Wednesday, February 25, 2009

SF Chron plan: Web fees, job cuts, givebacks

Higher subscription prices for the print product, pay-per-view sections on the website, scores of job cuts and sweeping union givebacks are included in management’s plan to eliminate the operating loss threatening the San Francisco Chronicle.

These steps – and others – were discussed in emergency meetings today between management and union representatives after Hearst Corp. threatened on Tuesday to close the paper if it cannot reverse an operating loss that otherwise would surpass $1 million a week in 2009. The company, which has plowed more than $1 billion into the newspaper in the last eight years without earning a dime of profit, said it lost more than $50 million in 2008.

Management did not reveal the precise number of jobs targeted for elimination, according to sources familiar with the discussions with the California Media Workers Guild and the local Teamsters chapter. In keeping the with the federal law that requires employers to alert workers to any plans to reduce the force by more than 50 employees, the unions were told only that “more than 50 positions” would be scrapped.

As reported here, it would require the elimination of nearly half of the 1,500 employees of the newspaper to wipe out the operating deficit.

To avoid cutting that deeply into the staff, the Chronicle plans to boost revenues by increasing subscription prices for the newspaper and to begin charging consumers for access to certain features and sections at its website. The site, SFGate.Com, now is entirely free.

The pain in San Francisco will be felt throughout the building. Union reps were told that the management ranks will be thinned through layoffs and that a pay freeze for exempt personnel already has been instituted.

A major concession sought from the Guild is the removal of most of the newspaper’s advertising sales staff from union jurisdiction. The move presumably would make it possible to convert the ad staff from hourly wages to a commission-oriented system that would award high producers and weed out low-grossing reps. The company proposes to de-unionize ad reps hired after 2006.

Other givebacks requested by the company would lengthen working hours; trim vacation, sick pay and maternity leave; permit layoffs without regard to seniority; roll back pension contributions; permit the hiring of occasional employees, and suspend a $30-per-week raise scheduled for most Guild workers in January, 2010.

Union sources said they believe management will sell or close the paper if major concessions are not achieved in a “matter of weeks.” Further negotiations are planned on an expedited schedule and the Guild pledged on its website “to do all we can to reach an agreement that will keep the Chronicle open and return it to profitability.”

Among the budget-balancing initiatives, the Chronicle wants the right to outsource certain duties now under Guild jurisdiction, such as the composition of advertising. The ads for the neighboring newspapers operated by MediaNews Group are created in India, achieving a savings of nearly 50% of the cost of producing them in Northern California.

The Chronicle already is well on the way to implementing a plan to print the paper in a non-union plant in suburban San Francisco that will be operated by a Canadian company. When the highly automated plant opens this summer, the members of the paper’s pressmen’s union will be out of thier jobs.

There are potential outsourcing opportunities for the newsroom, as well. One possibility would be to send copyediting, headline writing and page layout to India.

Alternatively, according to one rumor making the rounds today, those duties could be handled at the Chronicle’s sister paper in Houston. Not only would labor costs be lower in Houston than San Francisco, but the difference in time zones would keep the Texas editors busy in the slack time between editions of their own publication.

Looks like Tierney is in the ejection seat

Brian Tierney’s days appear to be numbered as the chief executive of Philadelphia’s Inquirer and Daily News.

If and when he departs, drastic cost cutting is sure to follow as Tierney’s beloved dailies come under the control of the evidently frustrated creditors who are on the hook for $412 million in debt and additional accumulated interest payments.

“This is a company in need of parental supervision,” one of the attorneys representing the newspapers' top creditors said in a hearing Tuesday on the Chapter 11 bankruptcy filing by Philadelphia Newspapers, L.L.C., according an article in the Philly Daily News.

Tierney and fellow hometown investors founded and funded Philadelphia Newspapers in 2006 to buy the papers during the liquidation of Knight Ridder, its long-time owner. As a consequence of this week’s bankruptcy filing, Tierney’s investors lost $150 million, with the flamboyant former press agent himself taking a $10 million hit.

Bankruptcy documents and the oral arguments in court reported by the Daily News indicate there has been a fair amount of friction between Tierney and his lenders. With the company long in default on its obligations and now in bankruptcy, creditors will have considerable leverage to change management if they deem it to be recalcitrant.

The comment calling for “parental supervision” suggests that at least one creditor thinks a change is in order.

Tierney did himself no good when he boosted his pay by 38% to $850,000 a year in late 2008 at a time when the company was unable to pay its loan obligations. Although Tierney Tuesday rescinded the raise for himself and two top aides, the move will not soon be forgotten by either the creditors or the short-handed staffs of his struggling newspapers.

According to unnamed sources cited by the Daily News, Tierney also has rejected the suggestion from “some of the company's creditors” who have proposed shutting the tabloid to save money at a time the company’s cash flow is projected in court documents to be on track to plunge 30.5% this year to $25 million from $36 million in 2008.

“As long as I'm running the place, the Daily News will never be closed and we'll never rescind our contracts,” Tierney told the Daily News.

The tab’s staff can take small comfort in such bravado, given Tierney’s slippery grip on his job.

Tuesday, February 24, 2009

SF Chron cost-cut target equals 47% of staff

If the San Francisco Chronicle had to slash enough payroll to offset the more than $50 million operating loss threatening its future, nearly half of its 1,500 employees would be dismissed.

That’s the magnitude of the challenge facing the managers and union representatives who were tasked today by Hearst Corp. to find a way to cut the paper’s mushrooming deficit – or else.

After losing more than $1 billion without seeing a dime of profit since purchasing the paper in 2000, the Hearst Corp. today threatened to sell or close the Chronicle if sufficient savings were not identified to staunch operating losses surpassing $1 million a week. Without significant cost reductions, the losses would accelerate this year as a result of the ailing economy, said Michael Keith, a spokesman for the paper.

To wipe out a $50 million loss, let alone make a profit, the paper would have to eliminate 47% of its entire staff, assuming an average annual cost of $80,000 per employee for salary, benefits and taxes. Because any savings package presumably would include more diverse measures than just cutting payroll, the eventual staff cuts likely would be less severe than this theoretical number.

But publisher Frank Vega made it clear in a letter to his staff that labor cuts are a top priority. “First and foremost of these cost savings will be a significant reduction in force across all areas of our operation affecting both represented and non-represented employees,” he said. “Our current situation dictates that we accomplish these cost savings quickly. Business as usual is no longer an option.”

Nearly half of the newsroom of the Newark Star-Ledger was eliminated last year after its owner, Advance Newspapers, threatened to sell or shut the paper if drastic expense-reductions were not achieved. Deep staff cuts also were negotiated with unions elsewhere in the plant to stem a loss that management pegged at $40 million a year.

Beyond cutting payroll at the Chronicle, other ways to reduce expenses would be further constricting the paper’s already diminished circulation footprint, making additional cuts in the paper’s already shrunken newshole and outsourcing such activities as editorial production, ad makeup and delivery.

