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Intro By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute Newspapers are still far from dead, but the language of the obituary is creeping in. The industry has been in declining health for some time now. It got sicker rather than better in 2007, and 2008 offers no prospect of a quick cure. The dismal fundamentals, chronicled in the last several years of these reports, continue. Basic indicators were as bad or worse in 2007 than in 2006:
Bright spots? Online audience and revenues again are both up substantially, but advertising revenue growth has slowed to 20% on average, compared to 30% or more in the earlier years of this decade.5 Moderately optimistic analysts now think the growth could equal print revenue losses within two to three years, which would constitute welcome equilibrium but hardly an industry turnaround. Like fans of a struggling sports franchise, newspaper watchers typical have a “maybe-next-year” scenario. For 2008, the hope is that a collaboration of more than 400 daily papers with Yahoo will generate a kick of as much as 10% to 20% in online advertising because it will be much easier to buy and place ads under the new arrangement. On the plus side, newspapers have improved their Web sites -- with a 24/7 diet of breaking news, an array of multimedia features and a wave of redesigns. This builds visitor traffic and induces at least some readers to spend more time on the site. Put online audience together with print, and newspapers can rightly say that they are reaching as many readers as ever. On the other hand, the industry is no closer to charging for the growing cost of generating this content. During 2007, the New York Times ended its $50-a-year Times Select premium service, despite having 200,000 subscribers. Murdoch has decided to stop charging for some of the content of the Wall Street Journal Online, with more than 700,000 paid subscribers for the full service at $100 per year. In both instances the idea is that increases in traffic and ad revenues will more than make up for lost subscription revenue. And beyond the slowdown in online ad revenue growth, questions are emerging about the effectiveness of ads on news Web sites. Print ads have a high-degree of acceptance among readers, and many begin the shopping week by hunting for bargains in the fat stack of Sunday newspaper inserts. Online advertising, with its dancing mortgage offers and drop-down display ads, by contrast, is often as intrusive as the worst of television advertising. Besides, it has become clear that the typical online shopper is on a narrowly targeted buying mission and thus just as happy to search commerce-only sites (which some papers are experimenting with now in their home communities). As for cuts, the end of 2007 and the beginning of 2008 are shaping up as a time of you-ain’t-seen-nothin’-yet. On the business side, newspapers companies are busily outsourcing, taking functions like payroll, circulation service complaints and ad production to vendors across town or as far away as India. On the news side, the game plan is to do less with less but in an artful way that will minimize negative reader reaction. As one executive, ordered by headquarters to plan a fresh round of newsroom cuts for 2008 told us, “I’m past bleeding – we’re into amputation now.” Foreign bureaus at all but the biggest papers were decimated in 2006; current targets for deep cuts include satellite bureaus, specialty beats like science and religion, and in-house movie and television critics. What remains of stock tables is the target of more cuts, and some freestanding business sections are being collapsed to a couple of pages inside the metro section. Phil Bronstein, executive editor of the San Francisco Chronicle, which eliminated more than 100 newsroom jobs in 2007, including that of the managing editor, put it succinctly: “We can’t afford to cover the Richmond City Council anymore,” a reference to a municipality in the Chronicle’s circulation area.6 This sort of development risks driving readers to seek their local news elsewhere. Few hyper-local sites have succeeded yet in generating revenue or serious meat-and-potatoes coverage. But a host of start-ups, some driven by foundation support, others funded with venture capital, are emerging to pick up business if newspaper coverage becomes truly uncompetitive. Their scale remains a question. A year ago, we cited the sheer bulk of the newspaper industry as a saving grace. Even with numbers slightly lower at the close of 2007, nearly 50 million newspapers are sold on an average day and 117 million read one.7 The industry remains profitable, but it has come time to take the “obscenely” out of that commonplace observation. On average, the industry recorded a pre-tax profit margin of about 18.5 % in 2007.8 Some papers were still in the cash-cow, 20%-plus range of the good old days, but many of the nation’s best metros were in the low single-digits or flirting with actual losses. Smaller newspapers – with much less direct competition – are still doing relatively well. What is true all over is that margins have begun to decline quickly and that high fixed costs from the era of print dominance are not sustainable. That puts some papers facing the possibility of going into the red, and sales of extraneous business units or buildings and land have become commonplace. Were print advertising losses to accelerate, it might even make sense three to five years hence to look at pulling the plug on print and rolling the dice on getting readers and advertisers to follow to a Web-only format. That would eliminate, in one swoop, the cost of paper, pressmen and circulation delivery – perhaps as much as 35% of a typical newspaper’s expense base. Still the scenario would make sense only if savings exceeded the loss of print revenues. Certainly the last few years have wrung nearly all remaining complacency from a once-stodgy industry. A focus on online development and novel business models (for now, mostly in the early concept stage) has become universal as has urgent attention to cost control. You could call the industry’s situation, as a friend who is expert in new media has, a “race against time.” For businesses that prospered for decades slow and steady as a tortoise, success in 2008 and beyond will require developing new sources of audience and revenue at sprint speed, while tending as well to the old print business that still pays the bills. Content Analysis By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute In 2007, despite numerous hits to the industry and a rush of resources away from print and toward the Web, newspapers stood out in 2007 for unique coverage. Their particular strength, at least in print, may be less covering breaking news than tracking stories that percolated, ebbed and flowed over the course of the year. The nation’s newspapers gave front-page coverage to issues and events often not found in other news genres. The state of the U.S. economy, the continuing debate over health care policies and foreign news beyond the war in Iraq, among others, stood out on newspaper front-pages. Here, we take a look at three distinct areas of coverage where the role of newspapers stands out. The Economy In January of 2008, economic concerns rose significantly among Americans to rival the war in Iraq as the top problem facing the country.1 At the same time, it began driving the presidential primary debates and became a top issue influencing primary votes.2 In the press, newspapers had already been covering the issue for months, dedicating staff, space and early attention the story when most other genres had yet to treat it as top news. Looking across 2007, newspaper front pages covered the downturn in the U.S. economy more than any of the other six genres studied. Over all, it was No. 4 among the biggest stories of the year in newspapers, accounting for 3% of the front-page newshole. The only other genres to include the economy on their top 10 list were online news sites, where it ranked No. 6 over all (2%) and network morning and evening television news, where it placed No. 5 for each (2%).
