Thursday, September 28, 2006

Cutting profit margins for newspapers only a short term fix

Cutting “expected” profit margins for newspapers will not prevent long term downsizing of newspaper expenses.

In a post I made today at Rebuilding Media I talk about the inevitability of downsizing at newspapers. I suggest you read that before continuing here, though it’s not necessary.

There is no doubt that newspapers need to downsize to reflect both their shrinking circulation and their stagnant advertising. Investing in a better newspaper will not substantially change the forces pressuring the paper product.

There is one point that the critics of downsizing do hold that is legitimate. That is the profit margins that the publishers are trying to maintain. The usual number thrown out is 20%, which is well beyond the profit margin of a well-run manufacturing company—which is how newspapers are classified.

The level of profitability has eluded many of the big city newspapers, such as the beleaguered Philadelphia Inquirer, which reportedly (sub req.) had an operating margin of about 9%-- not too shabby by industrial standards, but well below the industry target.

So there is some element of reality to the perception that owners—primarily the large pension and mutual funds, but large individual holders as well—based their investment on expectations of now unrealistically high earnings ratios. Privately held newspapers-- such as Morris, Landmark, Freedom, Scripps—do not face the same degree of pressure, but even then there can be behind the scenes forces.

A closely held company may be satisfied to look at cash flow rather than profit margins. But once the stock gets split up among second and third generations of siblings, some of whom have no involvement with the publications, similar pressures evolve – opportunity costs. The value of the newspapers would be much higher in the hands of a publicly-owned company that would run them for industry- standard profit instead of being managed for cash flow or because the older generation was rewarded with the prestige or influence possible in running newspapers. Publicly owned media companies are rarely run to maximize political influence—they are run to provide a comfortable profit. It’s the privately owned, family run, smaller operations where influence or power is more likely to be salient. (See pages 19-21 of Who Owns the Media). It is the pressure to “unlock” the financial value that resulted in many family chains selling out in the 1970s and 1980s and has affected even the polices of some publicly owned companies where control has resided with the family, such as the Bancrofts of Dows Jones and now the Chandlers at Tribune Co. (sub. req.)

However owned, accepting lower profit margin, while perhaps realistic, does not fundamentally change the outlook for the future of newspapers nor its employees. It would only delay the inevitable. If a newspaper that was earning 20% decides to accept a more reasonable 10% margin, for a few years it could maintain its current level of operations, watching expenses climb faster than revenue. Margins would fall, but in two, three, maybe four years hit 10%. Then what?

Of course, we would hope that management is also looking for ways to rejuvenate the business, recasting it as the source of local news and information of all sorts and in whatever format. There are some models for this. Among others,, Bluffington and are searching for locally based and branded sites that are more than just newspapers online.

Accepting lower profit margin may be needed to free up investment capital as news-papers transition to profitable news-gathers, but it still may require cutting in areas of the old (read press rooms, circulation departments, some newsroom functions) and diverting those savings to building the future.

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