The Chronicle already has hired Transcontinental Inc., a Canadian company, to begin printing its papers this summer at a new plant built at a cost of $150 million to $200 million, according to production experts. It is widely believed that the long-term contract with Transcontinental would require Hearst to pay the printer at least the cost of the plant if it were to close the paper at any point during the life of the agreement.

So, Hearst evidently has a powerful incentive to avoid shutting the Chronicle – a motivation it did not possess last month when it declared that it would close its money-losing Seattle Post-Intelligencer unless a buyer emerged within 60 days. To date, no purchaser has stepped forward in Seattle, just as no buyers have been announced for such once-desirable properties as the Miami Herald, the Rocky Mountain News and the San Diego Union-Tribune.

Unlike many of the other papers that have been on the block for months with no takers, the Chronicle has a potential buyer in MediaNews Group, which operates a sprawling complex of newspapers across Northern California whose collective audience dwarfs the Chronicle’s 370k daily circulation by more than 2 to 1.

Far from competing at arm’s length, MediaNews and Hearst became business partners in 2006 when Hearst put up about a third of the money needed to fund a complicated, $1 billion deal that helped MediaNews acquire two of its largest titles in the San Francisco area, the San Jose Mercury-News and the Contra Costa Times.

In exchange for helping MediaNews buy the two former Knight Ridder papers, 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.

As reported here in a post last month predicting that Hearst was bound to lose patience with the mounting losses at the Chronicle, a plan to sell the Chronicle to MediaNews potentially would be challenged by the antitrust division of the U.S. Justice Department.

Historically, the Justice Department has been wary of approving the combination of competing newspapers in a market for fear the surviving entity would use its leverage to raise advertising rates. When approval was given, the newspapers were required to create joint operating agreements requiring them to maintain separate editorial departments while combining ad sales, production and circulation activities.

Several JOAs have unwound in recent years because publishers could no longer bear their operating losses. Given the weakened state of the newspaper industry and the wide number of competing ad media enabled by interactive technologies, antritust objections to newspaper mergers – and JOAs – may be about to become relics of the past.

At the end of the day, Clint Reilly, a former political consultant who became a real estate magnate in San Francisco, may turn out to be a more formidable foe than the Justice Department if Hearst tries to combine the Chronicle with MediaNews.

Reilly hauled Hearst into federal court not once, but twice, to protest what he deemed to be anticompetitive activities in the Northern California market. The second time, he charged MediaNews, too. He won both civil cases, costing the publishers many millions in legal fees.

Asked today if he would oppose teaming the Chronicle with MediaNews, Reilly said he would have to think about it.

Related posts

Something’s gotta give at SF Chron

Staff cuts won't cure SF Chron woes

Is S.F. Chron next on Dean's list?

Monday, February 23, 2009

Bankruptcy could kill Philly Daily News

The bankruptcy filing of Philadelphia Media Holdings could deliver the deathblow to the Philadelphia Daily News.

The gritty and colorful tabloid – whose circulation is about a third of its sibling, the Philadelphia Inquirer – is the most logical place for publisher Brian Tierney to find the significant operating savings that will enable him to restructure the debt that has overwhelmed his young media company.

Tierney and the investors who helped him buy the papers in 2006 all but certainly lost their collective investment of about $150 million when Philadelphia Media Holdings on Sunday filed for Chapter 11 bankruptcy protection. The filing, which seeks to protect the company from creditors owed some $412 million in debt plus additional accumulared interest payments, is the fourth by a major publisher in three months.

Journal Register Co. sought bankruptcy protection on Friday, the Minneapolis Star Tribune sought protection in January and Tribune Co, sought protection in December. The relative financial health of certain other publishers is detailed in the most recent iteration of the Default-O-Matic.

Although the Philly Daily News has a loyal following with an average of 97,694 copies per day, the costs of producing a second title may be something Tierney no longer can bear in the worst environment for newspaper advertising in history. The long-running secular declines in readership and advertising have been aggravated by the continuing deterioration of the global economy.

Closing the Daily News would enable Tierney to achieve across-the-board savings on everything: editorial, production, marketing and circulation. The shutdown of the Daily News presumably would give management the ability to eliminate certain positions mandated today under contracts with the unions that produce and deliver its papers.

Most of the savings probably would be go toward repayment of the company’s debt in the new deal that Tierney has said he hopes to craft with his lenders. When the economy turns around, any surplus profits generated by the surviving Inky could be used to fund such potential strategic projects as suburban weeklies or online and mobile initiatives.

Although shuttering the Daily News would be painful, Tierney has an advantage in the evident familiarity that a substantial number of Daily News readers have with the Inky. The Inky’s circulation swells to 556,426 on Sunday from 300,674 during the week, suggesting that a fair number of Daily News readers take the Inky on Sunday.

To ease the transition for Daily News readers, the Inky would prominently feature signature features and writers from the Daily News and might even consider publishing a tabloid edition of itself for six months. The Chicago Tribune recently began printing a tab version of itself to boost street sales and mimic the format of the competing Chicago Sun-Times.

FOOTNOTE: Things aren't all glum in Philly. Forbes Magazine reports that it discovered in the bankruptcy papers that Tierney got a 38% pay raise two months ago to $850,000.

Sunday, February 22, 2009

JRCO cut 50% of papers, 15% of jobs

Journal Register Co. radically slimmed down its operations in the year leading up to its bankruptcy filing, shedding half of its non-daily newspapers and 15.5% of its work force.

Details of the unsuccessful effort to avoid default on the company’s debt are contained in the documents supporting the bankruptcy petition filed Friday in Manhattan. The petition seeks to reorganize JRCO as a privately held firm owned by the lenders holding the company’s $646.3 million in debt.

The extent of the cutting at the company in the last year is revealed by comparing its 2007 annual report with the affidavit filed in support of the bankruptcy petition by James Hall, the company’s chief executive. The comparison reveals:

:: The company has shrunk to 159 non-daily newspapers today from 321 titles at the end of 2007, representing a 50.5% reduction.

:: The number of full-time equivalent employees dropped to 3,465 today from 4,100 at the end of 2007, reflecting a 15.5% decline.

:: The number of daily newspapers fell to 20 from 22 as the result of the sale last year of the properties in New Britain and Bristol, CT.

Some of the headcount reduction would have been associated with the sale of the Connecticut properties, but Hall’s affidavit states that the company sought economies throughout its operations in the last year by eliminating “duplicative efforts in outside sales, inside sales, production, operations, editorial and circulation.”

Even prior to the declines in circulation and advertising that have caused many publishers to streamline their operations, Journal Register was known as being perhaps the most tight-fisted operator in the newspaper industry.

The company’s lean – and some say mean – operating philosophy was enforced by Robert Jelenic, its founder and long-time chief executive officer. Stricken with cancer, Jelenic resigned in November, 2007, and died 13 months later.

When he departed the company, Jelenic was awarded more than $6.3 million in salary, severance and other compensation. Evidently some of the pay was deferred, as his estate is listed in the bankruptcy documents as being owed up to $749,311.

Saturday, February 21, 2009

Journal Register files for Chapter 11

UPDATED at 4:15 p.m. PST on Feb. 21, 2009

The Journal Register Co. quietly filed Friday for Chapter 11 bankruptcy protection, becoming the third publisher in as many months to succumb to an overwhelming debt load.