The emphasis in print is even greater than it first may seem, considering it includes only the front-page articles. The business section fronts may well have had more. This compares to the entirety of network evening news shows, the hard news section of the morning programs (where all the economic news would likely be) and several hours of cable programming each day. (The online news studied is more similar to newspapers — the top five stories of the page.) This difference also was not a case of the big national papers tuned in to debates in Washington and on Wall Street while smaller papers across the country focused on more local matters. If anything, the local papers tuned in to the issue of the flagging economy first. The issue actually accounted for more of the front-page newshole in medium-sized metropolitan papers (3.6%) and small papers (3.4%) than the national papers (2.9%)3. Part of this attention at the local level was due to the nature of the story. It did not evolve as a Washington policy event initially but in neighborhoods across the country as people found their houses were not selling or the sale of their neighbors’ houses suggested their home values may have dropped. The sense of security that people had in their homes began to waver, and local newspapers began reporting the shifts, having attachments to the local communities and still with newsrooms structured to cover more than the news of the moment (something local television finds hard to break free of).
As early as March of 2007, for example, the Ohio Star Beacon in Ashtabula reported that late mortgage payments had jumped to a three-and-a-half-year high, with foreclosures at an all-time high. The Bakersfield Californian front page noted that, after a steep decline, the local housing market was now one of the nation’s worst. Another sign of the local nature of this story is that these smaller newspapers devoted their own staffs to covering this issue. For major national news stories, local and metropolitan papers tend to rely on the wires, especially the front-page stories. This was not the case when it came to coverage of the economy in 2007. At the mid-level metro papers, nearly 80% of coverage about the economy was from staff reporters versus about half the coverage of about the war in Iraq and only 37% of coverage about Iran. At the most local papers more than half (53%) of front-page economic coverage were written by staffers compared to just 29% of Iraq coverage.
The national paper that stood out most in early coverage was the Wall Street Journal. In March 2007, the paper carried front-page articles on failing mortgage lenders, fears about sub-prime loans and foreclosures, regulators facing added scrutiny and even a profile on one investor trying to take advantage of the low housing market. Setting the Agenda The failing economy had become a major story in American newspapers as early as March of 2007 when it was the eighth-most covered news event (accounting for 2% of the front-page newshole). The burst of coverage was driven largely by the downturn in the housing market. Fully 89% of the economic coverage that month (63% of the coverage for the year) pertained to the housing market. Again, roughly half of that was state or local reportage. Elsewhere, the media had not yet noticed. The state of the economy did not show up in other sectors as a top story until August. That month, when the Federal Reserve began taking action, possible bankruptcy emerged at the largest mortgage lender and credit worries hit overseas markets, news Web sites, network news programming and radio news suddenly jumped into the story. For cable news, it took even longer and the economy did not make it into the top 10 list until December.
In newspapers, the troubled economy spiked to the top spot in August, accounting for 8% of the front-page newshole. And after that, the only months when the economy was not a top 10 story were May, June and July, when the scandals at the World Bank, the death of Jerry Falwell and Palestinian uprising drove it lower. Health Care Policy Newspapers also stood out as the one genre to devote significant amount of front-page space to the debate over health care policy. In 2007, it was not one big event or debate in Congress driving the coverage, but a story that ebbed and flowed throughout the course of the year as Congress debated new programs, states adopted new practices or public opinion shifted. Over all, the health care debate was the 10th-biggest story on newspaper front-pages and accounted for 2% of the total front-page newshole. Top Stories in Media in 2007
No other genre covered the story to a degree that placed it among their top 10 stories of the year. Even the network evening news, whose agenda is usually the closest match the newspaper front pages (See Network Content) gave the story significant coverage only in one month of the year. That was October, when the debate about the State Children’s Health Insurance Program pushed health care to No. 9 among network news stories (for 2% of the newshole on network news programs). That month it is also ranked No. 5 in the radio programs studied (4%). In newspapers, the health care issue ebbed and flowed but was around much of the year. The coverage ranged included rising Medicare costs, state initiatives such as the requirement in Massachusetts that residents carry health insurance, and, later in the fall, congressional debate over the proposed broadening of the State Children’s Health Insurance Program. In total, it made the top 10 list in six months. It appeared first in March with news of several different changes in policy: new strict federal standards on transplants, states turning to pharmaceutical companies to help contain Medicaid spending and doctors delinquent on Medicare tax payments. It then reappeared in June — more coverage of delinquent doctors, high costs for retirees in California, other state-level developments — and remained within the top 10 through October. In September when several local papers reported on new state findings or programs, it was the No. 5 among stories used. As with the economy, this was not a case of the big papers covering the Washington debate. The issue actually accounted for more coverage in mid-sized papers (2%), followed by the smallest (1.8%) and then the national papers (1.4%).4 In this case, more than half of the reporting was about initiatives or problems in health care policies at the state or local level. Coverage included businesses in Albuquerque starting to charge high-risk employees, San Francisco — the first city ever — offering health to uninsured individuals, and new figures on college graduates opting out of health insurance. Geographic Range Beyond the issues in our own country, newspapers also were second only to news Web sites in their coverage of foreign affairs that did not involve the U.S. directly. The newspapers examined here devoted 13% of their front-page coverage to non-U.S. news, three times that of cable news (4%), more than double that of radio (7%) and also more than network television news (9%). Only online coverage devoted more — nearly 25% of lead-story coverage. Aside from events in Iraq the biggest foreign stories were about the situation in Pakistan (9%), the conflict in Israel and the Palestinian territories (3% on conflict between Israel and Palestine and 2% on the factions among the Palestinians ) and Iran (2%).
One of the big issues in print is whether local and big metro papers should now become more local, or even “hyper local,” in the language of some Wall Street investment advisers. In past studies, PEJ has found a fair degree of foreign coverage in local papers, often on the front page, and more than in other media. The geographic differences bear watching in 2008 as many metro papers found hyper local coverage to be, in many ways, more work. Covering 12 neighborhoods required more reporting, more resources — and in many cases faced greater competition -- than did covering national issues. Conclusion As newspapers struggle with the future unknowns — audience base, delivery mechanism, revenue base and even reporting agenda -- one thing is clear: In 2007, the print pages, and the print front-pages in particular, still provided information that was harder to find elsewhere. How, and if, that service translates to the Web or to the distribution of newsroom resources remains to be seen. Footnotes 1. Pew Research Center for the People & Press, January Political Survey, Final Topline, January 9-13, 2008, www.people-press.org. 2. For detailed , WashingtonPost.com reports entrance and exit poll results from every state that has voted: 3. In order to get a representative sample of what the 1,450 daily newspapers cover across the United States, PEJ divides them into three tiers based on circulation. Five newspapers from the first tier and four each from the second and third tiers are in the sample. The list is as follows:
For each of the newspapers included in our sample, we code all articles where the beginning of the text of the story appears on the front page of that day’s hard copy edition. If an article has only a picture, caption or teaser to text inside the paper, we do not include that story in our sample. We code all stories that appear on the front page with a national or international focus. Local articles that have no connection to a major news event or ongoing issue are not included in the sample. In this case, among other issues, the economy and health care were considered national domestic issues and included in the analysis. 4. The weekly news coverage index studies national news and thus for local newspapers includes all local coverage that pertains to a national news story. It does not include purely local news such as the closing of a local school or a highway accident. In this case, all health care stories were considered a part of the national news and were included in our analysis.
