Capital Crisis in the Profitable Newspaper Industry: Solving This 'Will Call upon Levels of Creativity, Innovation and Entrepreneurship Infrequently Found in Newspapers in Recent Years.'
Picard, Robert G., Nieman Reports
The recent sale and breakup of Knight Ridder is symptomatic of the broader problems newspaper companies face due to their difficulties in creating value for readers and investors. These problems have resulted in a capital crisis in the industry because financing through the stock market, which is the primary way in which the nation's leading and midsized newspapers get capital, is increasingly regarded as a less viable investment option by financial firms. This circumstance also has led to apprehension among journalists and industry observers, since managerial behaviors have changed in an attempt to satisfy investors.
This crisis arrives at a time when the newspaper industry is struggling, too, to respond to changes in technologies, society and in how consumers use media. Audiences are less willing to spend time and money on newspapers, and this induces advertisers to increase spending and to seek other market mechanisms in new media to reach customers. The pace of change seems especially striking since the second half of the 20th century produced such dramatic advertising growth and an extraordinary era of journalistic and business success. But the conditions leading to that growth have all but vanished. In the past decade, news companies have slashed newsroom resources, made staff reductions, and cut back on the product they produce. Concurrently stress levels in newsrooms and boardrooms rose while morale sunk to its lowest point ever.
There is a wide-spread sense that investors, as well as some newspaper owners and managers, are giving up on the industry. Knight Ridder could have fought for its survival, but there apparently was little fight left in its board or top company executives. The board sold the firm and its 32 newspapers to McClatchy for 4.5 billion dollars plus the assumption of two billion dollars in debt. McClatchy subsequently began selling off papers that were not in growth markets to private companies in the United States and Canada, including MediaNews Group, smaller newspaper groups such as Ogden Newspapers, Schurz Communications, and Black Press Ltd., and a private investor group formed specifically to acquire The Philadelphia Inquirer and Daily News. McClatchy accepted two billion dollars for 11 of the unwanted papers, covering 28 percent of its original purchase price and reducing the papers acquired by just one-third. The secondary deals reduced the acquisition prices of the papers that McClatchy wanted, because the total asking price had undervalued the unwanted papers.
Why did McClatchy and others want to buy these papers when Knight Ridder no longer had the will to stay in the newspaper business? The primary reasons are these: The new owners believe in the papers' future; they determined the papers can be operated profitably without the management fees each paper previously paid to Knight Ridder, and they believe lower profit margins will still produce good returns on their investments.
Given this willingness to invest in newspapers, how can there be a capital crisis? And how can it exist in an industry that consistently produces above-average profits compared to other industries in which these same investors place their funds? Finally, how can there be a crisis in an industry in which journalists and media critics consistently characterize it as pleasing investors by providing high returns, sometimes to the detriment of how those who work at the paper are able to do their jobs?
Lacking a Long-Term Vision
Although overall newspapers are highly profitable, publicly traded newspaper companies often show weakness in comparison with industries such as major drug manufacturers, telecommunications services, restaurants, resorts, department stores, property and casualty insurance firms, major aerospace and defense contractors, and hospitals. While newspapers tend to have better-than-average net profits and dividend yields and produce average returns on equity and average price/ earnings ratios, they also tend to engage in short-term planning rather than developing longer-term strategic visions and promoting company development. …