television stations that formed the basis of what today is the Fox Network.

Because federal rules prohibited him from owning a newspaper and TV station in the same market, Murdoch decided to sell the Sun-Times to Bob Page, who bought the paper for $144 million in 1986 with the backing of a New York investment firm called Adler & Shaykin.

Page’s reign lasted a couple years, marked among other things by his infatuation with a guru in India whose gifts were celebrated in the newspaper from time to time in stories ordered up by the publisher.

Page departed in the summer of 1988 “after he lost an intense power struggle with the newspaper's chief financial officer, Donald F. Piazza,” according to the New York Times, which added: “Earlier, Mr. Piazza had brought about the ouster of two of Mr. Page’s lieutenants.”

Charles T. Price, a hard-nosed labor attorney who had been brought in as the newspaper’s general manager, replaced Page as publisher. Price oversaw a series of acquisitions that rolled together nearly 90 suburban and outlying newspapers into what potentially could have been a powerful marketing and ad-sales network.

The operative word here is “potential.” For all the opportunity that the acquisitions promised, a host of cultural, technological, union, managerial and other issues left the company with an unwieldy collection of properties that performed, to put it generously, in a sub-optimal fashion.

Casting about for an exit, the New York investors in 1994 sold the papers for $180 million to Hollinger International, a Canadian publishing company with global pretensions helmed by the buccaneering (and, we later learned, crooked) Conrad Black.

That’s when things went from bad to worse.

Next: Fading to Black

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Tuesday, January 20, 2009

How Slim could end up owning NYT

Billionaire Carlos Slim Helú gained the inside track to buy the New York Times Co. when he lent the publisher $250 million to avert a looming default.

Though NYT is not for sale at the moment, the continued deterioration of its business could unleash the sort of pressures in the controlling Ochs-Sulzberger family that have led to the sale of a number of newspapers in the past.

Slim’s timely loan to the NYT not only nets him a prodigious 14% annual interest rate but also warrants that will enable him to buy enough stock in the company to nearly triple his stake to 18% of its common shares.

As a creditor entitled to all manner of financial information, Slim will get not only a detailed view of the company’s finances but also the right to put the screws to NYT the minute it violates any of the terms of the loan.

At a time when few financiers are willing to lend to newspapers, Slim had more than a few reasons for helping NYT avoid the possible default on $400 million in debt that is due for repayment in the spring.

One is that he wanted to protect the worth of the shares he already owns in the company, which have lost more than half their value in four months and today are worth some $60 million. Another is that juicy interest rate, which will boost the company’s borrowing costs by almost 50% to $74 million.

But the real appeal for Slim may be that he sees the loan as a major step in a sequence of events that eventually could enable him to buy the company publishing one of the most important newspapers in the world.

Here’s how that might play out:

After the company’s operating profits fell by 38% in the first nine months of 2008, NYT was forced it to cut its dividend by three-quarters. This had a huge impact on the Ochs-Sulzberger family members who own the super-voting shares that control the company, because it trimmed their collective annual stipend to less than $7 million from $28 million.

If the newspaper business continues to deteriorate, NYT would be forced to choose between making further cuts in the dividend or making substantial reductions in the ample resources still afforded the flagship newspaper. Or both.

Any of the above outcomes likely would provoke tension between the family members who want to preserve what's left of their dividends and those who want to maximize the resources available to the Times.

In other words, the conditions would be ripe to set off the classic conflict that has put many a newspaper in play.

One roughly similar example is Dow Jones, which Rupert Murdoch picked off in 2007 for a sumptuous $5 billion after wearing down the resistance of a majority of the heirs of the founding Bancroft family. Beyond the five bil from Rupert, the chief motivation to the heirs was the company's anemic stock price.

Although the family at the NYT is smaller and reportedly more attached to the New York Times than the Bancrofts were to Dow Jones, the affection for the paper among the NYT clan actually could motivate them to accept a well-timed, too-big-to-refuse deal from Slim.

In addition to wafting an eye-popping sum at the NYT family to ease the pain of forsaking their birthright, Slim could promise to sustain the resources and integrity of the Times. Murdoch made a similar pledge to seal the deal for Dow Jones, which he kinda, sorta honored.

With a fortune estimated at $60 billion by Forbes magazine, Slim got to be the second wealthiest man world by employing tactics that the New York Times once characterized as being worthy of a 19th Century robber baron.

Another contender to buy the NYT once might have been the Harbinger shareholder group that accumulated a fifth of the company’s common stock before Slim turned up. But the group has been unwinding its position after losing as much as nine figures during the precipitous drop last year of NYT stock.

The Harbinger hangover is bound to frighten off other hedge funds, assuming any survived the September surprise. With Harbinger out of the picture, Slim is in the catbird’s seat.

The Dow Jones acquisition didn’t come swiftly and the courtship of the NYT clan won’t be any quicker.

Unless an unexpectedly rapid and convincing turnaround in the publishing business helps NYT substantially lighten its $1 billion-plus debt load, then Slim will be well positioned to make a run at the company when, as they say in the Cialis commercials, the moment is right.

Sunday, January 18, 2009

NYT called potential savior a ‘thief’

The Mexican billionaire who may provide hundreds of millions of dollars to save the New York Times from potential default was characterized as a thief in the newspaper less than 18 months ago.

Carlos Slim Helú, whose fortune of approximately $60 billion makes him the second-wealthiest man in the world, was reported by the Wall Street Journal over the weekend to be negotiating a financing that would prevent the New York Times Co. from possibly defaulting on $400 million in debt due in May.