Audience By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute When it came to audience and circulation, 2007 was simply another verse in the same old song for the newspaper industry. Paid circulation continued to fall and at just about the same rate as in the two previous years. For the six months ending September 30, 2007, the Audit Bureau of Circulations (ABC) reported that circulation was down 2.5% daily and 3.3% Sunday compared to the same period a year earlier.1 Cumulatively, newspapers end 2007 with 8.4% less circulation daily and 11.4% less Sunday than in 2001.2 Industry executives took some solace in alternative measures. Readership is, of course, higher than circulation by a factor of about 2.1 times daily and 2.5 Sunday.3 The number of people who read the print paper at least once during a given week is higher still. Add in that the unduplicated audience of a newspaper’s Web site (people who don’t also read the print edition) typically is growing at a healthy rate, and you get a picture of newspaper organizations growing total audience rather than shedding it. One of the industry’s many works in progress is to get good counts and marketable demographics for each of its ventures on any platform. Some newspapers – the Sacramento Bee and the St. Petersburg Times, are two examples – now have audience development directors and teams in place of the traditional circulation department. But since audience strategies remain a work in progress, it makes sense to discuss the old measure and the new ones separately. We have noted in earlier editions of this report that declining paid circulation has multiple causes. Several of the less obvious ones had particular relevance to continued bad results in 2007.
One more factor to watch in 2008 and beyond is whether continuing cutbacks at newspapers — in the form of reduced news space, smaller newsroom staffs and reduced ambitions in coverage -- will drive a new wave of circulation losses. Ombudsman columns in 2007 were thick with complaints from those who see a less-is-less editorial philosophy for what it is and don’t like it. While newspapers are dirt cheap (compared to a cup of Starbucks coffee, for instance), buyers are surprisingly price sensitive. We may also be seeing the beginnings of what many newspaper futurists have predicted for some time -- more sophisticated and more expensive print papers targeted to an older, wealthier, more educated audience. So far, there is more talk than action except at top-of-the-line titles like the Wall Street Journal and Financial Times, which take care that the print version adds a second-day twist or some other perspective to what has become old news online. At many Gannett papers, by contrast, what is most evident are the continuing cuts rather than retooling and upgrading the print report.
Results at Individual Newspapers As in the last two years, metro papers continue to have the worst of it in circulation declines. Among the biggest losers, for the reporting period ending September 30, 2007, the Atlanta Journal-Constitution was down 8.9 daily and 9.2% Sunday; the San Diego Union-Tribune, 8.2% daily and 7.9% Sunday; the Dallas Morning News, 8.0 % daily and 7.6 % Sunday; and the Boston Globe, 6.6% daily and 6.5% Sunday. All were engaged in some of the voluntary trimming of distribution to distant areas. A few of the 25 top papers did eke out circulation gains, daily or Sunday: the Philadelphia Inquirer ( 2.3 % daily), USA Today (1% daily), the Los Angeles Times ( 0.2% daily), the St. Petersburg Times, (0.04 % daily and 0.85 % Sunday), the St. Louis Post-Dispatch (0.43 % Sunday), and the Houston Chronicle ( 0.1 % Sunday). But the numbers are small. The New York Times took a healthy hit – down 4.6% daily and 7.6% Sunday.4 That partly reflected a price increase and a decision to cut way back on third-party paid distribution of the Sunday paper. The Times is one of very few papers for which circulation is an important profit center, and CEO Janet Robinson told investors in December that circulation revenue was up for the year. Searching for other good news in the generally downward trend, at least circulation losses are not accelerating (though now advertising revenue declines are). Some of the big losers of recent years, for instance, such as the San Francisco Chronicle and the Washington Post were back closer to the industry average in circulation losses in 2007. But these are pyrrhic victories at best. Lee Enterprises, with a stable of mid-sized papers in the Midwest and Mountain states, had the best company performance of any chain -- losses well below the industry averages. ABC Rule Changes The Audit Bureau of Circulations has adopted a fairly sweeping set of changes in its reporting procedures over the next several years that might help the numbers look somewhat better over time. Since the changes are not immediate, it is too early to say whether the new counts will make a difference to advertisers.
ABC has also joined in the attempt to measure total reach to print and online audiences with a new Audience FAX product introduced in late 2007 and discussed below. The various categories will still be added up for a count of a paper’s total print circulation so it is unclear whether this may be a means to the goal of halting the regular news of yet another circulation decline. Since publishers may now discount as deeply as they wish, perhaps so. Also, the New York Times and a few other papers now offer electronic downloads of the daily paper at a price well below the print subscription. Should these hybrids pick up steam, they will help paid circulation. Online Audience and Total Reach Alternative measures of newspaper audience start with a simple premise -- not everyone who reads the paper does so in print anymore. By the Newspaper Association of America’s count, 62.8 million people visited a newspaper Web site in the third quarter of 2007, an increase of 9% compared to the same period a year earlier.5 So does that mean that online gains make up for print losses? Not exactly. Unique visitors per month is the most frequently used measure of Web traffic. But clearly a visit or several in the course of the month (for free) is in no way comparable to the purchase of a single day’s issue in print. A second important metric is time spent on site. By the Newspaper Association’s calculation in the third-quarter, the average visitor to newspaper Web sites spent 43 minutes on them in the course of the month, a modest increase over the average of 42 minutes in the period a year earlier. But that works out to less than a minute and a half a day (and is a measurement of visits to all newspaper sites including the popular national ones like those of the New York Times, Washington Post and USA Today). By contrast, a typical newspaper reader spends about 40 minute a day on a given issue. Consultant and blogger Alan Mutter, himself a former newspaper editor, analyzed paper-by-paper measures of so-called stickiness and found that a majority were actually posting declines year-to-year in October 2007. That could be a function of more quick visits to check a single article, but it hardly represents progress. Scarborough has developed a third way of looking at total newspaper audience. In larger markets it now measures how many adults look at either the print or online editions at least once in the course of a week. Drawing on those numbers, the Newspaper Association says that the newspapers measured reach 77% of adults one way or the other on average.6 Once again, though, the detail carries some qualifiers. Scarborough found that in the top online newspaper markets – Boston, Atlanta and Phoenix -- as many as 16% to 17% of adults looked at the site at least once a week.7 But because most of those were also at least occasional newspaper readers, the addition of unduplicated audience was 4% to 7%. And in most markets, the additional reach was only a percentage point or two. The new ABC Audience FAX report, in prototype format only for now, is similar to Scarborough’s measure except that it will count the in-market audience coming to the site in the course of a month rather than a week. All this activity, as Stephen Hills, president and general manager of the Washington Post, put it in the November announcement of