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.


Blogger tom said...

This has been a subject of some conjecture around the Merc newsroom: whether Hearst ends up owning MediaNews or MediaNews ends up owning Hearst.

It's considered something of a given that the Chron's being allowed to lose money to grease the skids on some kind of merged operation because the Feds'd be much less likely to intervene if one of the papers was already losing money and in danger of closing.

11:54 PM  
Anonymous Anonymous said...

Faster, please.

12:46 AM  
Anonymous Anonymous said...

Well, your use of "doughty" sent me to the dictionary, I must admit :-) "steadfastly courageous and resolute; valiant." I think that captures Clint, particularly in his oft-Quixotic runs at corrupt monopolies. I worked with him on the first antitrust case and I wouldn't be surprised to see him take a leading role yet again.

I enjoyed reading your post and will continue to follow your thoughts on the

6:35 AM  
Anonymous Anonymous said...

Well, your use of "doughty" sent me to the dictionary, I must admit :-) "steadfastly courageous and resolute; valiant." I think that captures Clint, particularly in his oft-Quixotic runs at corrupt monopolies. I worked with him on the first antitrust case and I wouldn't be surprised to see him take a leading role yet again.

I enjoyed reading your post and will continue to follow your thoughts on the

6:36 AM  
Anonymous Anonymous said...

You are providing a well detailed account of the West Coast media shakeout. I have some missing pieces to your puzzle. Heast is much stronger and financially sound than MediaNewsGroup; Singleton has managed to string together a conglomerate of failed newspapers all over the country. But they are not top tier mastheads.

The SF Chronicle brand and SF Gate audience are much more valuable than the hyped circulation numbers of Singleton's rag-tag empire. Plus, Hearst owns a major chuck of broadcast media, with shares of ESPN, and Argyle Com., in addition to the Houston Chronicle, the most profitable newspaper in the U.S. in real dollars. San Francisco is where the Hearst empire began, William R. Hearst III and George Hearst are not about to let a bottom feeder like Singleton take over.

7:05 AM  
Anonymous Anonymous said...

And what about Tribune and News Media gobbling up Orange County and San Diego? All this is left is McClatchy/

1:21 PM  
Anonymous Anonymous said...

Remember, MediaNews is Richard Scudder -- who is 95 years old (+/- six months) -- and Dean Singleton -- who is coping with multiple sclerosis and certainly not going to live anywhere near as long as his partner. Hearst is the exit strategy for their families to remain wealthy. MediaNews isn't going to take over the Chronicle; the Chronicle is going to take over the Bay Area Newspaper Group (the MediaNews entity that runs the SF papers). But the thesis that Hearst is allowing the Chron to continue to spew red ink as a sop to regulators and pesky real estate magnates is probably accurate.

1:31 PM  
Anonymous Anonymous said...

Question: How long can these news organizations continue to pollute the environment while promoting more and more novel forms of environmentalism?

Answer: Forever, unless environmentalists have an alternative to promoting their own causes.

3:10 PM  
Anonymous Anonymous said...

Are you sure this merger will happen?
Unless I read this post too fast, you mention nothing that the Chron will close it's 2-press operations and outsource all printing later in the spring. That, I'm sure, will save millions right off the bat.

4:25 PM  
Anonymous Anonymous said...

A more likely exit strategy than the one you suggest is for Hearst to have the Chronicle to go to Sunday print only and let its more popular product, SFGate, dominate the market the other days.

10:28 PM  
Anonymous Anonymous said...

"...when the economy took its worst turn in more than 75 years." Do you really believe that? Unemployment was 25% in the Great Depression. Today it's at 7% (a figure that includes those too discouraged to look for work, a recent add-on by the Labor Dept. people who want to make things look worse so they can add to their bueaucracy.). 7% is equal to the 1991-93 jobless rate. The Dow is down to 2004 levels. The problem with the media is that they distort facts the way you have and then expect an audience to show up. About a third of those who say they are dropping home-subscriptions complain about political bias.

2:38 AM  
Blogger SactoMan01 said...

The newspapers are dying for two reasons:

1. They can't keep up with modern communications technology, particularly the public Internet. Why wait once a day for a paper when you can get constantly updated news on 24-hour news channels on cable/satellite TV or the public Internet? Especially now with "smart" cellphones that can receive the latest news--even real-time video!--over EVDO and HSDPA high-speed data networks.

2. The newspapers' strongly perceived loss of objectivity has SERIOUSLY hurt subscription rates. They've forgotten former New York Times Editor-in-Chief Abe Rosenthal's dictum: don't editorialize in the main stories of the newspaper.

4:02 AM  

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