Journal Register, whose stock closed Friday at a third of a cent per share, had shut dozens of its non-daily newspapers since the first of the year in an effort to raise enough cash to avoid defaulting on $646.3 million in debt.

The business achieved a 14.3% operating profit on sales of $428 million in the last 12 months, but the cash flow was inadequate to manage a debt load in excess of 10 times its profits.

After missing scheduled debt payments last year, JRCO persuaded its lenders to hold off on declaring a default. The so-called forbearance agreement lapsed a few weeks ago and documents filed along with the Chapter 11 case indicate the Journal Register seeks to be reorganized as a privately held company owned by the lenders.

The Journal Register filing was not announced by the company on Friday and its website did not respond for most of the day Saturday until about 7 p.m. Eastern time, when the company issued this press release about the filing.

The initial confirmation of the bankrupcty was obtained at the website commonly used by bankruptcy attorneys to manage cases. The online filings show the company had $736.6 million in liabilities and $596.2 million in assets, as of the end of November, 2008.

A company that grew through aggressive acquisitions, aggressive financings and even more aggressive management of operating costs, Journal Register traded as high as $21.84 per share in 2004 before being banished to the Pink Sheets last year when its shares fell below the $1 minimum required for listing on the New York Stock Exchange. The strategic missteps that led to the downfall of the company were described in this post.

JRCO owns the New Haven (CT) Register and about two dozen dailies and several hundreed non-daily publications. It has shut at least three dozen of the 321 non-daily properties it claimed in its 2007 annual report.

In seeking protection from its creditors in a federal court in Manhattan on Friday, JRCO joined in the Tribune Co. and the Minneapolis Star Tribune in Chapter 11. Tribune filed in December just days short of the first anniversary of its acquisition by Sam Zell and the Strib filed last month.

Friday, February 20, 2009

Lee dodges bankruptcy

It may be “good news” for the lenders and management of Lee Enterprises that the company was able to renegotiate the loans that threatened to plunge the publisher into bankruptcy this spring.

But the strict new terms of the loans will step up the pressure on the company – and, therefore, its employees – to achieve the stringent profit targets established in the new financings. Failure to stay on the straight and narrow in the best case will result in higher interest payments and in the worst case could put the company back at risk of default.

Lee’s auditors on New Year’s Eve issued a “going concern” letter expressing doubts about the company’s ability to continue as a sustainable business because it lacked the cash to make a payment on a $306 million note due in April.

In the new financings announced yesterday, the company repaid $120 million of the loan due in April and stretched out the rest of the payment over three years. At the same time, the company was able to revise the terms on another $1.1 billion in debt to buy more time to pay it back.

In an example of how this works, the company now is obligated to pay only $22.1 million against the $1.1 billion in September, instead of the previous requirement to pay $54.9 million. At the same time, the company has agreed to pay higher interest rates on the loans, which will reduce the resources available for investing in the business or restoring its dividend, which was suspended as the company mustered all available cash to service its debt.

The interest rates on Lee’s loans in the future will be calculated on sliding scales that measure the ratio of the company’s debt to its profits. The lower Lee’s profits go, the higher its interest payment will be. That, in turn, will require more of the company’s profits to be plowed into interest payments, instead of, say, investments in staff or new interactive products.

To keep borrowing costs down, therefore, management will be endeavoring to keep profits as high as possible. In the absence of robust sales, this potentially could mean further cutbacks in staff, newshole and perhaps even the suspension of publication on certain unprofitable days of the week.

Given the parlous condition of the economy and the newspaper industry, Mary Junck, the chief executive of the company, is justified in calling the agreement “good news.” Operating as a going concern is far better than operating in bankruptcy. But let’s not get carried away.

While dodging bankruptcy helped lift Lee’s stock by 57.6% today to 52 cents a share, the company’s shares are still well below the $1 minimum required for continued listing at the New York Stock Exchange. And Lee’s stock is 95.4% lower than it was one year ago today, when it closed at $11.32.

Monday, February 16, 2009

What would Jeff Jarvis do?

Free is a business model. I know this, because Jeff Jarvis says so. Actually, I think Chris Anderson, the author of “The Long Tail” may have said it first. Be that as it may, here’s the question:

Given Jeff’s deeply held belief that content should be free, why is he charging a retail price of $26.99 for his new book?

The central thesis of Jeff’s book, “What Would Google Do?”, seems to be that music, news stories, legal advice and other types of intellectual property should be free to roam the web to create links and communities which, somehow, Providence eventually will monetize.

So, why is Jeff charging $27.99 for the audio version of his new book?

Weighing in here on why the news should be free, Jeff opined at his popular blog, BuzzMachine: “Experience just tells us that it’s hard to charge for content, that charging brings other costs (subscriber acquisition marketing, customer service, churn), that it has other impact (draining Googlejuice and online branding and taking the content out of the conversation), that there is always another competitor who will offer content for free, and that once information is known, it becomes a commodity. See: TimesSelect. Charging is definitely a case of swimming upstream.”

So, why is Jeff charging $14.84 for the Kindle version of his new book?

Wondering why anyone would pay for the news or an opinion column, Jeff observed here: “A news story or an opinion, like a song, is unique—that you can’t get it somewhere else and so you have to buy the original. If I can’t get Allentown, the original, I’m not likely to settle for a cover. But if I can’t get [the column by David Carr the New York Times suggesting micropayments for newspaper articles], believe me, I can go elsewhere and find plenty more columns and blog posts just like it. And even if Carr had a unique idea here, the essence of it—without guitar accompaniment—can spread without having to hear him sing the tune. Information isn’t art. Neither are opinions.”

So, why is Jeff charging $9.99 to download a video infomercial for his new book?

He forthrightly answered the question himself here in Newsweek: “I'm a hypocrite. I didn't put this book up as a purely digital, searchable, linkable entity — I didn't eat my own dog food —because I got an advance from the publisher, and other services. Dog’s gotta eat. I couldn't pass it up.”

Speaking of dog food, I need to go buy some myself. I hope the store accepts Googlejuice in lieu of cash.

Sunday, February 15, 2009

Tip-jar journalism: Slim pickin’s for pubs

Kachingle is not going to make the cash register jingle very loudly at most newspapers, so let’s skip the idea of installing electronic tip jars at websites in the hopes publishers can collect enough spare change to pay their reporters.

For those who missed the paean to Kachingle by my friend Steve Outing (and a follow-up here), it is a service that would let website visitors pay for content on the honor system. Here’s how it would work:

Instead of requiring surfers to pay for content before they view or listen to it, Kachingle would install a button on participating sites to enable a visitor, if so inclined, to tithe a few pennies to the publisher after consuming the content. It’s strictly voluntary. A skinflint could surf all day without spending a penny.

In all the 3,842 words of his original argument for Kachingle, however, Steve forgot to do the math. So, I did.

And I discovered that a Kachingle-like system might produce some decent revenues at the most heavily trafficked newspaper sites but wouldn’t make a material contribution to covering the costs of producing any paper’s website.