the ABC initiative, is aimed at “marketing the industry.” It is a little hard to see why an advertiser would care about total reach as opposed to how many readers will see a given placement in a given medium. Still, addressing negative perceptions is part of what the industry is looking for. These totals can also be an invitation on a sales call to look at the range of offerings that are now standard at newspapers. News organizations also gain more tools directing ad messages to specific demographic groups. Perhaps newspapers will go the next step and develop more detailed information about the most regular readers of their Web site and the attention they pay to Web advertising. For now that information either is not available or is not helpful in making the case for advertising on newspaper Web sites. As we will discuss in the next section on newspaper industry economics, it has become clear that a very large share of those looking for content or advertising on Web sites come through the side door of search rather than the front door of the home page. That is causing newspapers to think like their competitors, seeing whether they can capture a share of the commerce-only visitor who is looking for a specific product or service and may be indifferent to the news surrounding it. In summary, the online audience has grown and will continue to grow. Print readership is not falling as fast as print circulation. And total readership of all the newspapers’ products is fairly healthy. But it is becoming clearer year by year that the traditional model of an audience coming for news and then sampling the ads does not work as well online as in print. Following or driving news audience to the Web has become an industry fascination, but it remains, as we will see, a bold leap to an undeveloped business model. Number of Daily Newspapers The woes of the newspaper industry have not caused a groundswell of owners to abandon the operations of their papers. Overall, the total number of daily newspapers was down slightly to 1,437 in 2006 (the most recent year for which there are data), compared with 1,452 in 2005.8 The net loss in daily papers is a continuing trend in the reduction of evening newspapers, some of them folding, others shifting to morning publication. There were 31 fewer evening titles in circulation in 2006 compared with 2005. On the other hand, there is also a continuing trend in the growth of morning newspapers, with a net addition of 16 papers in 2006. Sunday editions are holding steady, fluctuating both up and down slightly in the past 10 years. In 2006, there were 907 Sunday papers being circulated, down from 914 in 2005. This marks the fourth consecutive year of a decline, albeit small.
Also free newspapers seem to have slowed as competition. Several of the Metro free newspapers are money-losing and up for sale. The Examiner papers launched in Washington and Baltimore several years ago are not expanding, either. The strongest of the free papers seem to be those, like the Chicago Tribune’s Red Eye, that are basically brand extensions of the mother paper. Newspaper readership, like paid circulation, continues to decline. And this trend is true for nearly every demographic group, regardless of age, ethnicity, education or income. Young people continue to shun the newspaper. In 2007, just 33% of 18-to-24-year-olds and just 34% of 25-to-34-year-olds read a newspaper in an average week, according to data from Scarborough Research.9 This represents a decline of seven and six percentage points, respectively, since 2000. But the largest drop in readership is seen among those ages 35 to 44: since 2000 they have seen a 10 percentage point drop, from 53% to 43%. Even the elderly, newspapers’ most loyal readers, are losing interest in the newspaper, though at a slightly slower pace. Weekly readership among those over 65 has declined six percentage points since 2000, to 66%. Although Sunday readership is typically higher, these figures have also declined among all age groups.
The ethnic composition of newspaper readers continues to show the same trends that we have seen over the past decade. Whites are more likely than any other group to pick up a paper during the course of the week (49% read a daily newspaper in 2007, 54% read the Sunday paper).10 Those of Hispanic descent are the least likely to read a newspaper (31% read a daily newspaper in 2007, 33% read the Sunday paper), perhaps because there are a number of Spanish-language media options (see Ethnic Chapter). Hispanic readers, however, composed the only demographic group to show a slight uptick in readership from 2006 to 2007. This could be a result of the relative expansion of second- and third-generation of English-speaking Hispanics. Asian-Americans, African-Americans and the group of “other” ethnicities share very similar newspaper readership habits, although the decline in Asian-American daily readership may be ending.
Education has always been a strong indicator of newspaper readership and it continues to be so. In 2007, 62% of those with postgraduate degrees said they read a newspaper in an average week, compared with 46% of high-school-only grads.11 But as in years past, these numbers continue to decline regardless of the level of education that one has received.
Footnotes 1. Paul Ginocchio, “Newspaper Circulation,” Deutsche Bank Securities analyst’s report, November 6, 2007. 2. Ibid. 3. Newspaper Association of America, Trends and Numbers, Readership, at naa.org 4. Paul Ginocchio, “Newspaper Circulation,” Deutsche Bank Securities analyst’s report, November 6, 2007. 5. Newspaper Association of America, “Online Newspaper Viewership Reaches Record in 2007,” press release, January 24, 2008. 6. Newspaper Association of America, “Newspaper Web Sites Continue to Expand Medium’s Footprint,” press release, October 31, 2007. 7. Scarborough Research, Scarborough Newspaper Audience Ratings Report 2007,” April 24, 2007. 8. 2007 Editor & Publisher International Yearbook, 87th Edition. 9. Scarborough Research Center , survey data spring 2007 10. Ibid. 11. Ibid. Economics By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute Newspapers continued their weak economic performance in 2007. Advertising revenues fell by an average of about 7%.1 Earnings were down again, slightly more than 10% measured by earnings per share at public companies.2 Stock prices for public companies plunged for a third straight year, losing 42% of value cumulatively over the three years.3 The coming year’s prospects were for more declines in revenue and earnings – and that was even before recession was in the air. Gallows humor making the rounds in the industry sums it up, “If you liked 2007, you’re going to love 2008.” The short- and mid-term gloom may not be the worst of it, however. Doubts crystallized in 2007 over whether the industry can count on Web revenues – by themselves or with print -- to support a vigorous and comprehensive news report. Here are the issues:
Possibly, some day. For the moment, the newspaper industry is profitable — less so than it once was — but still significantly so. And it is, online and print combined, still generating advertising revenue of roughly $45.5 billion a year.5 Advertising Woes--Real Estate is the Bleeding Edge The fundamental reasons for decline have not changed. (See last year's report.) In brief review, the problems are as follows: Mergers and restructuring of American retail industry have permanently diminished retail display advertising. There are many fewer department stores and a continuing 25-year share of market shift to Wal-Mart, a very light newspaper advertiser. Robust insert business, much of it from big-box stores like Best Buy or Circuit City, brighten that picture somewhat, and smaller-circulation papers have done well retaining local merchants as advertisers. But part of that retail advertising base of the business is gone due to changes in retailing. . And newspapers can no longer raise ad rates aggressively, a cornerstone of the prosperous 1980s and 1990s. The industry has simply lost too many readers and has too many new competitors. The comparatively good news here is that newspapers have not been forced to cut ad rates despite lower circulation. That reflects a strength often overlooked -- the appeal of the