“The talks are ongoing and may yet fall apart but one of the options being discussed is a preferred-stock issue” that would be structured somewhat like a loan and carry no voting rights, according to the Journal. “It’s not clear how much Mr. Slim would be willing to invest but the people familiar with the matter said it would likely be several hundred million dollars.”

(UPDATE 1/19/09: The Times reports the financing will be a $250 million, six-year, senior, unsecured note bearing 14% interest with warrants that, if fully exercised, could give Slim control of up to 18% of the company. The notes do not include voting rights but the common shares acquired through the warrants would have voting rights.)

Slim bought a 6.4% stake of NYT in September but the value of his shares since then has dropped by more than half to about $60 million. Inasmuch as a default by NYT would further erode the value of his holdings, it is fair to assume Slim would be motivated to come to the aid of the company.

Slim finds himself in a position to do so as the result of the wealth he amassed by owning a near-monopoly over both wired and mobile telephone services throughout Mexico.

Slim’s success as a businessman was the topic of a bluntly worded column by Times editorial writer Eduardo Porter in August, 2007. Here’s some of what he had to say:
Mr. Slim is richer even than the robber barons of the gilded age…. It takes about nine of the captains of industry and finance of the 19th and early 20th Centuries — [John D.] Rockefeller, Cornelius Vanderbilt, John J. Astor, Andrew Carnegie, Alexander Stewart, Frederick Weyerhaeuser, Jay Gould and Marshall Field — to replicate the footprint that Mr. Slim has left on Mexico.

But the momentous scale is not the most galling aspect of Mr. Slim’s riches. There’s the issue of theft.

Like many a robber baron — or Russian oligarch, or Enron executive — Mr. Slim calls to mind the words of Honoré de Balzac: “Behind every great fortune there is a crime.” Mr. Slim’s sin, if not technically criminal, is like that of Rockefeller, the sin of the monopolist.

In 1990, the government of President Carlos Salinas de Gortari sold his friend Mr. Slim the Mexican national phone company, Telmex, along with a de facto commitment to maintain its monopoly for years. Then it awarded Telmex the only nationwide cellphone license.

When competitors were eventually allowed in, Telmex kept them at bay with some rather creative gambits, like getting a judge to issue an arrest warrant for the top lawyer of a competitor. Today, it still has a 90% share of Mexico’s landline phone service and controls almost three-quarters of the cellphone market....

But Mexico has paid, dearly. In 2005, there were fewer than 20 fixed telephone lines for every 100 Mexicans, and less than half had cellphones. Just 9% of households had Internet access. Mexicans pay way above average for all these services....
Now, Slim appears poised to be the man who may come to the rescue of America’s newspaper of record.

Friday, January 16, 2009

Strib vs. PiPress: Who will be left?

The Twin Cities are more certain than ever to become a single-newspaper market. It’s just hard to predict which paper will survive.

You would think the Minneapolis Star Tribune is the weaker of the two, having filed for bankruptcy after being in default on its loans for about half a year. Not so fast.

The Strib bankruptcy relieves the paper from having to service a too-heavy load of debt at a time of shrinking sales and profits. In other words, the Strib just escaped exactly the burden that still most likely afflicts its rival, the St. Paul Pioneer Press.

Because the PiPress is privately owned and does not release its financial results, we can only guess that its business has been battered as badly as that of the Strib, whose operating profit fell 56% in 2008 to $26 million.

If the PiPress is hurting as much as the Strib, then it also could file for bankruptcy to cut its debt and reduce its operating costs, right? Not so fast.

Owned by the heavily leveraged MediaNews Group, the PiPress was purchased in a $1 billion, four-newspaper deal that links its fate to the intricate complex of newspaper partnerships that MediaNews operates in Los Angeles and Northern California.

A default or bankruptcy at the PiPress almost certainly would trigger similar events across the MediaNews empire. Because Gannett, Hearst Corp. and Stephens Media have invested heavily in MediaNews, it is conceivable that a MediaNews default or bankruptcy could require the investors to either put up additional cash to backstop MediaNews or potentially face default themselves.

With the papers in the Twin Cities seemingly locked into an indefinite war of attrition, the initial advantage could go to the Strib, whose bankruptcy represents an opportunity to lower its expenses by renegotiating its debt, union contracts, leases and other costly obligations.

Though the Strib would emerge in the early going as the more streamlined of the two pubishers, it would have less margin for error than the PiPress if the newspaper business were to continue to deteriorate. In a sustained economic downturn, the PiPress presumably could draw on the vast resources of the potent investors in MediaNews.

So, it’s hard to pick a winner. Or predict when the denouement will come.

One thing seems all but certain: There won’t be a joint-operating agreement in the Twin Cities.

The model has been discredited by the recent or pending demise of the No. 2 paper in the JOAs in Albuquerque, Cincinnati, Denver, Seattle and, as of tonight, Tucson.

The reason JOAs aren’t working any more is that the ferocious and sustained contraction in the demand for newspaper advertising has left barely enough revenue in most metro markets to support a single newspaper.

Sufficient revenues and profits to support two newspapers in a community are artifacts of history.

Thursday, January 15, 2009

Gannett furlough could save 600 jobs

“The Gannett furlough is the crowning blow in making us look like the auto industry,” said the distinguished newspaper editor who retired to his reward as the dean of a prominent journalism school.

“Don’t be too hard on Gannett,” I told my pal Jerry Ceppos, the former vice president of news for Knight Ridder who now helms the Donald W. Reynolds School of Journalism at the University of Nevada in Reno. “The company has come up with a constructive way to save several hundred jobs.”

Gannett said yesterday that it would require most of its employees to take off a week without pay before the end of March. The alternative to the shared pain – and I recognize that it will be a pain in more ways than one – would be for the company to eliminate approximately 600 more jobs than the roughly 7,000 positions it has scrapped since 2007.

