Academic journal article Newspaper Research Journal

How Ownership, Competition Affect Papers' Financial Performance. (Research in Brief).(newspapers)

Academic journal article Newspaper Research Journal

How Ownership, Competition Affect Papers' Financial Performance. (Research in Brief).(newspapers)

Article excerpt

Over the decades, media schoolars and public policy makers have observed with trepidation the intensified acquisition of U.S. daily newspapers by public corporations. They fear these corporations are sacrificing public interest and reader welfare to pursue financial incomes. (1)

In 1993, Blankenburg and Ozanich, (2) using data from 1986 to 1989, found that the degree of public ownership in terms of inside control or voting stock held by company managers, affected the financial performance of news corporations. They suggested a positive association between public ownership and financial management pressure. Blankenburg and Ozanich tested five hypotheses and concluded that publicly traded newspapers had more short-term financial aims, concentrating more on gaining a higher return on equity and earnings predictability than did privately run newspapers.

Three years later, Lacy and associates, (3) using data from 1990 to 1993, basically supported the initial study. (4) Lacy and associates (5) also concluded that public ownership and newspaper competition influenced news corporations' financial performance.

The recovering economy may have caused the market-driven newspaper industry to shift its business strategy to public ownership, enabling a greater investment in order to compete in the long term.

Our study re-examines the potential effects of public ownership and competition on newspaper operations. This research is important because it explores the effects of increased mergers, acquisitions and newspaper ownership clustering since Lacy et al.'s earlier study. Another study should provide a clearer understanding of media economics and related public policies dealing with public ownership, market competition and market performance.

Brief Background

Media scholars (6) have investigated public newspaper ownership influence on newspaper performance. Conclusions about newspaper corporations' attitudes toward organization profits and newspaper quality are mixed across different types of ownership--public vs. private.

Daily newspaper competition, while examined less than newspaper ownership, has received considerable attention from scholars. For instance, Litman and Bridges' (7) financial commitment theory served as the thread of many studies on newspaper performance.

Method

The present study followed the same method used by Lacy and associates: The researchers ran a multiple regression on eight performance variables for each newspaper (See Table 1). (8) Eleven newspaper groups, reported in the Value Line Rating and Reports from 1994 to 1997, were used. The newspapers chosen met previous criteria: The groups had headquarters in the United States, had yearly revenues over $100 million, obtained more than half their incomes from newspapers and were highly traded.

As in previous studies, public ownership was conceptualized and operationalized as a continuous variable measured as the percentage of inside control, which the Value Line data provided as the percentage of voting stock controlled by managers and initial owners. The average operating margin is the percentage of revenue after expenses are deducted. Cash flow is the earnings deducted from depreciation; average cash-flow margin equals cash flow as a percentage of revenue. Return on equity is earnings per share divided by equity per share, and earnings predictability is a Value Line index that calculates how well a company fulfills market analysis expectations. The plowback ratio is the ratio of retained earnings to common equity. The percentage of revenues used for expense is the percent of income used to operate, and the percentage of market with competition, found in the Standard Rate and Data Services Circulation, is the newspaper's percentage of market penetration. Finally, a competitive market is defined as any market that has an additional daily newspaper or has an additional daily with more than five percent of penetration. (9)

Findings

The average percentage of inside control for newspaper groups over the years had dropped from 61.5 for years 1987-90, to 60.2 for 1991-93, to 56.9 for 1994-97.

Hypotheses 1, 2, 3 and 4 were supported (Table 2). Respectively, lower inside control is associated with a higher operating margin (H1), a higher average flow margin (H2), a higher return on equity (H3) and a higher earnings predictability (H4). Hypothesis 5, similar to Lacy and associates' study, (10) is the only original hypothesis unsupported. Rather than finding that lower inside control produced a lower percentage of net income to common equity, the opposite was discovered. When inside control dipped, the ratio of income to common equity hiked. An explanation is decreased advertising revenue, as noted by Lacy and associates. (11) The competition for advertising revenue has been greater because of the economy and additional competition from the Internet.

Hypothesis 6, which states lower inside control is associated with a lower ratio of expense to revenue, received the greatest support, also was supported by Lacy and colleagues. (12) Hypothesis 7 states that higher daily competition is associated with lower operating margins. The result in Table 3 showed support, but the degree (-.43) is much weaker than that in Lacy et al.'s study. (13) A likely explanation is that clustering and ownership mergers dominated the market, causing market competition to decrease. The average competition index for the overall newspaper industry dropped from 76 percent in the previous study to 64 percent here.

