A confidential report for INMA members

No Iceberg

Separating Truth from Fiction About Newspapers In This Recession

By Earl J. Wilkinson

The death of the newspaper is one of the great exaggerations of today’s economic downturn.It is a myth being perpetuated by people, companies, and the trade press that serve them that are inseeming cardiac arrest – many of whom have amassed debt beyond their means, possess business modelsvulnerable to today’s environment, and are unused to competitive profit margins.No matter how unbiased or agnostic we try to be, we are all creatures of what we read and what surroundsus.Being based in the United States, I am surrounded by extraordinary negativity. Not just talk aboutadvertising declines, classified migration to the internet, and circulation woes. The talk in the States is aboutthe death of newspapers, the death of the traditional print business model, and the death of companies thatown today’s newspapers.Recently, I decided to reach out to INMA members worldwide to understand the precise colour and tenor of this downturn.Is the extreme negativity justified?This brief report for INMA members is a summary of my findings. It is a narrative, based on the confidentialdiscussions with senior executives in Asia/Pacific, Europe, Latin America, and North America.

A. CORPORATE OWNERS IN TROUBLE, NOT NEWSPAPERS

The bottom line is this: Some of the corporations that own today’s newspapers may soon disappear, but thenews organisations they own will easily survive this downturn.These corporations own newspapers that remain operationally profitable, but must restructure debtsamassed in a business culture that encouraged highly leveraged ownership consolidation on the back of aharvesting strategy that may have gutted newspapers as much as today’s recession.So, let’s start from a basic premise. Newspapers worldwide are

not

on the verge of collapse. Newspapercorporations in certain countries that have certain business models and certain business circumstances arevulnerable, and the recession exposes this vulnerability.The more vulnerable position you are in, the more intense the pressure for change – especially fast change.To over-simplify, there are newspapers whose business models allow them to be “less affected” and “moreaffected” by today’s downturn. In broad terms, this is what this means:

Less affected

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Subscription-based.

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Paid newspapers.

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Distribution in a tight geography.

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Less than 60 percent of revenue comes from advertising.

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Low reliance on classifieds in the advertising mix.

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Low debt.

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Non-union.

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Capital expenditures not tied up in print operations.

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Low penetration of broadband internet.

More affected

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Single copy-based.

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Free newspapers.

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Distribution in a broad geography.

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More than 60 percent of revenue comes from advertising.

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High reliance on classifieds in the advertising mix.

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High debt.

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Union.

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Capital expenditures tied up in print operations.

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High penetration of broadband internet.It just so happens that newspapers in the United States, Canada, United Kingdom, and Australia mostlyhave business models that fall in the “more affected” category. Newspapers in many other countries arebeing affected, but to a far less dramatic degree than counterparts in “more affected” markets.In the United States, the economics of a labour-intensive metropolitan daily reliant on print classifiedadvertising and distributed to a vast exurban geography will force “second newspapers” in local markets toclose. Meanwhile, newspapers that chose not to slim down operations in good times, through inaction orunion intransigence, may consider closing instead of confronting the disorientation of cultural vertigo –peering over the cliff and cutting staff by half at one time.Let’s be clear here. This means a U.S. metropolitan market is not big enough to support more than one kindof 20

century-style publishing behemoth – a peculiar entity on the world stage that falls squarely in the “more affected” category. Most markets in the world can handle several such entities. In the United States,smaller, nimbler digital news operations will likely emerge with reverse publishing on profitable days thelikely model that fits the market. A Swedish publisher put it to me this way: U.S. newspapers are being pounded on 85 percent of theirbusiness model (advertising), while his newspaper is being pounded on 50 percent of his business model.His year is tough; his counterpart in the States’ year stinks. A Swiss publisher put it another way: “My view of what’s happening in the U.S. is that newspapers havemilked advertisers and readers until that model no longer works. The minute it became difficult, they movedentirely in a different direction.” That “different direction” is the all-digital future. The Swiss publisherbelieves in two scenarios: a) there will be a return to print advertising post-recession; or b) the U.S. modelisn’t entirely translatable to other national newspaper industries that don’t rely so heavily on advertising intheir business models.