To calculate the potential of the tip-jar system, I obtained the number of page views for several newspapers in 2008 from Nielsen Online. I assumed that site visitors would click the Kachingle button on 2% of the pages, which is a reasonably high response rate for most sorts of voluntary activities on the web. I further assumed that the newspaper would get an average of 2.5 cents per click, net of the commission Kachingle charged to participate in its network.

As you can see in the table below, the tip system might generate revenues of nearly $3.7 million a year for the New York Times, the busiest of all newspaper sites with 7.4 billion page views in 2008. The $3.7 million would pay 24.5 journalists making an average of $150,000 per year. Although that sounds pretty good, bear in mind that the paper has a newsroom staff of about 1,300 individuals. So, Kachingle would cover the cost of only 2% of the staff.

In the case of the San Diego Union-Tribune, where web traffic last year was 110.3 million page views, the projected Kachingle revenue would be $55,154 per year. That’s enough to pay for three-quarters of a reporter making $75,000 a year. (In all cases but the NYTimes, I assumed average pay and benefits of $75,000 per reporter.)

The web traffic is too low for Nielsen to measure in places like Peoria, IL, New Haven, CT, and Tuscaloosa, AL. It seems safe to assume that tips from Kachingle would be proportionately modest in each of those markets, too.

On to the next idea…

Wednesday, February 11, 2009

Default-O-Matic update: Closer to brink

Six of the 11 publishers covered in today’s edition of the Default-O-Matic either are at the brink of default or already have gone over it.

The publishers most likely to be unable to satisfy the terms of their debt are MediaNews Group and Morris Publishing, according to the latest ratings from Moody’s Investors Services, a company hired by borrowers to gauge their likely ability to repay their debt.

The debt of MediaNews and Morris each is rated Caa3, which reflects a 72.9% chance that the company will not be able to fulfill its debt obligations. Morris already has retained bankruptcy lawyers but officers of privately held MediaNews steadfastly have asserted that the company is in better financial shape than its ratings would suggest.

After those two publishers, the newspaper company next most likely to default is McClatchy, according to Standard and Poor’s, a competitor of Moody’s. S&P, which uses a different nomenclature than Moody’s, scores MNI’s debt at CCC, which is one notch higher than the MediaNews and Morris ratings. A CCC rating indicates a 48.3% chance of default.

Although the bond rating agencies usually come out fairly closely on a company’s rating, McClatchy gets a far better score from Moody’s than from S&P. Moody’s rates MNI at Ba2, which indicates only a 7.5% chance of default. McClatchy has renegotiated the terms of loans due in the second half of this year. While Moody’s believes the company to be able to comply with the new terms of the obligations, the ratings by S&P and Fitch, yet a third rating service, suggest a considerably higher level of doubt.

The companies that already have gone over the brink are Tribune Co., the Minneapolis Star Tribune and Journal Register Co. Less than a year after being taken private in a daring $13 billion transaction, Tribune filed for bankruptcy protection from its creditors because it could not make certain scheduled loan payments. The magnitude of the numbers was much smaller but the story was the same at the Strib.

Although over-leveraged Journal Register has not filed for bankruptcy protection, it has stopped repaying its debt to conserve cash, has quietly closed more than three-dozen weekly newspapers and has seen the value of its shares fall to barely half a cent.

Last week, the company announced that the agreement which permitted it to suspend interest payments has lapsed and "there can be no assurance" of "a consensual restructuring" of the debt or that its lenders "will not seek to enforce their rights under the credit agreement." In plain English, this means the creditors could take over the company.

The Default-O-Matic survey is by definition anecdotal, because published bond ratings are not available for all newspaper companies. Notwithstanding this limitation, the trend is instructive, if not to say chilling.

Since the last D-O-M update in August, the New York Times Co. tumbled into junk-bond territory after previously being considered an investment-grade credit. At a rating of Ba3, NYT is a relatively high-quality junk bond with a 10.7% probability of default. NYT is mortgaging a portion of its new headquarters in New York and borrowing $250 million from a Mexican telecom magnate to strengthen is finances.

Here’s why a slide to junk-bond status matters: Insurance companies, pension funds and many other institutions are not permitted to buy junk bonds because the likelihood of repayment is deemed to be too risky for a prudent fiduciary. They are permitted to buy only invest-grade securities.

A company with a junk rating has to pay higher interest rates to the community of investors who have the appetite for such risk. In the current credit-constrained environment, a borrower losing its investment grade status would see its interest payments rise by 33% or more.

With the NYT in junk territory, only three newspaper companies retain investment-grade status: Washington Post Co., E.W. Scripps and Gannett.

While WPO recently received confirmation of its A1 rating, the highest mark of this group but five notches from the highest possible score, Gannett was downgraded to the lowest of the five levels in the investment-grade category. Now rated Baa3, GCI joins Scripps, which has been at the same level since the summer.

In cutting Gannett’s credit rating last week, Moody’s said it was commencing a “review for further downgrade.”

So, the Default-O-Matic may be making another appearance before long. (Click the image below to make it larger.)

Tuesday, February 10, 2009

Cablevision chokes on Newsday

Cablevision’s investment in Newsday flamed out even faster than I expected when I wrote 10 months ago that the over-priced deal was unlikely to succeed.

But the company’s decision to declare as a loss up to 70% of the value of the newspaper might be good news for Rupert Murdoch, who declined to match the aggressive $650 million that Cablevision paid last year in a three-way bidding war for the property.

In addition to Cablevision and Murdoch, the third potential buyer in the auction skillfully staged by the strapped Tribune Co. was Mortimer Zuckerman, the owner of the struggling New York Daily News.

Murdoch, who might be motivated now to seize on the likely disenchantment of the folks at Cablevision to make a low-ball offer for the paper, was the odds-on favorite in 2008 to buy the Long Island tabloid. That’s because he could have reaped an estimated $100 million in annual savings by combining certain editorial, ad sales, production and circulation operations at Newsday with those of his perennially unprofitable New York Post.

Murdoch’s News Corp., which itself has been far from immune to the monumental misfortunes of the newspaper business, just had to write off something like half of the $5 billion it paid for the Wall Street Journal and other assorted Dow Jones assets. But the cost savings that could be realized by twinning Newsday and the Post could make a right-priced deal compelling.

Murdoch declined to stretch for Newsday last year when it became clear that Cablevision was intent on paying top dollar for the Long Island property. Insiders say Charles Dolan, the founder and patriarch of the family that controls the cable-and-entertainment powerhouse, long had coveted Newsday.

But the intervening months have not been kind to newspapers in general and to Newsday in particular. Now, the cable guys are stuck with running a faltering, over-priced acquisition in a collapsing economy.

Given the less than ideal way the Newsday initiative has worked out for Cablevision, an unsolicited overture from Murdoch for the paper might be well received. That’s assuming, of course, that the Dow Jones writeoff hasn’t soured Murdoch on newspapers.

Monday, February 09, 2009

How to charge for content. Theoretically.

Second of two parts. First part here.

It won’t be easy for publishers to overcome the Original Sin of giving away their valuable content for free. But it could be done. Theoretically.