Hypotheses 8, 9 and 10 were not supported. Daily competition is associated with a lower cash flow margin (H8), a lower return on equity (H9) and a lower earnings predictability (H10). These findings are in contrast with findings in Lacy and colleagues' study. Hypothesis 11, which states a negative relationship between competition and average retained income divided by common equity, was not supported either. A strong positive relationship was found instead, which was dramatically different from Lacy et al.'s findings. (14)

Hypothesis 12 was supported. H12 states the percentage of a competitive market would be correlated with a higher ratio of expenses to revenues. The level of support (.34), however, is smaller (.59 in Lacy and associates' findings).

Discussion and Conclusions

The findings from the present Study basically confirmed Blankenburg and Ozanich's (15) initial study and partially confirmed Lacy and colleagues' (16) replicated study. The disagreement between this study and Lacy et al.'s lies primarily in the degree of market competition impact on newspaper corporations' financial performance. While Lacy and colleagues (17) found strong evidence that supported most of their hypotheses, this project found no such support.

The influence of inside control remained strong, although the average percentage of inside control dropped from previous years. As claimed by Lacy and associates, (18) the greater degree of outside control would lead to a greater corporate-level managerial need to meet investor expectations. Expectations of earnings predictability and increased stock prices are probably the single most important financial goal. Accordingly, public companies still consider their financial constituencies to be a higher priority than their traditional newspaper constituency, the community.

The lessening of the market competition effect may have been caused by several factors. First, the considerable dip in competition intensity may result from market clustering and mergers. As public corporations strive to merge with or acquire other newspapers, the degree of inter-city and inter-county newspaper competition would have dropped, as claimed by Lacy and Simon. (19) Relevantly, joint owners may decide to spare money and decrease operating margin and cash flow by having the clustered or merged newspapers share the same facility for newspaper operations at lower costs. Consequently, newspaper groups may have reinvested more in themselves. Although we are unsure about how the reinvestment was conducted, corporations likely considered pulling in more financial resources in other news-related business ventures, such as the Internet.

Moreover, the combined effect of decreased market competition and inside control also may have driven the owners to compete for already shrinking advertising money. Lacy and colleagues (20) suggested that advertising revenues plummeted during the recessions in 1991 and 1992. While the U.S. economy gradually recovered after 1992, the industry probably still needed time to regain advertising income, which remains the bulk source of newspaper income; the percentage, however, has steadily decreased because of competition from television and the Internet. Accordingly, the impact of competition on earnings predictability dropped dramatically.

The current study inherited the weakness and limitation from the previous two studies, a small sample size of only 11 cases.

Nonetheless, this study seems to have contributed to existing knowledge of newspaper ownership and financial commitment and performance. Moreover, factors other than inside control and market competition could also contribute to the financial performance of newspaper groups. Lacy's four-step financial commitment model offers suggestions for future research. (21) For instance, the ratio of advertising to circulation of the newspaper operation income could be adopted as an additional financial performance dependent variable. The potential problem is that, while Lacy listed circulation as an indicator of market performance, he did not include advertising. To do that, researchers need to solve the nettlesome nature of newspapers as a joint product.

In summary, the findings revealed that market structure may have affected newspaper operations' behaviors and financial decisions. In a less competitive market, newspaper groups may decide to adjust and re-shape their market strategy to prepare for new challenges in a changing market environment.

Table 1 
 
Companies' Control and Performance Variables in Percentages 
 
Company            Inside      Operating    Cash        Return 
                   Control     Margin       Flow        On 
                                            Equity      ability 
 
Gannett            1           29.5         18.8        21 
Dow Jones & Co.    68.5        23           16.5        13 
Knight Ridder      15.8        18.3         11.9        13 
Lee Enterprises    24.5        29.6         19.6        19 
New York Times     87          17.5         12.7        10 
Pulitzer           94.7        24.9         16.2        23 
Times Mirror       75.8        14.1         8.8         20 
Tribune Co.        21.7        25.8         16.2        20 
Washington Post    82.8        23           16.8        17 
E. W. Scripps      81.9        25.7         17.2        11 
McClatchy          72.5        23           16.3        9 
 