B. DEBT-RIDDEN VERSUS RECESSION-RIDDEN COMPANIES

To cut through the deluge of reporting,

debt-ridden

companies are behaving differently from

recession- ridden

companies:

•

Debt-ridden:

Debt-ridden companies are behaving as if their very survival is at stake; in manycases, this is true and understandable. Newspapers owned by debt-ridden companies are underenormous pressure to throw off cash and produce profit margins that are unthinkable in this kindof economic downturn. A local publisher of one such company in the United States told me theyhad to get rid of their plants because they had no money to water them! For debt-riddencompanies, there is little long-term thinking; it’s all harvesting.

•

Recession-ridden:

The recession-ridden companies are in pain. The pain is greater than theother two global recessions, combined, from the past 20 years. Yet the pain is scalable. There willbe the inevitable balance between cost-cutting and development. I’m hearing panic mostly frompeople who have never before experienced a recession at a newspaper. I’m also hearing concernfrom companies having difficulty securing lines of credit.Look at the earnings statements and what you hear on the street.I’ve heard that one of the Tribune Company’s leading newspapers may have made a US$100 million profit inan otherwise horrible 2008 due to cost containment and targeting its opportunities. But put that in thecontext of the US$13 billion debt the Tribune Company has amassed and must service! You can throw off impressive profits, but the way newspaper companies structured their debt to acquireother newspapers assumed they could lift 20 percent margins to 30 percent and more. Little thought wasgiven to the idea that margins could drop from 20 percent to 10 percent or less.That is turning into a Shakespearean miscalculation.Let’s separate executives at recession-ridden companies who say “business is awful” from executives atdebt-ridden companies who say “I’m not sure we can meet payroll.” In late 2008, the American Press Institute convened a summit of U.S. newspaper publishers to discuss theeconomic crisis facing the industry. From the reports I received, the meeting was disappointing to allpresent with no consensus on how publishers can collaborate moving forward or push some kind of collaborative transformation agenda.From what I can piece together, the nuance of the differences of opinion in the room had more to do withthe context of the executive present. If you represented a debt-ridden company, newspapers can’t broadlytransform themselves fast enough. If you represented a recession-ridden company, the whole downturn isirritating but business will return and the only mystery is about how much cash to conserve and for howlong.If you’re a publisher with low debt or you invested in the proper capital expenditures in good times(databases, CRM systems) or you are operating in a national market with low internet penetration, there isno talk of death, bankruptcy, or other dismal subjects. The fundamentals for recovery are at your fingertips.

Where there is danger, there is opportunity.

In “more affected” markets, there are a lot of changes inbusiness models, expense allocations, and multi-media that can’t be made fast enough. In “less affected” markets, you have the opportunity of recession to force changes – though you are better positioned forsome degree of recovery post-recession.

C. BEHAVIOURAL TRENDS AT NEWSPAPERS

Newspapers worldwide are behaving like recessionary businesses:

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Where to cut:

The best ones are right-sizing their editorial and production operations relative tothe size of revenues they can generate. The worst ones are cutting across-the-board, deprivingmanagements of the ability to market, sell, understand customers in changing times, and evolvetoward digital.

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Transformation:

The best ones are turning danger to opportunity by accelerating transformationstrategies. The worst ones are sticking their heads in the sand, and hoping the storm will pass.

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Treating employees:

The best ones are treating their surviving employees as if they’ll be withthem for the long-run. The worst ones are treating surviving employees as if they’re lucky to havewhat they have.Business culture often mirrors the culture at large. The American capacity to consume and over-spend ingood times is legendary; so is the American consumer’s willingness to slash everything in bad times. That