The most logical way, as suggested prominently by David Carr in the New York Times and Walter Isaacson on the cover of Time Magazine, is some sort of micro-payment system.

Here’s how it would work: Consumers would use their credit cards to fund accounts to purchase online content through a single system deployed at the largest possible number of participating websites. We might call the system the Universal Simple Interactive Network, or UN-SIN for short.

Whenever a consumer wanted to watch a video, view a picture, listen to a podcast or read an article, she would click the UN-SIN button on the web page or mobile screen to authorize payment.

The amount of the charge would be up to the individual publisher but presumably would be kept to pennies, or even fractions of pennies, to encourage maximum readership. Consumers might not like being micro-nickled and nano-dimed for every article, but they would get over it, if the content were sufficiently compelling.

The problem with this otherwise-elegant solution is that UN-SIN wouldn’t work for one publisher if a competing publisher decided to provide the same, or nearly identical, content for free. If one publisher posted the score of a hockey game in the clear to gain traffic, then his competitors would have to do so, too. And the initiative would quickly collapse.

The other gotcha is that content would have to be secured so that someone who bought it could not turn around and provide it to a friend or, worse, publish it to the web in defiance of UN-SIN. Although this is a non-trivial technical problem, it already has been solved reasonably well by a number of companies.

I headed one such company, called SealedMedia, until the tech bust in 2001. Our technology was awesome, our system was effective and it was priced to appeal to even the thriftiest client. But only a handful of publishers were smart enough to put a priority on getting paid for their content. Today, they are doing quite well. So, I know this can work.

Because there is little hope of securing such generic news as breaking events, stock prices, election results and sports scores, the only content that publishers can sell in the immediate future is exclusive, premium content that they create themselves. A major hurdle in moving to pay content, therefore, will be cost-effectively producing enough of the right kind of content to get customers to click the UN-SIN button.

This is the approach the New York Times employed with TimesSelect, which briefly put its marquee columnists behind a pay firewall. The paper abandoned the program a couple of years ago in the hope it would generate more page views, and thus more banner ad revenues, by providing free access to the likes of Paul Krugman and Maureen Dowd. Editor Bill Keller told readers last week that the financially pressed Times is revisiting the idea of getting paid for its content.

Although a specialized newspaper like the Wall Street Journal has successfully required payment for its articles, the widespread adoption of paid content among general-interest media would require a critical mass of publishers to agree to collaborate more earnestly, more broadly and more smoothly than any group of humans in history.

Could it happen? Theoretically.

Sunday, February 08, 2009

Mission possible? Charging for web content

First of two parts

It is going to be just as tough for publishers to overcome their Original Sin as it has been for mankind to get past the original Original Sin committed when Adam and Eve partook of the forbidden fruit.

The Original Sin among most (but not all) publishers was permitting their content be consumed for free on the web. Now that ad sales are about as low as the belly of the snake who caused the mischief in the Garden of Eden, a growing number of us have concluded that consumers are either going to have to start paying for professionally generated content or there won’t much of it left.

But it isn’t going to be easy getting them to do so, because free is the presumptive price of news, information and entertainment on the web.

The challenge facing media companies trying to charge for something they have given away for 1½ decades is illustrated by the experience of the recording industry, which has been far more proactive than most print publishers and broadcasters about trying to protect its product on the web.

In 2005, the most recent year for which statistics are available, 10 times more songs were downloaded illegally than were purchased lawfully, according to the Recording Industry Association of America, the music industry’s content cop, and the Institute for Policy Innovation, a Texas-based think tank whose research is cited by the RIAA.

As illustrated in the chart below, the institute estimates that 12 billion songs were downloaded illegally in the United States in 2005. In the same year, the RIAA reports, 634.8 million physical units of CDs, tapes and music videos were sold, while 553.1 million tunes were purchased on the Net and for mobile devices.

iTunes notwithstanding, my hunch is that the proportion of bootlegged music is higher today than it was four years ago. And, remember, this happened despite the music industry’s vigorous and consistent campaign against piracy.

Life today would have been easier if newspapers, magazines and other print-to-web media had recognized in the first place that their content was too valuable – and too expensive to create – to simply give it away on the Internet.

This colossal strategic miscalculation bit publishers extra hard, because easy-to-acquire free content on the web rapidly undercut the demand, and therefore the revenues, for their flagship physical products.

"Why would consumers buy the cow when the milk is free?” I asked in one of the earliest posts to this blog in December, 2004. “If a newspaper gives away its costly and valuable product for free on the Internet, it may win friends and influence people in cyberspace, but it won't gladden the advertisers who pay the freight back here on Mother Earth.”

Even now, an amazing number of publishers defend free content, because it generates tons of page views for all the banner advertising they hope to sell. The problem with this thinking is that banners are fast becoming the lowest form of advertising life on the web, because marketers favor targetable and verifiable ads that require payment only when a consumer clicks on them.

Cost-per-action ads also are popular because they are a whole lot cheaper than the sprawling displays in newspapers and magazines that a legendary merchant once famously noted are disregarded by at least 50% of readers. “Half the money I spend on advertising is wasted,” John Wanamaker is reputed to have observed. “The trouble is I don't know which half.”

Wanamaker kept buying ads, but modern advertisers don’t have to. And they aren’t.

With the web awash in inventory and the demand for advertising slumping as the economy swoons, ad rates today are half of what they were a year ago. That’s another good reason to think about alternatives to the banner ad.

Next: How to get consumers to pay

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Thursday, February 05, 2009

Can newspapers transition to digital?

Last in a series. Previous installments are here, here and here.

It is all but certain that falling advertising sales, declining readership and rising costs will begin killing off some print newspapers in a matter of weeks, months or years.

If so, the choice for their publishers will be either to migrate to strictly digital operations or to shut down altogether. The problem for publishers hoping for digital reincarnation is that most are seriously unprepared to be full-on interactive competitors.

In but one measure of the staggering challenge they face, analyst Tom Corbett of Morningstar calculated that publishers recaptured just 1.7 cents in online ad revenue for every $1 of print advertising that they lost in the first nine months of 2008. In other words, publishers last year took 100 steps backward and 1.7 steps forward.

To be sure, not all print operations are doomed. Where there is sufficient demand for printed papers among readers and advertisers in the future, they will continue to be manufactured (though not necessarily on all seven days the week).

Where the expense of producing and distributing the physical product outstrips the ability of publishers to profitably produce it, then printed papers will succumb. How long can even the mighty Hearst Corp. afford to spend $10 per copy to print and deliver the Sunday San Francisco Chronicle to subscribers who pay only $20 for a weeks-long promotional subscription?

As discussed in the earlier installments of this series, newspaper companies in a post-print world would have to rebuild almost every fundamental aspect of their businesses, from their capital structures and revenue streams to their audience bases and products. (For a second opinion, see this prescription from Dr. Mark Potts.)

It is difficult to imagine how a newspaper company forsaking print today could avoid defaulting on the billions it borrowed to fund ill-starred acquisitions or avoid further erosion in the deeply discounted values of their franchises.

