"First of all I don’t think U.S newspapers have lost anything completely"
- Article ID:
An Interview with John Morton, Morton Research
WAN-IFRA: American newspapers have been severely hit by the advertising recession this year; all advertising categories have been affected. Is it a year that should be just forgotten or do you expect a long-term impact of this 2009 recession?
John Morton: First of all, I don’t think newspapers have lost anything completely. It’s just a question of how much they can get back. The most vulnerable area is classifieds, particularly for the metropolitan papers. If they were dominant on paper, on the Internet they are not because there is a lot more competition. They will recapture some of what is lost in print on their websites, but competition means less profit.
Maybe the long-term issue is if the industry will ever be able to recapture what it has lost in this recession. That is now the fundamental question of a future prosperity for the newspaper business. I mean that in all past ‘recession recoveries’ -- the most recent recovery being in 2002 -- the newspaper industry was able to recapture the advertising it had lost during those recessions. It is not at all clear if this going to happen this time. One of the reasons is the impact of Internet. Clearly the newspapers will have a hard time recovering, and the question is will they lose 15 percent or 75 percent of what they had before? I think nobody has a clue. But so far the indication shows that the loss will be significant, probably between those two extremes. Particularly for the large metropolitan newspapers, which have been the most severely impacted in this recession, going forward they will likely be thinner, offer less journalism than they did before, and certainly will be less profitable.
WAN-IFRA: Last year at about this same time, you told us that “in the first six months of 2008, the average operating margin of the publicly owned newspaper companies was over 12 percent…much better than in other industries.” Would you make the same comment this year?
Morton: It’s not true any longer. It was true last year, but profit margin has continued to decline and for the first six months of this year the average operating margin for the publicly reporting companies, which represents about 40 percent of the nation’s daily circulation, will be around 5.6 percent. It’s still profitable but does not compare favourably to other non-media industries.
WAN-IFRA: Are the financial analysts ‘softening’ on the media’s stocks toward the end of this year?
Morton: Strangely, even though the financial condition of the big media companies has not dramatically improved, analysts have seemed to become more optimistic because things have not gotten a lot worse. For example, when McClatchy reported their third quarter results, their stock got a boost for a little while because their ad revenue had only declined by 28 percent instead of 30 percent. The fact that things have not gotten worse seems to have raised a little interest on Wall Street. But most of the financial analysts don’t even bother to cover the newspaper industry anymore.
WAN-IFRA: In their effort to trim costs, newspaper companies have taken some drastic decisions, cutting in circulation, sections, newsroom, suppressing days of publication…What were some of the poor decisions and what worked, can we already make an opinion? If you take companies like Gannett or McClatchy as an example, have they devaluated their properties by doing so?
Morton: Cost cutting, layoffs, it’s been going on for a while now; most took part in 2008 and the groups are beginning to reap the benefits of all this. So cost cutting and lower newsprint prices are the reasons for whatever improvement in earnings most companies were able to report; it’s not because the business is getting better.
But in doing so, those groups have devaluated their properties and certainly their journalism. But you have to recognise that they are publicly owned and they have some obligation to show results to their shareholders and to Wall Street. It’s interesting now that the focus is less on layoffs and more on salary reduction. At some point you have to protect your properties, so companies like Gannett are trying more to get company-wide salary reductions. The New York Times has done the same thing. It’s recognition that if you try to cut your way to financial success, you’re going to destroy your franchise. Unfortunately, an awful lot of the franchises these companies own have been severely damaged.
WAN-IFRA: Last year the smaller publishing groups running local papers were performing better… is it still the case this year?
Morton: The big metropolitans have heavily relied on classifieds, the one area that is the most vulnerable to the Internet. Smaller newspapers get around 30 percent of their revenues, in normal times, from classifieds. For big metros it can be 50 percent and more. There are a few signs that some of the classifieds are coming back, but it has been the major cause of financial problems for the big metros. The local papers are closer to their readers and less vulnerable when the national economy is bad.