Gannett declines to discuss the economics of the initiative, but here’s how I estimated the number of saved jobs:

Assuming Gannett’s payroll is equal to 20% of its $7 billion in revenues in the last 12 months, then one week’s payroll is worth about $27 million. If the salary of the average employee is $45,000 per year, then the company would have to eliminate some 600 jobs to achieve the same level of savings as the furlough.

With all due respect to Jerry Ceppos, Gannett’s furlough plan is a better deal for the company than what an automaker could achieve.

When Detroit tells people to stay home because no one is buying cars, most unionized employees get so-called “supplemental unemployment benefits” from the Big Three that pay them almost as much as they would have made if they were actually working.

The fact that this is a good deal for Gannett means it is a bad one for its staffers. Because most Gannett employees are not unionized, they will have no choice but to accept the furlough – and they won’t be paid anything for the time they have lost.

On the other hand, one hopes, they’ll still have their jobs when they get back. And a week worth of unanswered email.

Wednesday, January 14, 2009

Yahoo! for Yahoo? Yikes!

The appointment of no-nonsense Carol Bartz as the new boss at Yahoo is a cause for major concern at the hundreds of newspapers that ceded much of their technological future to the stumbling Silicon Valley giant.

If publishers can’t prove themselves in short order to be worthy partners for Yahoo by selling lots of advertising, the new chief executive, who is bound to be closely monitoring the relationship, could decide to curtail or abandon it.

That would leave participating newspapers “up the creek,” as one executive put it rather succinctly.

Some 770-plus newspapers owned by 32 publishers have come to rely on Yahoo as a primary provider of advertising technology and inventory. Newspapers sell ads on the HotJobs recruitment site and get paid 99 cents whenever one of their website visitors clicks on a Yahoo-generated contextual ad.

But the biggest and newest initiative is called APT, a platform for creating, scheduling and billing ads based on customer behavior.

APT, which is just edging into early beta tests at a handful of papers, could be the best thing for newspapers since the Linotype machine. Or not.

But its success will depend on the ability of newspaper salespeople to grasp and successfully sell something more sophisticated than X number inches on Y days of the week for Z dollars per inch.

I’m not saying they couldn’t do it. But some newspaper executives are worried.

While it still is early days for reps and advertisers alike, “our sales staff has not adapted and the product is not selling as quickly as we hoped,” said one exec. “If this washes out, we are up a creek.”

Through no fault of either Yahoo or the newspapers, APT is rolling out in the face of the worst economy since the 193os. Extenuating circumstances aside, APT's success will have a direct bearing on the future of the Yahoo-newspaper consortium. Here’s why:

Newspapers entered into the partnership with Yahoo because they recognized that they did not have the native capability or resources to fund technology development. Yahoo supplied the technology in return for a 50-50 share of future ad sales, recognizing the superior efficiency of selling ads to small and medium clients via the thousands of newspaper reps working in hundreds of markets across the country.

Now that Yahoo is under new management and hard pressed to raise profits to rehabilitate its stock price, the company’s new CEO will be closely evaluating which projects to expand, which to support and which to throttle.

If Carol comes to believe that newspapers are not likely to be able to pay back the investment her company has made – or will make – in developing technology for them, then she might curtail or kill the partnership. (For a second opinion, see this from fellow kibitzer Ken Doctor.)

To date, the dollars spent on the various newspaper projects have been “disproportionate to the outcome,” triggering envy in certain quarters at Yahoo, said a newspaper exec. For example, he noted, Yahoo loses money every time it pays a newspaper 99 cents for a click on a contextual ad.

The consortium already has lost a major champion in Yahoo president Sue Decker, who resigned her position immediately after learning she was passed over for the CEO position. Sue was a staunch supporter of Hilary Schneider, the former Knight Ridder executive who conceived and managed the newspaper project.

When Carol is done putting her stamp on Yahoo, will anyone be left to speak up for the newspapers?

Related posts

Yahoo! for Yahoo? New worries

Yahoo! for Yahoo? Maybe not

Yahoo! for Yahoo?

Sunday, January 11, 2009

Scoopless in Seattle: P-I beat on own sad news

The only insult that can compound the injury of having your newspaper shot out from under you is to hear the news first from a competing television station.

That’s what happened last week to the staff of the Seattle Post-Intelligencer, who learned from KING-TV that Hearst Corp. was planning to put the paper up for sale – and would close it if no buyer were found. Because the odds of finding a buyer in the next 60 days are short, the announcement amounts to a death warrant for the 146-year-old publication.

So, who leaked the story to KING?

The television station first broadcast the news of the impending announcement on Thursday night. The official word was not delivered to the shell-shocked staff until mid-day Friday, when Steven Swartz, the president of Hearst newspapers, delivered a short, apologetic announcement (video below).

Steven said the newspaper has lost ever-larger amounts of money each year since 2000. The newspaper later reported that the deficit was $14 million in 2008 and projected to be even higher in 2009.

Because the highly sensitive decision to shut a business unit usually is closely held at the top levels in any corporation, the list of potential leakers at Hearst is fairly short. It would include Steven, his bosses and a handful of legal and financial advisers. But it seems all but certain that they would not have wanted to sow unnecessary consternation by prematurely leaking word of the shutdown.

The betting among insiders in Seattle is that the leak came from the feds. Because the P-I is a partner in a joint-operating agreement with the Seattle Times, Hearst likely had to reveal its intentions in advance to the U.S. Justice Department, which oversees JOAs that operate under a waiver of the antitrust laws.