In light of the highly constrained economic resources likely to be available to them, digital-only newspapers would be hard pressed to maintain the depth and breadth of professional journalism produced by even today’s most minimally funded newsroom.

If newspapers are going to be saved in a semi-recognizable form – whether in print, online or some other way – then a number of changes have to happen fast to restore the economic well being of an industry that has failed for nearly two decades to adapt to radical changes in technology, demographics and consumer behavior.

Here’s what needs to be done, urgently:

:: Newspapers should do everything they can to sustain a profitable print business as long as they can to fund the development of a diversified portfolio of media-agnostic publishing brands. While it is fine for them to produce papers (ideally in outsourced production facilities), they should be equally open to exploiting web, mobile and other delivery platforms. The only factor that should matter is whether the medium is profitable.

:: Newspapers should leverage their content-creation and marketing resources to create cost-effectively produced niche products geared to carefully selected audiences attracting a sufficiently large group of advertisers to assure commercial success. Newspapers that find it unprofitable to publish Monday or Tuesday should endeavor to develop new weekly niche products to replace them. They may or may not carry the flagship newspaper’s brand.

:: Newspapers have to abandon their all-but-exclusive dependence on display and classified advertising in favor of modern interactive formats than enable marketers to efficiently target customers on a pay-per-acquisition basis. The new media should include, but not be limited to, contextual advertising, search advertising and Yellow Pages-style directories. Newspapers should be leaders, not followers, in deploying (but not building!) advertising-delivery systems targeted to the demographics, expressed preferences and behavior of consumers.

:: Because the revenues associated with cost-per-acquisition advertising are going to be lower than the print and online rates typically charged by newspapers, publishers will have to sell advertising to far more small and medium advertisers than they historically have done. Because the value of those orders will be smaller than the schedules purchased by large advertisers, newspapers will have to develop efficient inside sales teams, rather than making the costly in-person sales calls they favored in the past. Telephone sales can be readily outsourced, affording significant cost savings in many cases.

:: Publishers also can reduce their sales expenses by developing Google-style systems that empower merchants to create, buy and pay for advertising without human intervention. To get there from here, newspapers will have to invest in acquiring (but not building!) the systems to support such services. They also will have to market aggressively their do-it-yourself ad services to both customers and potential customers.

:: Newspapers should become interactive media consultants, providing content-creation and marketing services to their client base. This would include everything from producing videos and blogs for customers to managing their search-engine optimization and keyword advertising campaigns on third-party sites. Papers should outsource SEO and SEM services to companies with that native skill.

:: The unlimited distribution of free content has to stop. While teaser snippets may be offered to strategically whet the interest of casual readers who can be turned into paying customers, newspaper companies must reassert their right to be paid for the content they create. It makes no sense to focus on driving page views when banner ad rates are deteriorating because advertisers favor targeted interactive formats whose results can be verified and measured.

:: With generic news and information freely available on the web, the only way newspapers can successfully charge for content is by creating unique and valuable information. To do this, they have to adequately staff their newsrooms. Starving this vital operation will be strategically disastrous, because weak content will turn off loyal readers and repel new ones.

:: Newspapers cannot afford to author everything they publish. They must develop compelling content by aggregating and editing data that can be easily and appealingly acquired by consumers who are overwhelmed with too much information. Aggregation sites should be combined with personalization technology and smart ad systems, thus giving consumers control of the user experience and the publisher targeted advertising inventory that can be sold at premium rates. Newspapers also should acquire algorithmic publishing systems to turn government records and other raw data into compelling new products like Everyblock. In each case, the newspaper should buy and not try to build the relevant technology.

:: Newspapers have to make their sites truly interactive. There is a strong desire among consumers – particularly young ones – to contribute to and comment on the news. Newspapers can leverage the crowd for everything from investigations to self-help forums and from hyperlocal news to restaurant reviews. In developing the portfolio of products suggested above, the middle-aged managers who make most of the business decisions would be well advised to consult young staffers – or students at the nearest high school or university – for insights into the types of products that are likely to fly.

If newspapers have a prayer of getting where they need to go, their managers will have to abandon their stubborn attachment to print-centric thinking. Here’s what I mean:

The Poynter Institute, which rightly is esteemed as a major thought leader in the newspaper industry, owns Congressional Quarterly, which is exactly the sort of profitable and growing niche publication that a publisher would be thrilled to operate.

But the Poynter Institute also owns the St. Petersburg Times, which, like other newspapers, reportedly has been losing money as a result of the long-running secular decline in advertising and the particularly nasty downturn in the economy in Florida.

So, what does Poynter do? It puts the profitable and growing CQ up for sale to raise money to subsidize the newspaper.

Because the Poynter Institute is organized as the sort of non-profit foundation that so many people think can save newspapers (a belief I do not happen to share), the institute’s charter may leave its directors no choice but to sell CQ to support the paper. Or, the decision may reflect the desire to support the paper at all costs because it probably generates 10 to 20 times more revenue than CQ.

Whatever the reason Poynter was forced to act, it shows how an over-dependence on print for too long has brought the industry to the biggest crisis in the 300 years it has existed on this continent.

Wednesday, February 04, 2009

Newspaper-site traffic: Weaker than it looks

Third in a series. Part one is here. Part two is here.

If printed newspapers were discontinued, there would be several reasons for publishers to worry about whether they could sustain, let alone grow, the traffic on the websites that would become their primary business.

One of the biggest reasons to question the potential for standalone newspaper sites has been identified by Greg Harmon of Belden Interactive, who since 2001 has polled 300,000 newspaper website users in 250 markets across the country.

In his work, Harmon has discovered quite consistently that fully two-thirds of the visitors to newspaper sites say they visited the site because they are readers of the print newspaper.

This suggests that newspapers have taken good advantage of the strength of their brands and the visibility they command in the markets they serve. But what would happen if the print product went away?

A case could be made that website readership would rise, because readers would have few, if any, other places to get local news. However, it is unlikely the vacuum created by the disappearance of the print paper would remain unfilled for long.

As new print and online media moved in to compete with the standalone newspaper site, the newspaper site, stripped of the advantages that formerly differentiated it from all other rivals, would become just one of thousands of URLs competing for attention on the busy, noisy web.

Fighting to gain visibility, traffic and advertising, a standalone newspaper website would be burdened by the second major problem turned up consistently in Harmon’s research: Young consumers, who represent the future of any media business, spurn newspaper websites.

Year after year since 2001, Harmon reports, the average age of newspaper website visitors has been rising as the number of readers under the age of 35 declines.

As of 2007, half of newspaper site visitors were 45 or older. By comparison only 34.4% of the U.S. population is 45 or older, according to the latest data available from the U.S. Census Bureau.

On the other hand, the number of younger visitors to newspaper sites is falling. While 46% of newspaper site visitors were between the ages of 18 and 34 in 2001, the number dropped to 27% in 2007, according to Harmon’s research.

The third reason to be concerned about the strength and stability of standalone newspaper website readership is that the bulk of the users not referred to newspaper sites by the print product are relatively fickle visitors who Harmon calls “fly-bys.”