Company            Earnings    Plow-        % of        % of 
                   Predict-    Back         Revenues    Market 
                                            Used for    with 
                                            Expenses    Competition 
 
Gannett            87.5        15.5         77.6        60 
Dow Jones & Co.    60          5.5          80          88 
Knight Ridder      65          7.5          86.9        55 
Lee Enterprises    76.3        11.8         71.1        46 
New York Times     22.5        6.9          86.9        61 
Pulitzer           61.3        19.3         89          80 
Times Mirror       5           12.3         90.8        75 
Tribune Co.        65          14.4         70          56 
Washington Post    75          12.8         82.7        100 
E. W. Scripps      60          7.2          78.2        39 
McClatchy          70          6.7          85.4        44 
 
Sources: Value Line Rating and Reports, December 1998 for all except 
percentage of revenues used for expense, which came from each year's 
annual report for the 11 media groups. Also, data for inside control 
and earning predictability came from yearly reports from 1995-97. 
 
Note: Figures for all but expenses as a ratio of revenue represent the 
entire media group. N=11 
 
Table 2 
 
Pearson Correlations, Regression Coefficients and Beta Weights for 
Dependent Variables With Percent of Inside Control in the Three 
Studies 
 
Dependent                      Inside Control 
Variables 
 
                                      r 
 
                          87-90      91-93     94-97 
 
Average 
   Operating Margin       -.46       -.39      -.41 
Average 
   Cash-Flow Margin       -.36       -.36      -.26 
Average 
   Return on Equity       -.35       -.44      -.29 
Earning 
   Predictability         -.59       -.53      -.49 
Average Retained 
Income 
   Common Equity           .38       -.20      -.14 
Average 
   Percentage 
   of Revenue Spent         ~        .59       .57 
 
Dependent                      Inside Control 
Variables 
 
                                      b 
 
                          87-90      91-93     94-97 
 
Average 
   Operating Margin       -.06       -.03      -.05 
Average 
   Cash-Flow Margin       -.04       -.02      -.02 
Average 
   Return on Equity       -.03       -.09      -.07 
Earning 
   Predictability         -.17       -.14      -.37 
Average Retained 
Income 
   Common Equity           .03       -.03      -.04 
Average 
   Percentage 
   of Revenue Spent         ~        .07       .11 
 
Dependent                      Inside Control 
Variables 
 
                                     Beta 
 
                          87-90      91-93     94-97 
 
Average 
   Operating Margin         ~        -.24      -.37 
Average 
   Cash-Flow Margin         ~        -.18      -.23 
Average 
   Return on Equity         ~        -.51      -.48 
Earning 
   Predictability           ~        -.38      -.52 
Average Retained 
Income 
   Common Equity            ~        -.25      -.29 
Average 
   Percentage 
   of Revenue Spent         ~        .39       .52 
 
N=11 for all variables. 
 
Note: ~ denotes that no data were given or the variable was not 
tested in that particular study. 
 
Pearson r.--Degree of relationship between two variables. 
 
Regression coefficients--Used in analysis to predict the correlation 
among independent variables and their predictive value on dependent 
variables. 
 
Beta weights--Correlations among the independent variables. Used in 
analysis when all variables are in a standard-score form. 
 
Table 3 
 
Pearson Correlations, Regression Coefficients and Beta Weights for 
Dependent Variables With Percent of Market With Competition in the 
Three Studies 
 
Dependent                      Market Competition 
Variables 
 
                                        r 
 
                             87-90    91-93     94-97 
 
Average 
   Operating Margin            ~      -.43      -.26 
Average 
   Cash-Flow Margin            ~      -.46      -.17 
Average 
   Return on Equity            ~      -.10      .34 
Earning Predictability         ~      -.49      -.13 
Average 
   Retained Income 
   Common Equity               ~      -.01      .28 
Average Percentage 
   of Revenue Spent 
   on Expense                  ~      .59       .34 
 
Dependent                      Market Competition 
Variables 
 
                                        b 
 
                             87-90    91-93     94-97 
 
Average 
   Operating Margin            ~      -.10      -.03 
Average 
   Cash-Flow Margin            ~      -.08      -.01 
Average 
   Return on Equity            ~      .06       .13 
Earning Predictability         ~      -.23      .07 
Average 
   Retained Income 
   Common Equity               ~      .03       .09 
Average Percentage 
   of Revenue Spent 
   on Expense                  ~      .19       .05 
 