“Our understanding is the leak came out of Washington,” David McCumber, the managing editor of the P-I, said in an email. “I don't really care very much where it came from. I'm far past caring about the night from hell that it produced for me and my staff. I'm more concerned about the death of a great newspaper and the blight on a brave and talented staff – the best group I've worked with in four decades.”

We’ll probably never know for certain whodunit. But the damage is done.

The news should have reached the newspaper’s staff before the competition, said P-I reporter Kery Murakami, who was quoted in an article in the Times. “That just makes this situation worse, if that's even possible. It's like sticking and twisting the knife.”

Friday, January 09, 2009

The squeeze is on for No. 2 papers

Although there aren’t many two-newspaper towns left in the United States, the few remaining No. 2 papers are the least likely to get out of 2009 alive.

As demonstrated in Denver and Seattle, not even joint-operating agreements have been enough to save the weaker competitors in those two-newspaper markets.

With the worst economy in decades compounding a fierce secular contraction of the newspaper industry, the challenge for No. 2 papers will be stiff for standalone papers in places like Boston, Chicago, Los Angeles, Miami-Fort Lauderdale, Minneapolis-St. Paul, Philadelphia, New York and San Francisco.

No. 2 papers in joint-operating agreements in places like Detroit, Salt Lake City and Tucson also have to be concerned about their long-term viability. (While the partners in Detroit previously announced a curious plan to sustain both papers by eliminating home delivery several days a week, a number of observers [including yours truly], have come to believe the more likely outcome will be the shutdown of the Detroit News).

The reason No. 2 papers are endangered is simple:

When ad dollars shrink in a metropolitan area (as they are doing), they do not shrink proportionately among the competing papers. The largest share of dollars goes to what advertisers and readers perceive to be the stronger of the two papers. This starves the already-lean flow of advertising to the second paper, strangling its profitability to what in many cases may prove to be the breaking point.

In the cases of both the Rocky Mountain News in Denver and the Seattle Post-Intelligencer, the owners of the newspapers engaged in joint-operating agreements have said they will shut their papers if buyers are not located within a matter of weeks. Given that buyers are unlikely to emerge in the most toxic environment for newspapers in history, the announcements amount to death warrants.

With respect to some multi-newspaper towns, it is not clear which of the two competitors might succumb first:

:: The Star Tribune is reported to be on the verge of bankruptcy but the precariously financed MediaNews Group owns the cross-town Pioneer Press.

:: The New York Daily News and New York Post, which both are believed to be losing money, are supported by billionaire patrons. The respective patrons are Mortimer Zuckerman and Rupert Murdoch. If either blinked, his paper would fail.

:: The over-leveraged McClatchy Co. reportedly has put up the Miami Herald up for sale with know known interest. But the Tribune Co., the owner of the neighboring Sun-Sentinel, already has filed for bankruptcy.

:: Both papers in Philadelphia are owned by a home-grown investment partnership that has been struggling to avoide default. In the interests of streamlining the organization to enhance its profitability, the Philadelphia Media Group might find it necessary to fold eiter the Inquirer or the Daily News, which, incongrously in this day and age, compete against each other.

Even in Seattle, as Mark Potts notes, it was a jump ball as to whether the P-I or the Seattle Times would fold first.

Thursday, January 08, 2009

Retail slump will gut newspaper ad sales

The unprecedented meltdown in retail sales in the fourth quarter of last year all but assures that newspaper advertising sales in 2009 will fall another 17% – or more – on top of a similar plunge in 2008.

Assuming the projection detailed below proves to be correct, print and online sales for the industry would amount to no better than $31 billion this year after diving to something like $38 billion in 2008.

The last time industry sales were as low as $31 billion was in 1993. In 2007 dollars, $31 billion would be worth $43 billion.

Hopes were dashed today for a reprieve in the fierce decline in newspaper ad sales when a wide spectrum of retailers reported dismal sales in December in what the New York Times called “one the worst holiday shopping seasons in decades.”

The holiday period generates a third or more of the annual profits for most retailers. Deep discounting to clear inventories in the fourth quarter almost certainly put even more pressure on retailer profits than the anemic sales numbers would suggest.

The pain for merchants translates directly into pain for newspapers, because retailing is by far the largest advertising category, producing no less than half of industry revenues. With employment, automotive and real estate classified advertising already severely depressed by the worst economy in generations, the collapse of retailing will put further pressure on already-battered newspaper sales.

Apart from a lower-than expected sales increase of 1.7% at Wal-Mart, the numbers were all red for most other national retailers. With sales off 4%, Macy’s said it would close 11 stores, including outlets in St. Louis and downtown Los Angeles. Revenues fell 10.6% at Nordstrom, 14% at Gap, 19.8% at Saks, 24% at Abercrombie and Fitch and 31.2% at Neiman Marcus.

With long-time companies like KB Toys, Mervyn’s and Linens ’n’ Things already in liquidation, many retailers will fade from the scene altogether in 2009. Companies like Circuit City, Macy’s and others plan to close under-performing stores to save money.

The International Council of Shopping Centers, a trade group, estimated in October that 148,000 retail stores would close in the United States in 2008 and that another 73,000 would do so in the first half of 2009, reflecting a potential annual rate of 146,000 closings in 2009.

Another major way merchants will attempt to save money will be by cutting back on advertising. While publishers report that merchants advertised as much as they afford during the difficult holiday shopping season in hopes of attracting the most possible business to their stories, many newspapers have experienced a sharp decline in ad demand since the first of the year.

Unless a palpable rebound in the economy gets consumers shopping again, this is going to be another long and difficult year for newspapers.

