Tuesday, July 07, 2009

Hardest hit: Profits slid 100% at big papers

UPDATED 4:21 PM - July 7, 2009: The Inland Press Association today reissued the summary of the study on which this post was based. The major change is that 12% is the average profitability of large newspapers in the last five years, not solely in 2008. Although the original post is published below, it should be read in connection with the follow-up post here.

The bigger newspapers are, the harder their profits fell in the last five years, according to newly revised data provided Monday by the Inland Press Association.

Profits fell 100.1% since 2004 at newspapers with circulation greater than 80,000, said Tim Mather, the analyst at the trade association who collated financial date reported by 120 papers across the nation.

Compared with other industries, however, publishers on average still are doing remarkably well.

Notwithstanding the triple-digit profit plunge occasioned by a 28.09% drop in advertising sales, the largest newspapers reported profits averaging 12% of sales at the end of 2008, according to the Inland study.

A 12% profit margin is more than double that achieved last year by Wal-Mart Stores, the largest of the Fortune 1,000 companies. A 12% pre-tax profit is just about a percentage point light of the margins run by Exxon and Chevron, the second and third largest corporations behind Wal-Mart on the Fortune list.

The reason margins could fall 100% and profits could still average 12% is that some newspapers plunged from proftabiliy to steep losses but other pubications still generated healthy, double-digit margins, said Mather in response to queries (see comments below) as to the validity of the data.

If average profitability were calculated on a weighted basis, then it might be lower than 12%, he explained. But the association took a simple average of the profitability of each publication in each of several circulation brackets and “that’s the way the math works,” said Mather.

As you can see from the table below, sales in the last five years fell at all but the smallest papers. However, operating profits tumbled in each and every circulation category.

Papers with less than 15k circulation reported that they were able to lift revenues despite a slump in advertising that started in 2006 and has accelerated every quarter since.

Papers with circulation of 15k to 25k suffered the least damage to their bottom lines, according to data volunteered by publishers who were guaranteed anonymity by the industry association.

When the Inland survey originally was released last week, an error in computing the data indicated that papers in the 25k-50k bracket had suffered a 190% plunge in profitability. But Mather said the actual drop was 90%.

The results in the original report were counterintuitive, because the abundance of anecdotal evidence suggests metro papers have been most deeply affected by declines in readership and advertising revenues.

Combined with high and intractable cost structures, it stood to reason that their profits would be squeezed the most.


Anonymous Anonymous said...

If operating profit fell by 100.1% for the largest group, how could they still be making an operating profit? Something seems off about the Inland numbers.

5:46 AM  
Blogger Martin Langeveld said...

I'm still confused.

If operating profits at the 80K+ papers dropped 100.1%, that means all the profits disappeared. But you still show them with 12.0% OP. (If they went from 24% to 12%, that would be a 50% drop in profits.)

So there is still something counterintuitive going on, but I'm not seeing what it is.

6:20 AM  
Anonymous Anonymous said...

Is op profit the same as EBITA?

6:28 AM  
Anonymous Anonymous said...

I think we are focusing on the wrong issue here. There is no question that newspapers still turn over profits that are quite generous. But it is the other end of the books that is causing the headaches -- the staggering debts they assumed to produce these profits. The insanity of the last decade was the idea that debts don't matter, and companies fell over one another accumulating debts to consolidate and expand. But now we have the situation where Gannett, historically the most profitable of American newspaper companies, is choking on its debt, and foundering.

6:37 AM  
Anonymous Social Media Commando said...

So margins remain in tact, but on lower revenue...correct?

Does this take into account just the Printed Product, or (I assume) the entire Operating Costs/Profits of newspaper companies?

Any word on that new revenue model coming down the pike? ;-)

6:55 AM  
Anonymous Anonymous said...

These figures don't seem to add up. If profits fall by more than 100%, then you have no profits at all -- you have a loss. How then can operating profit still be 12%? -- Mark A. Fisher, Columbus Dispatch

7:23 AM  
Anonymous Anonymous said...

