It's Not Newspapers in Peril; It's Their Owners

Dailies Still Make Good Money, but Debt-Laden Publishers Post Losses

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Corrections have been made in this story. See below for details.

NEW YORK ( -- For all the apocalyptic news about newspapers, there's a distinction worth making: Newspaper owners are far more endangered than the medium itself.

Even as they take blow after blow from recession and digital media, newspapers themselves still earn decent profits. They do even better outside big cities, which tend to get all the attention.

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"Not a lot of papers are operating at a loss," said John Morton, the veteran industry analyst. "There are roughly 1,400 daily newspapers. We only hear about the top markets. That leaves at least 1,300 papers out there."

Publicly owned newspapers averaged an operating profit of 10.8% in the first three quarters of last year, Mr. Morton said. That's not the margin enjoyed by newspapers when they were monopolies, but it's not nothing either.

Problems at the top
The owners, on the other hand, are variously posting huge losses, at least on paper; watching their stock prices plunge; and, crucially, struggling to make payments on debt they took on under projections that didn't pan out.

Some owners even borrowed that money to double down on newspapers, which aren't engines of growth even when their balance sheets are healthy.

More newspaper owners will probably follow Tribune Co., where Sam Zell's rescue attempt has failed, into bankruptcy protection. Some papers will be handed to lenders. There will be fire sales.

But there's no reason for newspapers themselves, whoever owns them, to stop the presses. Most operations are plenty profitable.

And demand for their core product -- news -- is growing, as shown by the soaring traffic to newspaper websites. Those web surfers don't bring the same ad rates that print readers do. But the business of newspapering has a longer bridge to the future than it often seems.

Take a look at Lee Enterprises, which operates papers primarily in midsize markets but reported an $889 million net loss for the 12 months ended Sept. 28. Its loss primarily reflected a huge accounting write-down as the company adjusted its estimated value. It's not that $889 million of cash flowed from the coffers just to make payroll and keep the presses running.

Strip out the accounting charge to look at the real dollars Lee papers collected and spent. Its operating profit for those 12 months topped 20%. That's a better return than Carlos Slim is getting on his 14% loan to The New York Times Co., which finally suspended its dividend payments last week to shore up cash flow.

Lee, moreover, bought itself more time late last week by reaching agreements with lenders to refinance $306 million of debt tied to its 2005 purchase of the St. Louis Post-Dispatch. The publisher of the Southern Illinoisan, a Lee paper, used the occasion to distinguish between Lee's finances and his paper's health, telling readers that the refinancing and related moves "quashes ill-considered speculation that Lee's debt obligations could somehow impair the ability of The Southern Illinoisan to continue serving readers and advertisers."

In a similar fashion, McClatchy is freezing pensions and hunting another $100 million in budget cuts. The company, publisher of papers including the Sacramento Bee and the Fort-Worth Star Telegram, is struggling under more than $2 billion in debt, much of which it assumed in 2006 to buy Knight Ridder -- doubling down on newspapers at a cost of $4.6 billion.

But look past the interest, taxes, depreciation, amortization and charges such as severance; they matter, but they affect the owner's balance sheet more than they reflect newspapers' viability. McClatchy's underlying newspaper portfolio just delivered a 21.5% operating profit margin.

Gannett profits
The country's biggest newspaper publisher, Gannett, is rolling in layoffs and busily writing down its own estimated value. But excluding one-time charges such as severance and write-downs, its newspapers -- from big markets such as Phoenix to small towns such as Ithaca, N.Y. -- produced an 18% operating profit margin last year.

Scripps is trying to decide whether to sell or shut down the Rocky Mountain News in Denver, which lost $16 million in 2008. But its overall newspaper portfolio, perhaps better typified by the Naples Daily News in Florida, last week reported a 2008 operating profit margin of 9.8%.

Even the newspapers owned by Tribune, which entered Chapter 11 last December because it took on too much debt going private, returned a modest 5.4% operating profit in the first three quarters of last year.

The bigger markets, to be sure, are struggling more. "Smaller markets tend to have relatively high margins because you're more of a quasi-monopoly," said Alexia Quadrani, an analyst at J.P. Morgan. "The New York Times is going to have low margins because of its high expense base. The Boston Globe's margins have deteriorated meaningfully in recent years, just because of the ongoing weakness in that marketplace."

Worse year than last
And even if newspapers aren't the walking dead, they're obviously the walking wounded. Public newspaper companies were reporting operating profit margins averaging 21% as recently as 2006, according to Ken Doctor, a longtime newspaper executive turned industry analyst for Outsell. "At that point it had been dropping about a quarter percent, a third of a percent, each year for three years," he said. "It had been a slow drop in relatively good economic times. Now we know 2009 is going to be worse than 2008."

We don't know how much advertising will return to newspapers once the recession lifts, Mr. Morton pointed out. "In all previous recoveries from recession, newspapers were able to recapture almost everything they lost," he said. "It has since become much more competitive for eyeballs and advertisers. I'm sure it won't be 100%."

All that probably means today's newspaper owners won't all be in the business much longer. Many will exit one way or another, following the Chandlers, who once controlled Times Mirror, and the Bancrofts, who once owned Dow Jones.

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CORRECTION: An earlier version of this story incorrectly said the Rocky Mountain News lost $16 billion, rather than $16 million, last year. It also mistakenly said the Chandlers controlled Knight Ridder, rather than Times Mirror.
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