More on Newspaper Profits

My friend Jonathan Groves, also a PhD student at Mizzou, former long-time reporter, editor, and Web geek, and instructor at Drury University in Springfield, Missouri, had an interesting rebuttal/addendum to my previous post, and he even has an MBA.  I think it’s great to have conversations like this that help us to really understand what is going on so that we can make informed decisions about our future. He suggests that we have to be sure not to give the corporate folks a pass — which I couldn’t agree with more.  Here are his comments:

Two thoughts:

*I believe Rick Edmonds was talking about the operating margin of the newspaper division alone, so that I don’t think the 0.6 percent includes the Kaplan stuff at the WaPo.  [Me: That’s what I meant, but good to clarify since that wasn’t well-stated on my part.]

*Yes, the declines are massive, but those are year-to-year declines, so be careful about reading too much into that. I checked Gannett’s latest quarterly report (through April 2008), and here’s what the results were:

Revenue dropped 8.4 percent from $1.8 billion to $1.6 billion. Its net income dropped from $210.6 million to $191.8 million, an 8.9 percent drop. Yes, those are marked declines. But look at the margins: 11.5 percent in the 2007 quarter compared with 11.4 percent this year. If you look at the balance sheet, their assets actually declined in value, meaning they’re not investing in long-term assets such as plant, property or equipment. In the discussion of the financial results, the company notes: “The Company’s continued aggressive cost control efforts during the quarter mitigated to a significant degree the effects of lower revenue results.”

Yes, but what is the company doing to plan for the future? Where is the investment in new technology and training? How is it motivating its work force to take on the challenge of the future? There’s a hint of it in the press release: “The increase in equity losses in unconsolidated investees was due to weaker results from newspaper partnership earnings, the impact of new digital investments and lower operating results from certain digital partnerships due to the timing of certain promotion and other expenses.”

But why not take some of that added profit and invest it in other projects? What is it doing to be innovative?

I know it’s folly to compare unlike industries, but Apple spent $273 million in research and development during its first quarter of 2008, a 49 percent increase in the R&D budget year over year. That investment came with a cost: Its profit margin was 14.6 percent in 1Q 2007, and the increased R&D budget dropped the margins 3 percentage points to 11 percent for 1Q 2008.

If Gannett had agreed to accept a similar drop (say, a 9 percent profit margin), that would have meant about $48 million it could have invested in technology and training. But did it? No. It was trying to appease shareholders and Wall Street expectations.

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