Tuesday, January 06, 2009

Something’s gotta give at S.F. Chronicle

Given that Hearst Corp. has plowed more than $1 billion into the San Francisco Chronicle without seeing a dime of profit, it’s a fair bet that something is bound to change at my hometown newspaper.

The only questions are: What? And when?

Like most publishers, the Chronicle has been whittling away at its staff for the last few years, dropping the headcount in the newsroom to 260 today from 400 in 2007, according to Michael Cabanatuan, a reporter who is president of the newspaper’s chapter of the California Media Workers Guild.

With the staff 35% smaller than it was two years ago as the result of some year-end buyouts, the paper has 0.7 journalists for every 1,000 of circulation, or well below the old (but now widely discarded) rule of thumb that a paper ought to have one journalist for every 1,000 subscribers.

It would be a relief if that were the end of the cutting. But it’s hard to believe it will be, inasmuch as the newspaper is said by knowledgeable sources to have suffered an operating loss of approximately $75 million in 2008 on top of unabated operating losses in every year since Hearst bought it for $600 million in 2000.

Add together the purchase price and the ongoing losses that Hearst has been subsidizing with profits from its other media operations and the publisher, conservatively, has put more than $1 billion into the newspaper with no hope of a profit in sight. The bulk of the money was spent before 2008, when the economy took its worst turn in more than 75 years.

With the outlook for the newspaper business now worse than ever, a more radical solution than nipping and tucking the Chronicle to profitability would seem to be in order. And it probably is this:

Folding the Chronicle into the network of MediaNews Group papers that completely surround it – a network, significantly, that Hearst itself played a major role in building.

In that event, the Chronicle’s now-independent news, ad sales, production, distribution and administrative staffs would be merged into a single entity managed by MediaNews. Deep staff cuts likely would result in every department, not the least of which would be the already decimated newsroom.

The Chronicle’s editorial staff, which numbered 592 when Hearst acquired the paper, likely would be stripped in a merger to a far leaner complement than today’s 260 souls. The survivors would be tasked with producing a modest ration of local stories for a paper filled with generic content produced by the other MediaNews properties in the market. Click here to see how that worked at the MediaNews paper in neighboring San Mateo County.

While the merger of the last two independent dailies in a market historically would have run afoul of federal antitrust laws, the depressed (and depressing) state of the newspaper business – and the rising strength of the Internet and other alternative media – would seem to strengthen Hearst’s case for favorable consideration from the new team about to settle in at the U.S. Justice Department.

In seeking the antitrust waivers necessary to permit a merger that effectively would create a single publishing entity for the fifth-largest media market in the land, Hearst could argue convincingly that it no longer is willing to underwrite the Chronicle’s formidable losses. The rationale, quite simply, would be that it is better to save the editorial voice of the Chronicle by merging with MediaNews than to have it drowned out forever in a sea of red ink.

The situation for Hearst is not as dire as it might appear to be. At the same time Hearst has been funneling millions into the Chronicle, it has been working on what seems increasingly likely to be the plan to get the Chronicle off indefinite life support.

Hearst put up $1 billion in 2006 in a complicated deal that helped MediaNews acquire two other major competitors in the market, the San Jose Mercury-News and the Contra Costa Times. Upon the completion of those transactions, the Chronicle was surrounded on the north, east and south by MediaNews properties. The closest competition to the west is the Honolulu Advertiser.

Today, the circulation of the MediaNews properties dwarfs the Chronicle’s 370k daily circulation by more than 2 to 1.

For helping MediaNews buy the two former Knight Ridder papers flogged off by McClatchy, Hearst gained a significant interest in the massive cluster of newspapers MediaNews has assembled in southern California. Hearst also bought some MediaNews papers in Connecticut in August when MediaNews needed cash to pay off a slug of its nearly $1 billion in debt.

The close but complex financial relationship between Hearst and MediaNews means that their financial interests are far more interdependent than competitive.

To wrap the Chronicle into the MediaNews cluster in northern California, however, Hearst and MediaNews presumably would have to satisfy not only the Justice Department but also a doughty local activist named Clint Reilly. A former political consultant who became a real estate magnate, Clint previously hauled the publishers into federal court not once, but twice, to protest what he deemed to be anticompetitive activities.

The first time, Clint blocked the sale of the Chronicle to Hearst in 2000 by demanding that Hearst find a way to assure the continued publication of the San Francisco Examiner. In 2000, Hearst owned the Examiner, which it published in a joint-operating agreement with the Chronicle, then owned by the descendants of the founding de Young family.

Because antitrust rules forbade Hearst from owning both papers at the same time, it was required to sell the Examiner to acquire the Chronicle. When no buyers materialized for the Ex, Clint’s legal challenge forced Hearst to pay $66 million to the family running a local Asian weekly to take over publishing the Ex. (The Ex subsequently was sold to Denver billionaire Philip Anschutz, who owns it to this day.)

The second time Clint checkmated the publishers was in 2007, when Hearst and MediaNews voluntarily abandoned pending initiatives to co-operate on ad sales and circulation after Clint challenged their plans in federal court. As the result of that settlement, Clint got free space in the MediaNews papers to run a weekly column, which isn’t half bad.

After Clint and his attorney prevailed in both challenges, they got several millions in each case from the publishers to cover their legal fees and expenses.

Clint, who says he hung out as a young man at the loading docks of the newspapers on Saturday night so he could be among the first to buy the Sunday edition, says he never made any money for himself by suing the publishers. He undertook the actions, he says, strictly in the public interest.

Would Clint fight the publishers for a third time if they tried to merge the Chronicle with the MediaNews Group? He’s not saying.

Five fatal flaws in local Internet ad sales

Online sales require different skill sets than those that historically have been employed by traditional media companies.

