Can We Read the Writing on the Wall?

At the risk of being depressing, I feel that I have to write about something that has been bugging me for awhile now.  Please correct me if you think I’m wrong as I’m not trying to pretend to be an economist — maybe there is something I’m missing.

We all know that the newspaper industry is in a state of crisis. ‘Nuff said.  But I’m constantly surprised by what seems to me to be a lack of knowledge among journalists and academics about what really going on financially.

I still hear the following over and over from people from all different lines of journalistic work: If only newspaper companies would stop being so greedy and simply accept less exorbitant profit margins, we would be fine!

Folks, that ship has sailed.  You know I hate to say it.  But I think it is true.

It once had some truth to it, especially in the late 90s and even just a few years ago (although it is an essential market reality, whether we like it or not,  that all publicly traded companies have to keep increasing their margins in order to remain attractive to investors — which places a substantial burden on all large companies that have to make a whole lot of money if they are to keep growing).  Newspapers have historically reaped huge profit margins in the 20-or-more percent range. Contrast that with grocery stores and many other enterprises that make only 1 or 2 percent profits, and you’ve got yourself a cash cow.  Even as margins have gone down in the newspaper industry, many people say, they are still pretty impressive, especially when you consider that you are talking about more than just a widget, but rather a vital organ of democracy.  So we should really content ourselves with less and all is well.

What is happening now, though, is a revenue slide that is so precipitous that we can’t keep making that argument, folks.  In other words, even somebody as bad at math as I am can tell that if something keeps going down, and down, and down, eventually you are going to hit bottom — and even worse, the cuts you make to compensate for the downward slide in turn erode the quality of your product, which may accelerate the whole cycle.

According to a Biz Blog entry by Poynter’s Rick Edmonds, The Washington Post newspaper division had a first quarter operating margin of 0.6 percent. That’s basically breaking even (they are lucky to own Kaplan and other properties that help keep them in the black.)  He also observed:

“Among more profitable public companies, operating margins and cash flow margin are not all that they used to be but are still robust. The hitch is that those percentage measures of profitability conceal how quickly actual profits are declining. Gannett, for instance, reports results for its community newspapers, USA Today and a group of British papers as a single publishing division. For the first quarter, operating margin was around 19 percent, little changed from the year before. But publishing revenues were down 8.6 percent, operating income down 16.2 percent and cash flow down 14.5 percent.”

That is, in two words, not good.  Here is another number that freaks me out:  Journal Communications Inc., parent of the Journal Sentinel, reported a 60 percent (yes, that is a six and a zero) drop in net income in the last quarter of 2007.  Although this drop reflected some one-time charges, it is still a staggering figure.

I also hear many people bemoaning, understandably, the papers recently taken bought up by the likes of Sam Zell and Brian Tierney, and indeed, Zell’s recently announced productivity and 50/50 news advertising mix (linked here from Romenesko) is plenty outrageous.   But as Steve Yelvington points out, these guys aren’t just fooling around for giggles — they are  floundering with massive debt.  For example, the Philadelphia Inquirer,  purchased by Tierney, is currently in default on its loan terms, which Yelvington compares to the situation that is roiling the real estate market.  Yes, they are technically still making money (although the margins are declining rapidly), but crushing loan payments are dragging them down anyway.   As he observes, even news organizations that know they have to spend money to invest in the future can’t do that if they don’t have and can’t get any capital to work with.

At a meeting I attended a few months ago of some executive editors and publishers, a publisher drew a bunch of numbers up for all of us to see and explained why he is getting night sweats.  I can’t remember the exact numbers, but suffice it to say, within a few years, they went from black to red.   An editor confessed to walking around the block after financial meetings to defuse some of his fears and emotions before returning to face his staff, to whom he wants to project a more optimistic outlook.

It might be over soon for newspapers, but I don’t think it’s over for journalism.  I am actually feeling pretty bullish lately as to the ultimate job prospects of many of the journalists whose work I respect so much, which I will elaborate on later.  But just saying “the problem is that we won’t accept lower profit margins” is wishful thinking of the kind that can cloud our up with better strategic plans for the future.  And I think that in the long run, democracy is much better served if we all have a grasp on what the picture really looks like so that we know how to confront it.

3 Comments

Filed under Business of News

3 responses to “Can We Read the Writing on the Wall?

  1. Ron

    As poor as my opinion is for the journalism in my local daily, I consider the cost of my subscription to be a form of civic duty. Not too different, in my eyes, from protecting a Constitution that allows nincumpoops to be elected to our highest offices. It is the Fourth Estate, after all, and our demand for quality journalism should be separate from our need for journalism itself.

  2. changingnewsroom

    Rock on, Ron. I agree. Just wish that everybody thought the same way. Although I will confess that I have become more and more of a fan reading newspapers on the Internet, which I never thought would happen, but now I really actually prefer it. I’m an oddball (sadly) who actually would pay for that luxury. And I think I read as much if not more of an article online.

  3. Jonathan Groves

    An interesting letter on Romenesko from Trevor Butterworth offered an instructive anecdote for the importance of keeping good journalists who are willing to think critically and challenge press releases:

    “The thing about press releases is that they are not always accurate. Take, as a convenient case in point, today’s LA Times story warning people about the toxic fumes given off by shower curtains. Scary, huh? But it’s based on a study by an activist group, and if you *read the study,* you’ll find, albeit towards the end of the 44-page document, that the group admits its emission tests couldn’t find the chemicals (phthalates), which are touted by the LAT as especially risky, migrating from the curtains. And if they don’t come out, how can they be a risk? It’s a bit like saying ‘if you drink gasoline, you’ll get sick; therefore (read all about it!) cars are toxic.’

    “Given that William Knowles, who received the Nobel Prize in 2001 for work crucial to developing green chemistry, recently denounced this kind of activist science on phthalatees, don’t you think you should reward journalists for doing more than transcription? I mean, if that’s all you want journalism to be, write a program to trawl Ascribe or the PR news wires, and hire a few reporters from Britain’s tabloid press to come up with catchy, provocative headlines and scandalous spin. Alternatively, think about the value of journalists *not* writing inaccurate stories by doing background research, otherwise known as ‘reading,’ and leaving the cubicle to go out and ‘talk’ to people.”

    Indeed. Does anyone think “Meet the Press” will be quite the same without the intelligence and insight of Tim Russert?

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