Not long ago, four or five years ago, the sales price of a stand-alone newspaper that had a market to itself, would be somewhere between 12 to 14 times the operating cash flow or EBITA. That has dropped to four or five times, even lower for particularly troubled newspapers. It’s a recognition of difficulties… But this ratio would probably be a bit higher for a smaller newspaper. Seventy percent of the dailies in U.S. have a circulation under 50,000. For the most part those newspapers have managed a low double-digit operating margin (with the exception of certain parts of Arizona, California, Florida, etc., areas that got the most hit by the housing bubble) this year. Even if they have suffered, for the most part they are still profitable, even those who are owned by large corporations, like Journal Register, that were forced to file for bankruptcy because of their debt leverage.
WAN-IFRA: A number of newspaper groups filed for Chapter 11 this year. Is it a sign of how the newspaper industry is in danger?
Morton: It’s interesting to see that some people take the number of newspaper bankruptcies as a sign of the failure of the newspaper business; it’s not the failure of the business because all of those bankrupt companies own profitable newspapers. It’s just that when their corporate companies borrowed all this money to make acquisitions, they had anticipated that the cash flow of these newspapers would never go down, but it did so the corporate company could not meet their debt obligations anymore.
The newspapers that succumbed in 2009 were those jailed in joint operating agreements. So you can’t base the so-called “death of the newspaper industry” on those examples. Certainly their agencies were pushed over the edge by the recession but it’s never been as bad as it has been portrayed. That’s because the newspapers on the radar screen are metropolitan newspapers. You don’t hear of the rest, and the rest might not be doing as well as three years ago but they are still very viable businesses.
Frankly, I don’t think there are any more obvious candidates to file for bankruptcy. McClatchy and Lee (Enterprises) have escaped through cost cutting. Lee also because they own mostly small newspapers… I would say that the most in danger already filed… but I could be surprised.
WAN-IFRA: Do you think that the New York Times was really serious on their project to sell the Boston Globe? Did they only give up because of the price offered or was it the perspective of a better economy combined with the fact that they trimmed costs at the Globe? Also what it this strategy of launching an edition in San Francisco, do you have a chance there when you’re called The New York Times when all local newspapers seem to be struggling to maintain their local penetration?
Morton: They were a very reluctant seller to begin with. I mean the New York Times is a newspaper company run by newspaper people so they were very reluctant to unload a major newspaper property. Probably, they did not have the choice. They were disappointed by the very low price offered and since there was some sign of the economy coming back they decided to keep the Boston Globe.
The launch of a Californian edition is a wise move. Bear in mind that it’s part of their strategy to become a big national newspaper, and there’s still a long way to go to achieve that goal. It speaks to the fact that 60 percent of their ad revenue comes from national ads; it’s about three times more than what is typical for a metropolitan newspaper. It makes sense for them to extend local editions, even sometimes in collaboration with other local papers. It’s always difficult to launch something like this in a recession but you can’t always wait until times are great to do everything, and I think it was a smart move on their part.
-- Dean Roper
*Morton Research Inc, is headed by John Morton, who since 1971 has specialized in analyzing the media industry and has served as consultant to numerous media companies. His work includes consultation on trends, capital expenditures, acquisitions, dispositions and appraisals for estate taxes, employee-stock ownerships and other purposes. Among companies for which he has performed these services are Cox Enterprises, Inc.; A.S. Abell Co., formerly owner of the Baltimore Sun newspapers and a Baltimore television station (advisor in the sale of the company to Times Mirror); the Houston Endowment, formerly owner of the Houston Chronicle (advisor in the sale of the company to Hearst Corp.); and numerous other media companies owning newspapers. Additionally,he has served as a consultant to law firms defending various media companies in legal actions, including Gannett Co., Inc., Knight Ridder, E.W. Scripps, the New York Times Co., A. H. Belo Corp. (Dallas Morning News), Donrey Media, Hearst Corp., Chronicle Publishing Co. (San Francisco Chronicle), and Freedom Newspapers, Inc.