Dave Chase, one of the founders of Microsoft’s Sidewalk.Com who has gone on to be an independent investor and sales consultant, tells what it takes to build a successful online sales organization. He eats his own cooking at what he says is his own profitable local website in Idaho,

By Dave Chase

Too much time is being spent discussing ways to reduce production costs or find new ways to fund journalism. While that may help, I'm convinced the only path to long-term economic viability is to address directly the revenue problem.

The level of innovation happening on the production and funding side of the equation needs to be matched by innovation on the revenue side. Unfortunately, I have observed five fatal flaws in generating revenues that will lead local Internet plays to fail as many before them have. These are entirely avoidable but most are falling into these traps. Laid out below are the flaws and a high-level summary of how to avoid those fatal flaws.

1. Farming Hunters

I have blogged previously about Farming Hunters and Hunting Farmers, which is a common mistake present in sales organizations. That is, people who are skilled at managing an existing customer base (“farming”) is a far different talent than “hunters” who know how to find new business. We strongly believe in having clear role definitions throughout the sales process with accompanying job descriptions and compensation models. We define four main types of reps — Lead Qualification, Acquisition, Development and Retention. In our experience, many of the newspaper organizations we’ve worked with only have “farmers” that have managed a book of business for a long time. They not only are ignoring 80% to 90% of the advertising market that has been out of the reach of newspapers but they simply have a different skill set than those with capabilities to develop new business.

2. Expensive sales people and processes for low-dollar advertisers

It’s a mistake to think an advertiser still relatively new to online advertising will spend at the same level as an advertiser who has been in the newspaper for the last 20 years. The aforementioned 80% to 90% of the local advertising market that didn’t advertise regularly in the paper generally is going to spend less per year. Nonetheless, traditional and expensive shoe-leather sales models are the rule rather than the exception. In my consulting business, I have seen technology and media companies closing business into the low six figures via phone-based sales models. With the dramatically lower cost of sale of a telesales organization, one can service a segment of advertisers that previously was out of reach of most local media organizations. Unfortunately, most media organizations have little experience building and managing a telesales organization, which is fundamentally different than a field-based sales organization. I’m convinced that building or buying this competence is absolutely vital and should start tomorrow.

3. Inability to quantify the value of your audience and articulate a return-on-investment to a prospect

For most local advertisers who are relatively small businesses, Internet-based advertising still is quite new. They have a hard time understanding online advertising. Consequently, they don’t know what to make of the numbers thrown at them by a typical sales reps. (Some reps further confuse the issue by not knowing the difference between "hits" and "page views" or "unique visits" and "unique visitors". Potential advertisers might ask themselves “is a million page views good or bad?” or “if they have millions of page views, should I expect hundreds of thousands of visitors when I advertise?” A successful online seller needs to not only know the basics of his or her site (e.g., quantity of visitors, demographic summaries, etc.), but the rep also needs to have data specific to a typical advertiser’s business to calibrate expectations of what a marketer should expect in an online campaign (hint: it’s probably closer to dozens of customers vs. hundreds of new customers). It is vital to use this information to show the advertiser his likely return on investment.

4. Cluttered sites with postage stamp-sized ads

I’m not the first one to write about this but it is still the norm for most local media websites. They are extremely cluttered with tons of ads per page. One of experiences from my last role at Microsoft was being on the Executive Board of the Internet Advertising Bureau (an industry-funded trade organization) following the dotcom bust. I was integrally involved in forming the Universal Ad Package ad standard. In order to arrive at that standard, we did a boatload of effectiveness research about ad sizes, placement and quantity. The short version of the findings is that fewer, bigger ads not only perform better but also sell better.

5. Rate card as afterthought vs. a strategic selling tool

The typical way an online seller deals with a rate card is just lobbing the rate card across the transom without explanation. To make it a strategic selling tool, there are two elements that are critical. First, it is important to recognize that a drawback to online advertising is you can’t tell the advertiser to look at page A6 or watch the News between 5:30 and 6:00 p.m. Unless it’s a permanent sponsorship slot, it is likely that Murphy’s Law will rear its head and the advertiser never will see his ad when he goes to the site. One way to combat this is to sell your site at a more granular level than most sites. This increases the odds of the advertiser seeing her ad, as well as giving your site a range of ad prices depending on the advertiser’s appetite. Second, creating scarcity by only allowing a certain number of advertisers in a particular section creates a sense of urgency that is often absent in online advertising, where inventory seems to be limitless to an advertiser. The deadline of print creates urgency, whereas online is viewed as having no deadline. Done right, this can also set the stage for improved advertiser retention, as you should be able to over-deliver against the impression levels that originally caused the advertiser to invest in the campaign.

Sunday, January 04, 2009

What’s next for Lee?

Although its stock has been pummeled to pennies per share and its auditors have stated the company is in danger of defaulting on $1.4 billion in debt, Lee Enterprises still produces a larger operating profit, percentage-wise, than Exxon.

So, let’s not forget that there is a reasonably robust business here. The problems are that (a) the business is not as robust as it used to be and (b) the business may not be robust enough to make a $142.5 million debt payment due this spring.

Because Lee is unlikely to have the cash to pay off that loan, its auditors questioned the company’s ability to remain a “going concern” in the annual report filed on New Year’s Eve. The report sent shudders through the company and prompted a number of questions I will endeavor to answer below. But first, a bit of perspective:

While Lee is in a distinctly unpleasant position with respect to its shareholders and lenders, it is important to note that the business generated $207.2 million in operating profits last year on sales of a bit more than $1 billion. Its operating margin of 20.1% surpasses that of Exxon Mobil Corp., which generated a 19.1% margin in the last 12 months. And Lee’s profitability positively blows away Wal-Mart, the largest Fortune 500 company, whose margins were only 7.4% in the prior 12 months.