I don't understand how these numbers work.

Surely a 100% profit decrease must end with profits at zero, regardless of the starting figure?

8:03 AM  
Blogger Rags said...

Frightening facts.. Great informative post! Thanks!

8:22 AM  
Blogger amanfromMars said...

So a drop in operating profits by 100% to 12% would suggest that previously the price of news and biased views was extortionate, especially whenever you consider that profit is money for nothing?

9:31 AM  
Anonymous Anonymous said...

For questions or concerns about the data referenced in this blog, please contact the Inland Press Association Financial Studies Manger, Tim Mather at 847-795-0380

11:28 AM  
Anonymous Anonymous said...

I have heard that a company,(or maybe just a newspaper), can make, say, $8mill. profit one year and then $6mill the following year and claim a $2mill loss. If there is any truth to that, how does it figure into this pofit/ loss equation? When is a loss really a loss?

12:03 PM  
Blogger Steve Ross said...

Nice to see Inland back me up on classified revenue -- that Craigslist and the rest of the Internet has not really affected revenue.

Operating profit is not the same as EBIDTA -- it includes cash flows, depreciation, etc., but NOT debt service or one-time gains or losses due to things like currency transactions and asset sales. It is important to note that Inland does great studies, but the data they have now summarized and worked over twice is based on a sample of 120 papers and is not statistically valid to a decimal place. The data also differs from my own (based on 44 papers), which suggests that 15K-60K circulation size is the sweet spot.

The data on publicly held companies is clear -- the industry as a whole had an operating profit of 18% in 3Q07. Privately held papers I know of had a higher operating profit, so my guestimate is that the industry as a whole was at 20% at that time. companies that own papers of many different sizes tend not to break out the data for each property, so we have good data for the whole industry but not by circ size.

Cash flow was higher than operating profits, because the profit numbers include non-cash charges such as depreciation, and papers rushed to chapter 11 or made deals to postpone repayments of debt.

Ad revenue had fallen 18% by 3Q08 (NAA data), but operating expenses had fallen, too. Still, ad revenue has continued to fall, so the entire industry right now is probably below cash flow break-even on operations.

This is bad, because Chapter 11 is an option until you fall below cash flow break-even. You just stiff the stockholders (no dividends) and the debt holders (no repayments). At the point of cash flow break-even, people you deal with to stay in operations (the utility company, the local tax collector, the employees) may choose not to deal. Then you have to sell assets, turn creditors into stockholders, etc. to keep from sliding into Chapter 7, which is corporate death.

6:54 PM  
Blogger Rick Falls said...

Great profile of what's happened to the newspapers.

They need to face facts and either find a way to step up or simply get out of the way and let newer technologies take over more effectively.

4:33 AM  
Anonymous Anonymous said...

Steve Ross once again claims Craigslist is not hurting newspapers, but the data he posts to prove it suggests otherwise.

Can we get Alan Mutter to devote a conversation to this topic? What do you think?

Let's take a look at where Craigslist has expanded its focus to and what has happened to classified advertising in those markets around that time.

5:09 AM  
Blogger Steve Ross said...

I've posted on the timing elsewhere on this site. Classified dollar volume was down 7% in the three years ending late 2007. On a per-subscriber basis it peaked late 2006. Let's assume that ALL of this was due to Craigslist and other Internet effects -- a pretty silly assumption actually. But ad revenue has since dropped more than 50%. So Craigslist at most was a small part of that.

Lineage has been declining for years, as newspapers raised ad prices and sacrificed share to keep revenue. That's another issue.

So what are people proposing? Paid web access to further reduce share. I'm for doing ANYTHING to save the enterprise in the short term. But why am I nearly alone in thinking that this is contrary to common sense as a long-term strategy unless combined with the kinds of investments necessary to improve quality, broaden the user base and increase share in other ways?

7:47 AM  

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