Dependent                      Market Competition 
Variables 
 
                                      Beta 
 
                             87-90    91-93     94-97 
 
Average 
   Operating Margin            ~      .31       -.12 
Average 
   Cash-Flow Margin            ~      -.37      -.08 
Average 
   Return on Equity            ~      .15       .52 
Earning Predictability         ~      -.27      .06 
Average 
   Retained Income 
   Common Equity               ~      .11       .39 
Average Percentage 
   of Revenue Spent 
   on Expense                  ~      .40       .15 
 
N=11 for all variables. 
 
Pearson r--Degree of relationship between two variables. 
 
Regression coefficients--Used in analysis to predict the correlation 
among independent variables and their predictive value on 
dependent variables. 
 
Beta weights--Correlations among the independent variables. Used in 
analysis when all variables are in a standard-score form. 

Notes

(1.) For example, Philip Meyer and Stanley Wearden, "The Effects of Public Ownership on Newspaper Companies: A Preliminary Inquiry" Public Opinion Quarterly 48 (winter 1984): 566-577; Ben Bagdikian, The Media Monopoly, 3rd ed. (Boston: Beacon Press, 1990); also Ben Bagdikian, "Conglomeration, Concentration, and the Media," Journal of Communication 30 (spring 1980): 59-64; David Demers and Daniel B. Wackman, "Effect of Chain Ownership on Newspaper Management Goals," Newspaper Research Journal 9 (winter 1988): 59-68; Stephen Lacy, "Effects of Group Ownership on Daily Newspaper Content," Journal of Media Economics 4 (spring 1991): 35-47.

(2.) William Blankenburg and Gary Ozanich, "The Effects of Public Ownership on the Financial Performance of Newspaper Corporations," Journalism Quarterly 70 (spring 1993): 68-75.

(3.) Stephen Lacy, Mary Alice Shaver, and Charles St. Cyr, "Effects of Public Ownership and Newspaper Competition on the Financial Performance of Newspaper Corporations: A Replication and Extension," Journalism Quarterly 73 (summer 1996): 332-341.

(4.) Blankenburg and Ozanich, "Financial Performance of Newspaper Corporations."

(5.) Lacy, Shaver, and St. Cyr, "Newspaper Competition."

(6.) Stephen Lacy and Frederick Fico, "Newspaper Quality and Ownership: Rating the Groups," Newspaper Research Journal 11 (spring 1990): 41-55; Martha Matthews, "How Public Ownership Affects Publisher Autonomy," Journalism Quarterly 73 (summer 1996): 342-353; Daniel Wackman, Donald Gillmor, Cecile Gaziano, and Everette Dennis, "Chain Newspaper Autonomy as Reflected in Presidential Campaign Endorsement," Journalism Quarterly 52 (summer 1975): 411-420; Ralph Thrift, Jr., "How Chain Ownership Affects Editorial Vigor of Newspapers," Journalism Quarterly 54 (summer 1977): 327-331.

(7.) Barry Litman and Janet Bridges, "An Economic Analysis of Daily Newspaper Performance," Newspaper Research Journal 7 (spring 1986): 9-26.

(8.) Lacy, Shaver, and St. Cyr, "Newspaper Competition."

(9.) Ibid.

(10.) Ibid.

(11.) Ibid.

(12.) Ibid.

(13.) Ibid.

(14.) Blankenburg and Ozanich, "Financial Performance of Newspapers."

(15.) Lacy, Shaver, and St. Cyr, "Newspaper Competition."

(16.) Ibid.

(17.) Ibid.

(18.) Stephen Lacy and Todd Simon, The Economics and Regulations of United States Newspapers (Norwood, N.J.: Ables, 1993).

(19.) Lacy, Shaver, and St. Cyr, "Newspaper Competition."

(20.) Stephen Lacy, "The Financial Commitment Approach to News Media Competition," Journal of Media Economics 5 (summer 1992): 5-21.

Chang is a doctoral candidate, and Zeldes is a visiting assistant professor in the School of Journalism at Michigan State University.

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