As rich as Lee’s profits are, however, they used to be richer. Its earnings before interest, taxes, depreciation and amortization (EBITDA) were 30.7% lower in 2008 than in the previous fiscal year. And that’s a big problem for a company that shouldered some $1.4 billion in debt to buy Pulitzer in 2005 in the expectation that rising sales and profits would enable it to repay the loans.

Unfortunately for Lee and several other publishers who also loaded up on more debt than they can handle, newspaper ad sales began collapsing after reaching an all-time industry high of $49.4 billion in 2005. (In 2008, sales probably were no better than $38 billion, reflecting a 23% plunge in just three years.) You can blame the collapse on major changes in the behavior of consumers and marketers, aggravated last year by the scariest economy since the Depression.

Now, Lee is in danger of having its shares dropped from the New York Stock Exchange and its auditors have warned that the company may default on its loans. Here are answers to the most frequently asked questions about these unsettling developments:

Q. If Lee had an operating profit of $207.2 million, why did it report a net loss of $888.7 million for the fiscal year ended on Sept. 28, 2008?

A. Operating profit, or EBITDA, reflects the difference between sales and the actual costs associated with operating a business. The net income calculation reduces EBITDA by such items as depreciation and amortization of assets, one-time events like plant closings or dispositions, and, in the case of Lee, a $1 billion loss associated with writing down the value of the Pulitzer acquisition. The $1 billion loss, which represents an accounting adjustment and not an actual outflow of cash, is the primary reason the company posted a $888.7 million net loss despite a $207.2 million operating profit.

Q. Why did Lee declare a loss of $1 billion on the $1.46 billion it paid to buy Pulitzer in 2005?

A. Accounting rules require a company to periodically re-evaluate the assets carried on its books. If the assets are found to be worth significantly less than their book value, the asset is deemed to be “impaired” and the company is forced to reduce the asset to its current fair-market value. The value of the Pulitzer acquisition was dropped by 68.5% for two reasons. First, the acquired properties are expected to generate lower sales and profits in the future than originally were projected. Second, the value of newspaper properties has collapsed in the time since Lee bought Pulitzer. The average value of newspaper stocks fell 83% in 2008 and Lee’s shares plunged 99% in the same 12 months.

Q. Why did Lee’s auditors question the company’s ability to continue as a going concern?

A. Given the weakness of the newspaper industry and the economy as a whole, the auditors are concerned that Lee will not be able to generate enough cash to make a $142.5 million payment due this spring on a portion of the debt it assumed when it bought Pulitzer. Failure to make the scheduled payment would trigger provisions in Lee's other borrowings that would require immediate repayment of the rest of its $1.4 billion in debt. If Lee cannot make the payment on the Pulitzer note this spring and cannot persuade its lenders to relax the terms of the other loans, then it would find itself in default on most, if not all, of its $1.4 billion in debt.

Q. What happens when a company defaults on its debt?

A. A number of things can happen, ranging from the shutdown of the business (which would be extremely unlikely in this case) to a bankruptcy filing where the company goes to court to prevent its creditors from foreclosing on the loans and seizing the assets of the business. If Lee cannot renegotiate its debt with its lenders, the company may be forced to file for Chapter 11 bankruptcy protection in substantially the same way that the Tribune Co. did in December.

Q. What happens when a company files for bankruptcy protection?

A. A Chapter 11 bankruptcy prevents lenders from seizing the assets of the business while the company reorganizes itself with an eye to emerging eventually from bankruptcy protection. This typically creates an environment where the company can negotiate better terms on its debt. A company under the supervision of a bankruptcy court will be permitted to renegotiate bills owed to vendors on everything from newsprint to rent, likely enabling unpaid trade debts to be settled for cents on the dollar. The company generally has the right to walk away from unnecessary leases on real estate, equipment and vehicles.

Q. What happens to the employees in a bankruptcy filing?

A. Wages, vacation pay, benefits and other obligations to employees usually are unaffected by a bankruptcy filing, but union contracts in some cases can be altered or abrogated. If part of the company’s reorganization plan includes reducing costs – and it usually does – then some jobs may be eliminated.

Q. How can the company avoid bankruptcy?

A. The surest way a company can avoid bankruptcy, of course, is by coming up with the cash necessary to pay its loans on time. The chief means to that end are improving sales; cutting costs to boost profitability, or selling assets like real estate, vehicles, presses or individual newspapers. In the absence of sufficient cash, a company also can urge its lenders to renegotiate its loans, which Lee is seeking to do. If the lenders are willing, the many possibilities include forgiving part of the debt, exchanging some or all of the debt for equity and extending the deadlines for repaying the loans. In almost every case, the restructuring of its debt will cost a company millions of dollars in legal and banking fees, as well as higher interest rates on its remaining debt.

Q. Lee has been warned that its shares may be removed from the NYSE. What does that mean?

A. The Big Board forbids a stock from closing at less than $1 per share for 30 consecutive sessions. Unless Lee’s shares rebound from the sub-$1 level where they have been since Dec. 1, the company is days from having its shares exiled to the Pink Sheets, an electronic trading platform for so-called penny stocks. The company said on New Year’s Eve that it will file a plan to cure the problem, but provided no details.

Q. What does it mean if Lee’s shares go off the NYSE?

A. Delisting per se is not that big of a deal. Absent an event like a loan default, business can proceed as usual for a company no longer traded on the Big Board. The resolution of the looming debt payment – whether through renegotiation, bankruptcy or otherwise – is the truly significant challenge for Lee’s management. But that is small comfort for the company’s stockholders, who watched the value of their shares sink 99% last year. The entire market capitalization of Lee was only $18.5 million on Dec. 31, 2008 vs. $677 million at the first of the year. As illustrated in the chart below, Lee’s shares have lost more than $2 billion in value since yearend 2004.