print buy, for sales and price information particularly, keeps most of those advertisers coming back. Being able to sell to online sites and niche publications gives the sales force an extra card to play with established customers, but those ads are at much lower rates than traditional print, so the gains in revenue do not make up for the losses. National advertising has held up reasonably well, though it ebbs and flows and is likely to take significant hits in 2008 with a recession. The worst damage has been to classifieds, which once accounted for 40% of advertising revenue and was a particularly profitable segment.6 If it were not for the declines in classified, indeed, newspapers would face only moderately difficult revenue problems. Newspapers have lost market share to electronic classified rivals, which exist in every major category. These online competitors, often by definition are made to be searched and thus are a perfect match to Web-based commerce. In employment/recruitment, the biggest losses came early in the decade with the rise of Monster.com. Newspapers have regrouped to a degree, partnering with industry-owned CareerBuilder and this year with Yahoo HotJobs and even Monster itself. This amounts to sharing a business the industry once had to itself, and 2007 marked another year of decline, almost 20% in the third quarter, the most recently reported.7 (We are not aware of a reliable figure for total share of employment advertising lost to online competitors over time.) Automotive is another problem child, unlikely to get better soon. The weakness in the U.S. car industry hurts; there are fewer local dealerships, and these get smaller advertising allowances from parent companies. Marketing studies show that buyers now also make heavy use of company Web sites, most of which now offer a version of “design your own car.” The forecast is for continuing shift to new media marketing. As recently as 2006, real estate classified was in positive territory, up 20% for the industry.8 But with the housing bust of 2007 came an advertising collapse, too. Revenue was down as much as 40% in former boom markets like California and Florida; newspapers in those states had the worst year-to-year total advertising revenue declines.9 One rival, Craigslist, free for everything but some employment listings, has hurt in several of these categories. It has gobbled share in general classified and is a presence in real estate, cars and employment as well. As the situation for classified worsens, gutting what was once the most important financial leg of the industry, managers now frankly admit they do not know where the bottom is. Finally, newspapers retain a lot of advertising volume – about $42.5 billion in print and $3 billion more online in 2007, compared to a peak of $49.2 billion in 2000.10 That does not sound like a huge loss, but adjusting for inflation, by our calculation, the print side is down about 20% over those seven years with further losses on the way in 2008.11 You can still make a business out of that if cost structure can be reduced without grievous damage to the revenue stream. That, however, is no easy task.
Costs – Deeper Cuts Quickly In earlier editions of this report, we have discussed cuts in news investment in depth but otherwise looked at costs elsewhere in newspaper operations only in summary form, noting the trends in big-ticket items like paper or employee health benefits. In 2007, however, the industry’s cost structure came center stage, and 2008 is certain to see more urgent and novel plans to save money. As noted in the audience section, newspapers have tried to cut costs, both by eliminating circulation to distant areas and reducing churn, the amount of money spent to aggressively sell new trial subscriptions at discounted rates to sustain circulation at current levels. Now, executives are beginning to look at many more places in their operations to cut costs than ever before. McClatchy’s CEO, Gary Pruitt, was asked at the December investors meeting: if he were starting from scratch, how would he structure business differently? His answer: news and advertising are core functions that need to be in the company. Everything else is up for grabs. In late 2007, McClatchy acted on that principle when its flagship Sacramento Bee outsourced advertising production (the design and production of advertising that is not “camera ready” from the advertiser) to India. A wave of outsourcing is now well under way industry-wide with functions like call centers or payroll sent elsewhere if there are savings to be realized. Some companies have quietly shifted to subcontracting printing rather than owning their own presses. For instance, the struggling Boston Herald is now printed by its rival Boston Globe and the Chicago Sun-Times by the Chicago Tribune. Another maneuver to avoid outright losses is selling what can be comfortably disposed of. McClatchy’s Miami Herald was one of several newspapers selling land it had banked in better times for expansion. The Philadelphia Inquirer announced it was considering selling its whiter-than-white office tower at the edge of Center City and leasing back space it needs (no longer the whole building). The St. Petersburg Times said in January 2008 that it would sell the profitable CQ Press book subsidiary of its Congressional Quarterly. Sam Zell indicated that the Chicago Cubs would be sold as he took Tribune private. The company’s Connecticut papers in Stamford and Greenwich were dealt to Hearst in late 2007, and analysts speculate more deals are in the offing if Tribune is to cover the heavy interest expense of the transaction and still make a profit. Landmark Communications, based in Norfolk, Va., and publisher of papers there, in Roanoke, Va., and in Greensboro, N.C., was put up for sale in early 2008. We also are persuaded, as we will discuss in the Ownership section of this chapter, that more companies would be selling off some of their newspaper holdings were the pool of buyers more robust. But the pool is not robust, so the focus will be on less depressed assets and more rounds of reduction in support staff, news staff and paper use. Reducing paper use is important because after a flat 2007, newsprint prices are expected to rise slightly in 2008 and by 9% in 2009, dampened a bit by weak demand.12 And efforts at holding down wages, health and pension benefits — the focus of cost cutting in the past — will continue in 2008 as well. The Star Tribune of Minneapolis took the unusual step of announcing that it has retained consultants who specialize in drawing unions into a planning process for the future. Inflexible work rules that add expense and slow down change are particular targets in 2008. There is in place a cost structure that worked for many years but is a straitjacket now. Paper and production costs account for nearly 25% of total expense. Circulation sales and billing together with fleets of trucks and delivery employees throwing papers on the front lawn account for 10% more.13 But unless papers are ready to eliminate their print edition, there is a limit to how much these costs can be reduced. You can shrink the physical size of the paper. You can outsource printing. You can reduce the ratio of news to ads, though that clearly weakens the product. But you still have the cost of printing and delivery . The Growth in Online Revenue — How Much Upside? The question that has dominated industry conversation for the last five years is how much online advertising will grow to make up for the losses in print and the migration of readers to the new platform. Even as online advertising experiences bumps of its own, revenues continued to grow in 2007 at a rate of about 20%. That is a significant drop from the 30%-plus in previous years. Some of the slowing is simple math -- a dollar gain that yields 33% one year, amounts to only 25% the next. Another factor is that much of the rest of the slowdown traces directly to classified advertising troubles. Fewer print classifieds translate to fewer opportunities to sell a related online ad. If some categories of classified – like real estate -- pick back up, so may some of the related online business. However, with classified still accounting for 60% to 70% of ad revenues at many sites, the industry’s