Tag Archives: media economics

Ad Departments Can Help Us Save Journalism

When Bill Kovach and Tom Rosenstiel wrote the first edition of Elements of Journalism in 2001, the Staples Center controversy at the Los Angeles Times was still quite fresh, and journalists around the country were perhaps feeling even more protective of the proverbial wall between the editorial and business sides of news organizations.

However, Kovach and Rosenstiel (my former bosses at the Committee of Concerned Journalists) argued that this controversy actually revealed the poverty of the wall metaphor in actual practice. Instead, they argued powerfully that isolation served nobody very well because we are all on the same side.

Great journalism from a credible source sells ads.  Ads make great journalism possible. Anything that might undermine the trust of readers and viewers hurts us both. So it goes.

My observations at metropolitan daily newspapers lead me to believe that we are poised right at the cusp of developing a more productive relationship between business and editorial departments, but workplace routines and traditions – especially those that are well-intentioned and rooted in core values, even if  they don’t ultimately serve those core values very well — are hard to break down.

Reporters and editors want to know – heck, are desperate to know — more about their online readers’ habits and desires.  Not so that they can pander to them or sell them widgets, but so they can create multimedia journalism that will prove relevant and serve their needs as democratic citizens.  In many cases, a wealth of information about readers just sits on another floor of the building where it is never shared.  This serves nobody very well.

I’m behind on my blogging, but I wanted to be sure to highlight what I thought was a particularly important recent post relevant to this subject on Online Journalism Blog, “10 ways that ad sales people can save journalism” (thanks to Amy Gahran and E-Media Tidbits for the link.) It’s a British blog, but the lessons certainly seem relevant to U.S. papers.

I’d also like to point out that I’m not sure how many people realize how much organizational change has been forced upon advertising departments — often when we think about media change we think about news folks now coping with 24-7 deadlines and the need to produce multimedia. But the changes faced by ad folks are possibly just as disruptive. Newspapers were so fabulously successful for so long that many ad sales people simply had to answer the phone and take orders, top advertising executives at a metro daily told me.

Small advertisers who are now a vital source of revenue on the Web used to have no chance at affording print ad space and therefore aren’t even thinking about advertising with the local daily. This requires business managers to completely retrain staffers to aggressively sell their porfolio and go out into the business community to develop new relationships, an entirely different skill set and perhaps more importantly, mindset than they’ve ever had before. Sweeping organizational change is difficult and most of all, often time-consuming — but certainly never more vital.

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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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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.

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Things that make you go “hmm”: Raising prices and declines at small papers

Thought I would share a couple of things I’ve read out there on those darn Internets that have puzzled me lately.

First is Poynter’s Rick Edmonds calling for newspapers to substantially raise their prices, noting that US newspapers are much more of a bargain in the United States than in most places abroad, especially in an era in which we all plunk down a substantial chunk of change for gussied-up caffeination at the ‘Buck or similar. Apparently he found an international analyst that agreed with him. This runs counter to what almost everybody I talk to lately is saying, which is that the exact opposite is a much better idea — going free and therefore increasing your penetration and thus, of course, your value to advertisers.

If you ask a room full of college students if they would be more likely to read a paper if it is given to them in a convenient manner for free, the vast majority will raise their hands (although these are, of course, journalism students and obviously there is a response bias, e.g. wanting to look good in front of the teacher.) A fellow doc student, Karen Boyajy, is studying the impact of going free on the business model for her dissertation, and I can’t wait to read the results. Several papers including the Columbia Missourian and the Examiner in DC and other cities are experimenting with a free weekly edition delivered to everyone in town.

I’m no media economist, but I have to say that I’m not sure Edmond’s idea makes a whole lot of sense to me — it just seems like you’d have to raise prices pretty high to make up for your losses in classifieds and elsewhere — and there isn’t much value-added in the print edition of most papers that you can’t get online for free, at least not yet. Not to mention that some of your best customers are people like me who read newspapers avidly, are willing to pay for them — but would actually just PREFER to read them online because it’s easier.

Second, I’m trying to figure out what’s up with the bad news at small newspapers, which many of us were holding out hope would be keepers of the flame if all the metro dailies crashed and burned. After all, with everybody all abuzz about hyperlocal news, it seems obvious that small papers, which are somewhat hyperlocal by definition, would have a leg up. But Jennifer Saba of E&P did a story awhile back on how, surprisingly, small papers declined more than big ones in circulation recently. My friend and fellow doc student Jeremy Littau points out that the numbers don’t distinguish between small dailies and weeklies — many of us have heard that weeklies are thriving, at least relatively speaking. But none of us could quite figure out the explanation for this, unless it’s the bad economy or an erosion of quality at these papers, many of which have probably also undergone some cuts to staff or other resources.

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