Thursday, January 01, 2009

Lee auditors issue ‘going concern’ warning

With Lee Enterprises unlikely to have the cash required to make a $142.5 million debt payment due this spring, there is “substantial doubt about its ability to continue as a going concern,” according to its auditors.

The statement is contained in multiple locations in the annual report the company filed quietly at 4:42 p.m. (EST) on New Year’s Eve. Twenty-three minutes later, the company also disclosed that it has been warned by the New York Stock Exchange that it may be booted off the Big Board because its shares have fallen below the minimum price required for continued listing.

The stock exchange forbids a company’s shares from closing below $1 for 30 trading days in a row. Lee’s shares have been trading under the $1 minimum since Dec. 1, closing Wednesday at 41 cents. With only a few days left to cure the problem, Lee said it “intends to notify the NYSE within the required period of 10 business days of its plans to return to compliance.”

Getting booted off the Big Board is the least of the company’s problems.

As discussed here, Lee, like lots of other publishers, loaded up on debt to fund acquisitions in the expectation that it could repay the loans though ever-rising sales and profits. The deep, secular decline in the newspaper industry – exacerbated by the worst economic downturn in several generations – has dashed those hopes.

In Lee’s case, the acquisition was the purchase of Pulitzer for $1.46 billion in 2005. Lee wrote off two-thirds of the value of the acquisition as a loss in 2008, according to accounting rules that require it to be treated as an “impaired asset.”

Lee took on $1.4 billion in debt to buy Pulitzer, assuming in the process the responsibility for a loan originally secured by Pulitzer. The upcoming repayment of the Pulitzer notes is the company’s most pressing concern.

With $142.5 million in principal due to be repaid on the Pulitzer loan this spring, “the company does not have sufficient cash flows to meet both its requirements for 2009 operations and repayment of the Pulitzer notes,” said Deloitte and Touche, the company's independent auditor.

Beyond the Pulitzer note, the annual report states Lee is in violation of additional requirements in its borrowings, which mandate specific ratios of cash to debt and certain other technical – but crucial – requirements known in the trade as “covenants.”

Unless Lee can begin generating substantially more profit or its lenders agree to renegotiate the loans, said the auditors, “the company has short-term obligations that cannot be satisfied by available funds and has incurred violations of debt covenants that subject the related principal amounts to acceleration, all of which raise substantial doubt about its ability to continue as a going concern.”

Acceleration of a loan means that immediate repayment is required, rather than waiting to the date it originally was due.

Noting that Lee last year paid $32.6 million in dividends and bought back nearly $19.5 million worth of its now anemically priced stock, the annual report questioned whether such expenditures would be possible in 2009. (BTW, the entire value of the company's stock today is less than $18.5 million.)

With “substantially all of the cash flows of the company required to be applied to payment of debt interest and principal,” Lee will face a reduced amount of “funds available for investment, capital expenditures and other purposes,” said the annual report, adding:

“The company’s flexibility to react to changes in economic and industry conditions may be more limited,” making it “more vulnerable in the event of additional deterioration of general economic conditions or other adverse events.”

Newspaper share value fell $64B in ’08

In the worst year in history for publishers, newspaper shares dropped an average of 83.3% in 2008, wiping out $64.5 billion in market value in just 12 months.

Although things were tough for all sorts of businesses in the face of the worst economic slump since the 1930s, the decline among the newspaper shares last year was more than twice as deep as the 38.5% drop suffered by the Standard and Poor’s average of 500 stocks.

The debacle was widespread and thoroughgoing, as detailed below. Here are some highlights from the data:

:: The shares of eight of the 14 publishers tracked in the survey fell by 90% or more. The best-performing companies were the Washington Post Co., New York Times Co., and News Corp., but WaPo, the least battered issue of all, still fell 51.5%.

:: While market capitalization surpassed $1 billion for all but one of the 13 publishers that were publicly traded at the end of 2004, only four publishers today are valued at $1 billion or more. The New York Times Co. is barely clinging to the distinction. A drop of as just a few cents per share would knock NYT out of the increasingly exclusive billion-dollar bracket.

:: The biggest loser of all was Tribune Co., which is worthless as the result of the bankruptcy filed less than 12 months after Sam Zell bought its shares for $8.2 billion to take the company private.

:: Trading for pennies, the shares of GateHouse Media, Journal Register Co. Lee Enterprises and Sun-Times Media Group are essentially worthless. GHSE, JRCO and SUTM all were banished to the Pink Sheets earlier this year when their shares fell below the rule at the New York Stock Exchange that prohibits an issue from closing below $1 per share for 30 days in a row.

:: At least two more publishers may be destined for the Pink Sheets early in 2009. Unless LEE’s shares turn around within a matter of days, it is likely to be the fourth newspaper stock booted off the Big Board. After falling below $1 per share in mid-December and failing to recover, McClatchy may not be far behind.

It is fair to surmise that newspaper stocks last year got trounced twice as badly as the broader market , because investors have not seen any plausible strategies from publishers to reverse the accelerating declines in readership, advertising and profitability that have been under way since 2006.

As if that were not bad enough, a number of publishers are staggering under the heavy debt they acquired in recent years to fund acquisitions that might have proven to be wise, if the newspaper industry had been able to replicate the steady growth in sales and profits that they largely had enjoyed in the decades since World War II.

But times changed, newspapers didn’t and investors lost faith in the long-term viability of the industry.