wagon is currently hitched to a fast-falling star.14 Some analysts like Gordon Burrell see the action in local online advertising shifting to search and even local video. Newspapers have not made much of a dent against Google in local search. But they are doing as well as any competitor in the nascent area of local video – and advertising that precedes video news clips is a healthy business. Even if you are skeptical (as we are) that the volume and direction of online advertising can be accurately predicted years out, most would agree that the game is in early innings and fluid. It strikes us as overly dour and premature to contend that newspapers have missed the train. There is likely to be plenty of business in play in years to come. On the other hand, Borrell, Deutsche Bank analyst Paul Ginocchio and others including the industry’s own influential Newspaper Next project fault the business side as slow to change and especially slow in adding online sales specialists, In early 2005, the co-author of this chapter, Rick Edmonds, projected that if revenue growth trends at that time continued, online revenues would take a dozen years to surpass print.15 Since then slow growth in print advertising revenue has turned to accelerating loss. And the online growth rate has slowed sooner than many expected. Today, using the same formula, the lines of the two revenue streams cross sooner, though that is still years away. Perhaps more important, those lines cross at a much lower point on the graph — meaning the newspapers industry in print and online combined will have shrunk. Around 7% of revenues were lost in 2007 alone, and McClatchy has announced it expects year-to-year ad revenue declines in the double digits in the first quarter of 2008. Though the out years might stabilize or might get worse, what once was a $60-billion-a-year industry (including circulation revenue) will be $50 billion or less sometime in the next decade. Thus the future depends both on improving the quality of the product online and finding new kinds of revenue streams. In other words, the industry, if it wants to thrive, cannot wait for the current business model to play out. What are the prospects? At the moment, they are difficult. Online classifieds, with their close connection to print classifieds, are no basis at all for growth. But display advertising may have limited potential as well. The Newspaper Association of America has nicely documented that print ads are welcome by readers, and that readers may come first for the news content but look at the ads as they leaf through (and also hunt the inserts for bargains). There is no such match online. Most visits are quick ones, not conducive to scanning the ads. Many of the ad themselves are intrusive – dancing mortgage offers, curtains that roll down over content, sound or video activated by moving the mouse from one part of the home page to another. Also, a Catch-22 becomes apparent as the volume of advertising increases. There are only a limited number of display positions on the home page and some sites find themselves “running out of inventory” of available space. Visitors who do want to sample ads may go straight to the category they care about – job listings, for instance --never seeing the rest of the site. Similarly, people coming to a site as part of a content search will most likely look only at the single ad displayed alongside. And the visitor may be from Madrid. For all that, online display advertising continues to grow at a healthy rate. The Newspaper Association of America is trying to make the case that while search may be the final jumping off point for an online transaction, other forms of advertising build awareness of the product or service for the buyer. Because the price of prime Google search terms has soared, the association reasons, a balanced mix of search and other online advertising programs should have increasing appeal. More than 400 participating daily papers now are pinning great hopes on the partnership with Yahoo. The arrangement, started in 2006 with a much smaller group, makes placing national ads in multiple papers’ Web sites (now next to impossible with separate billing and varying specifications) an easy one-stop buy on a common platform. For example, Nike could place spots on the high school sports section of as many of the sites as it wishes. Optimists, among them Ginocchio, think online could increase 20% in one year for the participating papers.16 But, as with many online initiatives, the scale of new things to continuing losses is discouraging. “I expect to do $1.8 million to $ 2 million in new business,” one publisher told us, “but my auto once was $18 million and now is $8 million.” So it would take the equivalent of five Yahoo partnerships just to get back to even. There is an assortment of other online revenue opportunities in the oven, but it is hard to forecast what will come of them. Local search advertising has been identified as a potential growth area for years, but has yet to arrive in a big way for newspapers. Google is a lot quicker and simpler way to find what you are looking for. A few papers, notably the Atlanta Journal-Constitution with its kudzu.com, are venturing to commerce-only sites, where the content is ads and listings with a sprinkling of viewer comments and reviews (as one finds on travel sites). The Philadelphia Inquirer has launched an Amazon-like site, titled Zeppy, and the Charleston (S.C.) Post and Courier has established a general shopping site, PalmettoBizBuzz.com. The Chicago Tribune took the step in January 2008 of moving employment classified to online-only on weekdays, and others may follow. Borrell believes that local video advertising will rise from a tiny base now to a hot format over the next five years and that nimble newspapers are in a position to get a good share of the action. (And they had better, according to Borrell, because he predicts that classified and local display will not only stagnate but decline). A typical video ad might be for a local car dealership, partly promoting service, good deals and the like, and part a demonstration drive of the latest models. The lines between ads and content can be fuzzy in the typical online page design, and online editors say they are besieged with proposals for content/ad packages — for instance a driving trip around the world, sponsored by a manufacturer and using its car. Online business executives, charged with growing this engine of future earnings, are eager to explore, but editors want to maintain, at least in part, the traditional wall between the news and business side in print. A year ago, we discussed high hopes for the Newspaper Next project, sponsored by the American Press Institute, urging newspapers to get innovation in their bloodstream, testing many ideas for “jobs to be done” for both readers and non-readers, traditional advertisers and the host of businesses and services that do not advertise. The concept was well received. In 2007 many newspapers set out to find ideas that were workable anywhere or were particular fits to their market. An early favorite, widely adopted by Gannett papers and others, is to create a site for busy moms. There is a natural mix of how-to features and listings of after-school activities or summer camps that quickly attracts an audience. Mothers, the thinking went, like to chat and thus contribute additional content. A targeted audience that visits with some frequency, in turn, draws specialized advertisers who might not be able to afford the print paper or the general news Web site. And indeed mom sites make a good little business, but with an emphasis on little. The revenue enhancements are modest, and publishing executives concede they will need 20 or 30 such successes to make up for the print revenue falling off the table. And it is unclear there are 20 or 30 good such opportunities there for the taking. Stephen Gray, director of the Newspaper Next project, was on the road most of 2007, doing workshops. In an interview, he conceded some disappointment that many experiments to date have been slower and smaller as money-makers than he had hoped. But he still sees merit in the idea that newspapers can evolve into a sort of “local information and connection utility” for their communities, some