Fly-bys, which represent about a third of a newspaper site’s traffic, are people who were referred to the newspaper’s site from a link at Google, Digg, Drudge, Huffington Post or someplace else. They drop in long enough to glance at a specific article on the newspaper site and then are gone. They are not the same as the loyal readers prized by either print or online advertisers.

The fly-by phenomenon explains why the Newspaper Association of America reported an average 12.3% increase in unique visitors to publisher websites in 2008 but only a 2.4% increase in the time that visitors spent on the sites. Industry-wide, time on site last year averaged 44 minutes and 1 second per month, or less than 1.5 minutes per day in a 30-day month, according to the NAA.

In the aftermath of the presidential election, which generated tons of extra traffic for all manner of news sites last year, the time spent on newspaper sites has fallen considerably. Statistics from Nielsen Online, the same independent agency the NAA used to prepare its report, show that the average time spent on the 13 largest newspaper websites in December was only 27 seconds per day vs. the 1.5-minute average reported by the NAA for all of 2008.

As illustrated in the table below, the average engagement at newspaper sites trails significantly the time spent at places like Facebook, Drudge Report, YouTube and even the top two cable news networks.

While it may not be fair to expect people to devote as much time to a newspaper website as they spend socializing on Facebook or watching videos at YouTube, the substantial difference in the level of user engagement demonstrates the profound failure of newspapers to create the sort of products that would attract young readers to their websites.

The inability of newspapers to connect with younger consumers matters, because the consumption patterns set today will influence the future prospects for readership, regardless of whether the product is delivered in print, on a computer screen, on an iPhone, on a Kindle, on ePaper or on whatever gizmo emerges as the next big thing.

If the interactive products produced by newspaper companies lack relevance and appeal for younger consumers, the economic deterioration of the industry will accelerate as older readers literally die off.

The reason young people don’t gravitate to newspaper websites is that most sites are more newspaper than web: staid, static and largely un-interactive.

Modern users expect to personalize their experience by picking the content they consume and choosing when, where and in what medium they consume it. They want to interact with a site (and other visitors to it) by posting original thoughts, commenting on the thoughts of others, ranking articles and voting on the credibility of a story and even its author.

In other words, 1995-style shovelware won’t cut it.

Before newspapers stop their presses in perpetuity, they need to fast-forward to the interactive age. Really, really fast.

Next: Can newspapers make the digital transition?

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Tuesday, February 03, 2009

Print drives online ad sales at newspapers

Second in a series. Part one is here.

The misguided assumption among those advocating paperless newspapers is that the revenues of the digital-only entities succeeding them will be at least as robust in the future as they are today.

This is dangerously false, because it overlooks the reality that the vast majority of online revenues at most newspaper companies come from print advertisers who are “upsold” to the web when purchasing a print schedule.

It requires a tremendous leap of faith to believe that the marketers who buy print advertising would continue to spend equal or greater sums on web advertising if the publisher eliminated the medium that attracted them in the first place.

Before anyone stops the presses in perpetuity, let’s get a grip on the facts.

As discussed in the first installment of this series, interactive advertising produces only a slender fraction of the total sales at the average newspaper company.

The $3.1 billion of interactive revenues booked by the newspaper industry in 2007 represented barely 7% of over-all advertising sales. While it is possible the industry may have generated up to 10% of its sales on the web in 2008, this is because print has been shrinking so rapidly that the online component has become proportionately larger.

Online revenues are declining, too, though not as fast as print sales. While online sales at newspapers advanced by 31% as recently as 2006, the rate of growth dropped to 18.8% in 2007 and almost certainly will be down by 2% to 5% when the final numbers are calculated for 2008. Few forecasters anticipate positive growth this year, especially since online ad rates on average are approximately half of what they were in 2007.

The worst part of the online sales story at newspapers is that fully two-thirds of revenues at most properties come from the three principal classified categories, employment, automotive and real estate. The verticals have been shrinking sharply for years because each is in state of profound secular decline.

The significance of the industry’s dependence on classified advertising is so great that it’s worth taking a deeper dive.

Classified advertising, which produced 40% of the industry’s revenues and more than 40% of its profits in 2000, generated only 23% of newspaper revenues in the first nine months of 2008, according to the Newspaper Association of America. Between 2000 and 2007:

:: Recruitment revenues fell $4.9 billion, or 56.3%, to the lowest level in 13 years.

:: Automotive sales slid $1.8 billion, or 35%, to the lowest level in 22 years.

:: Real estate sales, which had been the only category showing consistent gains after 2000, plunged sharply in 2007, dropping $1.2 billion, or 22.6%, in a single year.

When the final numbers for 2008 are reported, classified revenues will be down by somewhere between 25% and 30%, based on their trajectory in the first nine months of the year – a trend aggravated by the economic meltdown in final quarter of the year. In but one data point, the Conference Board reports that the number of online job listings dropped by nearly 645,000 listings, or 23%, between December, 2007 and December, 2008.

Though the rate of decay in the classified categories may moderate this year, the dismal state of the economy gives no reason to believe any of the categories will show positive grow in 2009. The crystal ball is too murky to guess what might happen in 2010 and beyond.

The long-running decline in classified advertising is not the product of a weak economy, although it certainly is exacerbated by it. And don’t blame the collapse of classified advertising on simply the bargain rates at Craig’s List, either.

Rather, the decline in classified advertising reflects the new ways employers are hiring workers; a shrinking number of auto dealers and the eight hours that consumers shop for cars online, and the way people will start buying and selling homes among themselves now that real estate agents have lost their multiple-listing monopoly.

In other words, there is absolutely no reason to believe the market for classified advertising will regain its strength whenever the economy recovers.

Even though the changes in consumer and advertiser preferences have been manifestly evident for eight years in the employment vertical, abundantly clear for five years in the auto sector and vehemently obvious in the last two years in real estate, newspaper publishers to date continue to rely to a dangerous degree on the rapidly decaying classified advertising business to generate the preponderance of their online sales.

They do this by encouraging – or, in some cases, forcing – print classified advertisers to buy online ads when they book a print schedule. This is called an “upsell” and, as noted above, it historically has produced roughly two-thirds of the ad dollars at most newspaper websites.

So, what would happen if newspapers stopped the presses and no longer had print ads to upsell from? Several things. All at once. And all ugly:

:: A certain number of advertisers would stop doing business with the publisher because they don’t like, don’t understand or don’t value the web.

:: Web-savvy advertisers doing a bit of comparison shopping would find that the rates for ads at the newspaper website are a whole lot higher than the free listings they can get at Craig’s List, Wal-Mart (via Oodle), Ebay’s Kijiji and many other sites, great and small. Newspapers would be forced to either sharply dial down their ad rates or risk losing a significant volume of business. Either way, revenues would shrink.

:: With their ad revenues constricted, newspapers would discover they no longer could afford the large and well compensated advertising staffs that historically enabled publishers to extract the largest share of advertising dollars in almost every community in the land. An ad rep who previously booked $9,000 in print revenues and $1,000 in online sales now might generate an order for only $1,000 in online advertising – or perhaps less, if the paper were forced to drop its online ad rates to remain competitive in the marketplace.

No matter how aggressively a publisher cut sales expenses to offset the sharp drop in revenues, she never could get them as low as Google or any of the thousands of other do-it-yourself online advertising media that employ no sales staff and, instead, rely on customers to create, schedule and pay for their ads by themselves.

Further, a substantial cut in the sales staff to trim overhead at a publishing company almost certainly would lead to a drop in volume, because fewer people would be calling on fewer prospects.

Newspaper publishers could join Google and move to do-it-yourself advertising, too. But they would have to make substantial investments in promotion and training to successfully migrate merchants in their communities to this new way of doing business. As demonstrated by Google’s recent decision to shut down the do-it-yourself print advertising system it had been offering to newspapers, the adoption of such a radical change is neither smooth nor rapid.

With likely declines in both ad rates and volume after the discontinuation of the print product, the typical digital-only newspaper company would be left with a notably smaller advertising base than it has today.

This necessarily would force economies throughout the organization. And the department that could be cut the most easily would be, as always, the newsroom.

Next: Newspaper web traffic depends on print, too

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Sunday, February 01, 2009

Why newspapers can’t stop the presses

Contrary to some of the ill-informed articles you might have read lately, almost every newspaper company still needs to print newspapers if it wants to stay in business.

Although the idea of paperless newspapers ricochets around the blogs with some regularity, fans of the concept recklessly disregard the economic realities of the publishing business as it exists today. So, we’re going to do a little math in a moment to prove:

A. Why it would be suicidal for any reasonably profitable publisher to stop its presses in perpetuity.

B. Why a paper going to digital-only publication would have to eliminate roughly half of its editorial staff to achieve even a modest profit on that operation.

Notwithstanding the above realities, this is not to say that publishing won’t, or shouldn’t, migrate to all-digital media in the future. Before that happens, however, the economics of the business would have to change far more radically than they have to date.

Because newspapers on average derive approximately 90% of their sales from print advertising, the only ink-on-paper newspapers that can afford to attempt digital-only publishing are the ones that are irreversibly losing money. Moving to digital publishing is the last, best hope to salvage at least some value from their waning franchises.

But those web-only franchises would produce far less cash than their print predecessors, reducing the value of those businesses by several magnitudes. How much less? A conventional newspaper moving to online-only publishing might produce at best 10% of the cash generated by its print-plus-online predecessor.

This would be catastrophic for any of the newspaper companies that operate today on the premise of selling both print and interactive advertising. This is especially true for the many publishers that borrowed billions in recent years to finance acquisitions that for the most part haven not produced sufficient profits to service the loans.

While all-digital publishing might represent a last-ditch effort for some money-losing newspapers, it might not even be a solution for the Rocky Mountain News, Seattle Post-Intelligencer or Tucson Citizen, whose respective owners plan to shut them if they can’t sell them.

The reason is that each of these papers is a participant in a joint-operating agreement, where a third-party agency sells the ads that appear in them. If any of the three papers elected to become free-standing digital publications, their owners most likely would have to invest in establishing new ad-sales and administrative staffs – investments they might not be willing to undertake in this inhospitable economic climate.

The latest buzz over paperless newspapers was triggered by a widely noted post a few weeks ago by Buzzmeister Jeff Jarvis, who reported that the Los Angeles Times makes enough money from its website to cover the salaries of the 660 journalists on its payroll (the staff is soon to be cut t0 590).

“Imagine if the Times turned off its presses tomorrow,” said Jeff. “I see hope: the possibility that online revenue could support digital journalism for a city. The enterprise will be smaller, but it could well be more profitable than its print forebears today and – here's the real news – it would grow from there. Imagine that: news as growth.”

It is reasonable to conclude that some communities could be left before long with digital-only news coverage, if the business of dead-tree publishing continues to shrivel amid shrinking ad revenues and inescapably high operating costs.

But we are a long way from seeing a publisher make the proactive decision to pull the plug on a profitable print-on-paper operation. That’s because pulling the plug is not a decision a rational publisher can afford to make.

To prove the point, let’s take a closer look the case of the Los Angeles Times, where editor Russ Stanton confirms that revenues from the website indeed cover the salaries of 660 journalists.

Though Russ won’t go into the details of his newspaper’s finances, it is a fair guess that the average salary in his newsroom is $100,000 per year (while that seems like a lot, a hundred grand doesn’t go as far in L.A. as it would in St. Louis). At an average of $100k per employee, the newspaper’s online revenues would be about $72 million per year.

Because newspapers on average generate 10% of their annual sales from the web, it is a fair guess that the print sales of the L.A. Times are about $650 million, making for total annual revenues of $722 million.

Assuming the paper were producing an operating profit of 10% of its sales (the average reported by the publishing division of its parent, the Tribune Co.), then the annual earnings of the Times before interest, taxes, depreciation and amortization (EBITDA) would be about $72 million.

That means the newspaper would be providing $72 million a year to help service the $12 billion-plus debt incurred by Sam Zell when he bought the company in 2007. (Tribune isn’t paying down its debt at the moment because it’s in bankruptcy, but neither the federal court supervising the case nor the bondholders want to see its cash flow go down.)

If the L.A. Times stopped publishing the print newspaper, 90% of its ad revenues would go away and something like $65 million of its cash flow would disappear. You can see how that would play havoc, to say the least, with Tribune’s ability to recover from bankruptcy.

But wait, you say, wouldn’t a web-only operation be more profitable than a combo operation? Not necessarily.

The $72 million in sales at the L.A. Times website covers only the salaries of the newsroom employees. It does not cover such things as medical benefits, the employer’s share of payroll taxes, workers comp, pension contributions, insurance, office rent, equipment leases, utilities, telecommunications expenses, web hosting, office supplies, travel and lunches with sources. The fully loaded cost of the newsroom is probably $18 million more than $72 million, or 25% greater than the site’s sales.

It takes more than a crackerjack newsroom to generate $72 million in sales. The digital operation would have to employ people to sell, create, schedule and bill for advertising. It also would need accounting, human resources and other administrative staff. The salary, benefits and overhead for that group would amount to about $11 million, or 15% more than the site’s $72 million in sales.

Thus, the fully loaded expenses of the digital-only L.A. Times would be 140% greater than its sales.

The only way a publisher could generate a profit on this operation would be by – you guessed it – cutting the newsroom. To pull a 20% profit out of an all-digital L.A. Times, the editorial staff would have to cut by roughly 48%.

If half of the newspaper staff had been engaged in the production of the print product, then the cutback presumably would have minimal impact the paper’s coverage (though it would be a miserable outcome for the talented and dedicated people whose positions were eliminated).

If it takes a lot more people than half the news staff to deliver the coverage for which the newspaper is renowned, then a digital-only strategy would not sustain journalism as we know it at the L.A. Times.

With $72 million in annual sales, it ought to be possible to make money with a local news website. But there are powerful reasons to question whether a free-standing website indeed would be nearly as successful as one associated with a print newspaper.

That’s the subject of the next installment.

Next: How online ad sales depend on print

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