of that information news, much of it not.17 More drastic scenarios Once, as futurists imagined the delivery of news digitally, they thought the savior of the news business would be the elimination of those brick and mortar costs — printing, production and delivery. The future of news, they imagined, was bright, because the cost of producing it would go down. That future seems much more cloudy in 2008 than it might have in 1988 when all that was just theoretical. How close are we today to that more radical cost solution – discontinuing publication on some days or eventually pulling the plug on print entirely, hoping that by then print readers and advertisers will follow to an online-only version? Newspaper executives have been saying for years that if the audience for news moves online, they are prepared to follow them there. Even if that means the end of the print editions. Do they really mean it? In 2008, the conditions are lining up so that, at least on certain days, papers may actually begin to experiment with just that scenario. As will be discussed at more length at the end of this section and the next on ownership, profits have deteriorated rapidly over the last two years. Some newspaper companies are highly leveraged with debt they took on to make acquisitions at prices that looked reasonable at the time but now appear way too high. They could have difficulty making their interest payments in 2008. Should newspapers see possible default in their near future, incremental changes will probably not be enough, and the stage would be set for a more radical solution. The math on pulling the plug on print is straightforward. The savings on paper, production, circulation sales and delivery would slice at least 35% off a typical newspaper’s expense base in one swoop.18 Online production systems and capacity are not without costs of their own, but added revenues drop quickly to the bottom line. (So, even maintaining print and online editions, companies like MediaNews have said they now see the majority of earnings coming from the electronic side within a few years). Discontinuing print would only make sense, however, if the savings were greater than the loss of advertising and circulation revenue. Given the perceived effectiveness of print as an advertising medium, and the fact that the paper still provides more than 90% of revenue while the Web sites contribute less than 10%, the industry appears not to be at a point yet where most of the advertisers (or all the paid subscribers) would follow over to the online alternative. A more likely scenario would be for some papers to discontinue daily editions on the lightest readership and advertising days. That would save paper and allow shrinking production and news staffs with only five days instead of seven in the working week. The proposition to readers would be that they could keep current with a more compact report on the Web site, a pattern some readers have probably already adopted. There has been discussion in the industry for several years of the eventual possibility of dropping print publication some days. We wouldn’t be amazed to see at least a few papers making this move in 2008 or 2009. If a pattern of phasing gradually from print to online does develop, Sunday editions will be the last to go. They provide as much as 50% of advertising revenue at some papers and are the focus of the insert business, which continues to thrive. Profits and Stock Performance It used to be that newspaper operating profits averaged above 25% and were routinely described by industry stalwarts like Davis “Buzz” Merritt or Jim Ottaway as “obscene.”19 That is certainly yesterday’s news. By 2006, pretax margins for newspaper companies whose stock is traded on the exchanges were down to 18.5%.20 As year-end 2007 figures began to come in, mid-teens appeared typical, and 2008 was expected to be worse. Early in 2008, Goldman Sachs analyst Peter Appert wrote that since a recession now seems probable, he was knocking an additional 5 percentage points off his estimate for revenues and expected “accelerating earnings declines.”21 Several points put this falling profit trajectory into perspective. While an analyst or an investor wants to know operating results (earnings before interest, taxes, depreciation and amortization, known as EBITDA), at the end of the day companies do need to pay out taxes (typically 35% to 40%) and interest on their debt. So the sky-high margins of yesteryear do overstate a bit. Taxes will fall along with earnings, but interest payments are becoming a big, threatening factor for companies with a lot of debt like McClatchy, Tribune, MediaNews and Journal Register. These falling results would be even worse except for the boost for online operations. As we have discussed, that contribution is leveling or even slowing -- and there is no easy way for companies to disentangle themselves from print and its cost structure (which, in any case, continues to provide more than 90% of revenue). Analyst Ginocchio has written that as much of the ad revenue declines of 2007 were cyclical.22 That portion, especially as real estate recovers, should be back eventually, although not in a 2008 recession. The structural changes in classifieds that are the heart of the print advertising problem are another story. Classifieds are clearly going to fall some more in 2008. Industry executives can hope classifieds level off to a smaller but stable base, but that’s no sure thing. Conceivably, the rate and volume of losses could even accelerate. Finally, an industry average of profit margins in the mid-teens masks the range of results that find a number of papers in deep trouble. Smaller-circulation papers are beginning to feel the competitive pain but never were as reliant on classified as the big metros. Lee closes its fiscal year in September and most of its papers had 20% pretax margins for 2006-07. But acceptable results elsewhere do not do you much good in San Francisco, Seattle, Minneapolis or Philadelphia, where publishers are already losing money or in danger of dipping into the red in 2008. Stock Values Given all these factors, the stock market gave newspaper shares a drubbing for a third straight year. Cumulatively, the remaining publicly traded companies have lost 42% of their value from the start of 2005 to the end of 2007, and 2008 started with more of the same.23 The table below provides details. Stock Values, Select Newspaper Companies
Source: Yahoo Finance The one company whose shares were up for the year was Washington Post. Its flagship newspaper shares the typical negatives of the industry, despite a Web site that is strong both editorially and financially and reaches a national and international audience as the printed Post does not. Investors like the company’s fast-growing Kaplan education business, which has passed the newspaper as the biggest source of revenues, plus its highly profitable television stations. Hardest hit were McClatchy and Journal Register (which owns small papers in New England, the Philadelphia suburbs and Michigan). Each is exclusively in the business of newspapers and Web sites and is facing a daunting debt load besides . Several companies raised their dividends. GateHouse Media continues to lead the pack, paying out a robust 40 cents a share, quarterly, even as its share price has fallen to roughly $6, and Wall Street has begun questioning the wisdom of its continuing acquisitions.24 Conclusion We don’t affiliate with the doom-and-gloom club like retired Knight Ridder executive Rob Reed, who delivered a lecture to a local senior citizens’ group in Battle Creek. Mich., titled “Are Newspapers Near Death?”25 No, they are not. There is life, earnings and maneuvering room in the industry. Even weakened, newspapers remain the top source of news for their communities. The editorial inroads of community-based online publications are patchy geographically and have been slow in coming. Still, 2007 and early 2008 were a time were the road ahead looked harder, and doubts developed over whether an online revenue rescue of the news enterprise will indeed materialize. The best bet for a 2008 strategy would seem to be balance – urgent attention to finances but taking care not to destroy what is essential for longer-term viability. And much of the brighter future that may on the other side of a print-to-digital transition still remains to be defined. Footnotes 1. Richard Perez-Pena, “Paper Cuts,” News York Times, February 7, 2008. 2. Peter Appert, “Newspaper Trends and Outlooks,” Goldman Sachs analyst’s report, December 12, 2007. 3. Yahoo Finance, January 2, 2008. Cumulative total for three years calculated form 2006 and 2007 State of the Media reports 4. Newspaper Association of America, “Online Newspaper Advertising Growth Continues,” press release, November 20, 2007 5. Newspaper Association of America, Trends and Numbers, Advertising Expenditures, at naa.org. NAA figures are through 2006. Adjusted for reported print losses and online gains in 2007. 6. Newspaper Association of America, “Annual Newspaper Ad Expenditures” Year-end 2005 over 2004 total retail ad spending increased by .8%. The first three quarters of 2006 were as follows: 1 st quarter showed (-1%) growth, 2Q (1%), and 3Q (-.3%)]. 7. Ibid. 8. Newspaper Association of America, “Online Newspaper Advertising Growth Continues,” press release, November 20, 2007 9. Newspaper Association of America, “Newspaper Classified Advertising Expenditures” cited in 2007 State of the Media. 10. Newspaper Association of America, Trends and Numbers, Advertising Expenditures, at naa.org. NAA figures are through 2006. Adjusted for reported print losses and online gains in 2007. 11. Richard Perez-Pena, “Paper Cuts,” News York Times, February 7, 2008. 12. Peter Appert, “Newspaper Trends and Outlook,” Goldman Sachs’ analyst’s report, October 2, 2007. 13. These estimates are discussed by co-author Edmonds in “Pulling the Plug on Print.” Poynter Online, December 3, 2007. 14. Paul Ginocchio, e-mail to co-author Edmonds, November 2, 2007. 15. Rick Edmonds, “An Online Rescue for Newspapers,” Poynter Online, January 27, 2005, and Rick Edmonds, “The New Bottom Line: 25 Percent Online Revenue by 2011,” June 23, 2006 16. Paul Ginocchio, “”Yahoo Deal Impact Could Be Greater Than Expected,” Deutsche Bank Securities analyst’s report, September 21, 2007. 17. Rick Edmonds, “What’s Next For Newspaper Next,” Poynter Online, November 13, 2007. 18. Edmonds , “Pulling the Plug on Print,” see footnote 13. 19. W. Davis Merritt, Knightfall, AMACON (American Management Association), 2005, page 224. Ottaway is cited in Adam Kushner, “Interview with John Morton, IFRA Magazine, December 2007. 20. Karl Choi, Merrill Lynch analyst, e-mail to co-author Edmonds, February 25, 2008 21. Peter Appert, “Reducing Estimates (Again) Given new Recession View,” Goldman Sachs analyst’s report, January 9, 2008 22. Paul Ginocchio, “Don’t Believe the Hype, Some of the Downturn is Cyclical,” Deutsche Bank Securities analyst’s report, July 20, 2007. 23. Yahoo Finance, January 2, 2008. Cumulative total for three years calculated form 2006 and 2007 State of the Media reports 24. “GateHouse Announces Third Quarter 2007 Results and Fourth Quarter Dividend,” press release, November 13, 2007. 25. Stephanie Antonion Rutherford, “Can Newspapers Survive in a Digital World?,” Battle Creek Examiner, January 11, 2008. Ownership By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute To read the financial press you would think 2007 was a year of big deals and high promise in the newspaper industry. Sam Zell took Tribune private in an $8.2 billion deal, and Rupert Murdoch’s News Corp successfully bid $5 billion for Dow Jones and its Wall Street Journal. Fair to say, those two events were positive proof that at least a few people with money see opportunity in newspapers, where most predict trouble and more trouble. In general, though, the deals were an exception to a cooling interest during the year in newspaper properties among prospective owners:
In earlier editions, this part of the report and the News Investment section following have examined the variety of ownership structures – publicly traded, private, family and nonprofit – and made distinctions between those aiming for high short-term margins and more long-term oriented and optimistic proprietors who see a payoff from investments in news quality. These distinctions are still relevant, but the intensity of current economic pressures has had a leveling effect. Wall Street in recent years has been more interested in “top-line” revenue growth than in bottom-line profits. Two bigger proponents of the bottom-line focus — Knight Ridder and Tribune’s former owners -- are now gone. That leaves the remaining high-margin crowd, Gannett to an extent, and Journal Register particularly out of favor with investors. That focus of Wall Street represents a change from the best days of the newspaper business, when things were so good investors seemed to gravitate to companies, like Gannett, that were growing by acquisition and making those papers more profitable. Now, the market wants more proof of a long-term strategy. At the same time, however, companies willing to accept single-digit margins in an off year like 2007 -- the Washington Post newspaper, the Newhouse family’s Advance chain -- are hardly immune from pressure. They can see red ink around the corner. That is not sustainable for very long for any ownership structure. Transactions of 2007 Tribune was put into play as an acquisition target in spring 2006 at the urging of the Chandler family, owners of 20% of the company’s stock received when Tribune took over Times Mirror in 2001.The Chandlers’ SEC filing included a scorching critique of Tribune management, accusing it of pursuing a failed strategy and steering the company to one of the worst performance records among public newspaper groups.1 More to the point, the Chandlers were ready to cash out. They hoped that a buyout would come at a premium (shares were down 50% from their peak) and figured they could shed potential tax liabilities in the process. An extended auction followed with expressions of interest from various private equity firms and from Los Angeles billionaires David Geffen, Eli Broad and Ron Burkle, each of whom hoped to acquire the Los Angeles Times if the company was sold in pieces. Ultimately Broad and Burkle bid for the whole company, but the winner of the auction in April 2007 was Chicago real estate mogul Sam Zell, who offered $8.2 billion and assumed $5 billion in debt.2 The financial deal was a complicated transaction in which a large share of the purchase funds came from the Employee Stock Ownership Plan. Simplifying slightly, Zell, not the employees, controls the company, but they stand to benefit should Tribune prosper but will not lose money or retirement benefits if not. And the structure allowed the deal itself to be virtually tax free. Zell, a colorful character and motorcycle enthusiast, was known as the “grave-dancer” during the mergers & acquisitions boom of the 1980 (an unfortunate juxtaposition to the current state of the industry). As potential owner through most of 2007 and proprietor once the deal closed in December, Zell has been accessible to the media and bullish on the industry but vague on details of his turnaround plan. In a round of pep talk visits in January 2008, he told newspaper staffs he would encourage “bottom-up” management and individual employee initiative, an allusion to the heavy-handed corporate directives of the Tribune management he has replaced. But in those early conversations with staff, he is also indicating a tough focus on the bottom line. During a testy exchange with an Orlando Sentinel photographer that ended with Zell cursing her out, he said, “My view of journalism is that I want to make enough money to afford you.”3 The sale of Tribune, the second largest-newspaper company after Gannett, constituted a big deal with a spicy accent of boardroom drama. But bigger and more dramatic was right around the corner. On May 1, Rupert Murdoch announced unexpectedly that his News Corp. was making a $5 billion offer for Dow Jones.4 At $60 a share, he was offering a hefty 60% premium over the price at the time. The reality was that Dow Jones had been limping financially for years despite a strong paid online site, initiatives to improve the Wall Street Journal editorially and an assortment of lesser-known specialized online business information services providing most of the c | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
