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What Do McClatchy, New York Times Company and Journal-Register Have In Common? They Have All Taken Huge Write-Downs On Some Of Their Newspaper Properties. With Little Advertisement Improvement In Sight, Values Are Falling!

There is nothing that makes clearer how many newspapers are no longer a growth business than when their values are reduced in the company’s financials. There have been some big write-downs recently, and surely more to follow.

write-downsThere is still little sign of newspaper advertising improvement. Many US groups reported fourth quarter earnings which at first glance look positive year-on-year until reading the small print tells that 2006 had an extra week in it compared to 2005, and take out the earnings of that extra week and ad sales are still in decline.

And the earnings showed one other trend. Those groups that have a wide portfolio in broadcast did OK last year. Gannett, Scripps, Tribune, and Belo, for instance, all had headline figures showing good overall performance in Q4 but again delve into the numbers and it is the broadcast side that turned up trumps with all of that political advertising from the US mid-term Congressional elections.

Look at Belo’s Q4 earnings and they are a good representation of what the major US media groups are reporting. The headline figure showed a 29% revenue increase in Q4, but break that down and television revenues rose 17% on the back of the biggest spend ever for mid-term elections, while newspaper revenue dropped three per cent because of weaker advertising demand.

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The Fall In US Newspaper Print Advertising Revenue Has Now Reached A New Negative Milestone – Even With the Double Digit Advertising Growth From Newspaper Web Sites Overall Advertising Revenue in Q3 Is Down
Overall US newspaper advertising revenue in Q3 came in at $11.8 billion, a 1.5% drop from a year ago. But newspaper web sites saw a 23% increase in advertising revenues over a year ago, so the sad conclusion for publishers is that their print revenue is now dropping faster than their superlative online products can replace it.

Publicis’ CEO Warns The Advertising Industry that The Playing Field Has Changed – Consumers Are Now In Charge Of When and How They Receive The Message -- And The Only Three Ways For Agencies To Survive In This New Media World Are “Change, Change, and Change”
Consumers now have so many different ways, empowered by technology, to obtain the news, information and entertainment they want when they want it that they have become “enlightened despots” according to Maurice Levy, Publicis Groupe CEO. And while he thinks television will remain a preferred medium for some time to reach those consumers, he does question whether print can continue to charge on a long-term basis.

Eight of the 10 Largest US Advertisers Slashed Their Ad Budgets in 2005, Led By Proctor & Gamble’s 4.6% Decline, But The Total US Spend Still Grew By 3% to $143 Billion. What Does That Say For 2006?
Procter & Gamble’s $3.2 billion spent on advertising in 2005 ensured it still remained the largest US advertiser, but that figure was down 4.6% over the year before, and eight out of the largest US advertisers also spent less meaning the total spend of the top 10 dropped by 3.3% to $18.6 billion.

When Knight-Ridder’s Largest Shareholder Told the Company To Sell Itself, The Shares of Most Newspapers Companies Jumped In the Hope This Was the Start of Good Times Ahead. Actually It Was The Start of That Shareholder Dumping Some $2 Billion Worth of Shares Involving Nine Newspaper Groups
Last November, the largest shareholder in US newspaper shares shocked Wall Street by demanding that Knight-Ridder (K-R) put itself up for sale to enhance shareholder value. The next two largest shareholders joined in and the die was cast. Shares in K-R and most other publicly quoted companies rose strongly and immediately on the hope this was just the start of improving shareholder value for that market sector.

With Circulation Spiraling Down and Internet Advertising Increasing, What Is The Newspaper Industry’s Solution for a Financially Successful 2006? It’s to Hike Up Advertising Rates and Increase the Cover Price! When Will They Learn?
It’s really not rocket-science marketing. The number of eyes looking at your product is decreasing, and the advertisers who pay the bills are spending more elsewhere. In that type of environment what do you need to do to maintain and grow the cash flow? One might think the prime aim would be to entice new readers and new advertisers, but that doesn’t seem to be the trend as 2006 begins. The newspaper industry instead seems to be going back to last year’s formula that fell flat on its face – charge more for less.

Belo’s digital revenues showed very good strength -- television up 47% and newspapers up 41%. 

"Like all newspapers, Belo's Newspaper Group will face continuing challenges in the first quarter," Dunia Shive, Belo's president/media operations, said in a statement. So, no sign of newspaper improvement yet.

Since it is broadcast that is softening the blow, indeed making things look good for media groups, it should not go unnoticed that some media groups are unloading their broadcast divisions. The New York Times has already sold its; Tribune has sold a few stations and most sale scenarios for the company envisage its entire broadcast group being spun off.  So, without being able to spread the downturn risk in later years if there is no broadcast division, the pressure on newspaper and digital activities to improve their bottom lines will grow even greater.

The trend to write down newspaper valuations – some will say the trend to be more realistic with newspaper valuation -- started last December when McClatchy stunned the US newspaper world by selling The Minneapolis Star Tribune to private equity firm Avista Capital Partners for $530 million -- less than half what it paid the Cowles family just eight years previously. The company could count on an additional $160 million tax loss bringing the sale’s value to $690 million but that’s still way off the $1.2 billion it originally paid.

McClatchy’s Q4 earnings reported a net loss of $354.8 million on the sale of those Minneapolis newspapers that were the largest newspapers in the group and that resulted in an overall loss for the quarter of $279.3 million ($3.41 per share). 

Gary Pruitt, McClatchy CEO, was quite explicit at the time of the Minneapolis sale why the company did it. “The Star Tribune did very well for a few years (it’s estimated McClatchy got about $1 billion in cash flow during the good times), but recently it has lagged in performance. Large Metro papers have underperformed smaller ones because they’ve been more dependent on classified ads, which have already been most affected by the Internet. The Star Tribune suffered from that.”  In other words, a smart business decision is that when the going gets tough, the tough get going out of Dodge (or in this case, Minneapolis).

With its huge $3.3 billion debt load brought on by its Knight-Ridder saga, management obviously saw paying down that debt a better use for the money tied up in Minneapolis. While McClatchy is doing pretty well absorbing the 20 Knight-Ridder newspapers it kept, Pruitt is quite blunt in saying that the advertising environment in the fourth quarter “grew more difficult” and he sees no respite in the first half of this year. So more cost cutting is in the cards -- operating expenses dropped 5.8% in the quarter from plans already in place.

The New York Times Company also announced a huge fourth quarter loss -- $648 million  -- because it took an $844 million pre-tax charge by writing down the value of the Boston Globe and the Worcester Telegramand Gazette. It had paid $1.1 billion for the Globe in 1993 and $295 million for Worcester in 1999, so the write-down reduced the value of those investments by 59%.

The Boston paper has been hemorrhaging advertising and circulation revenue for the past few years and the cost cutting to keep margins at existing levels has been non-stop – editorial slashed, all foreign bureaus closed, news hole reduced, jobs outsourced, etc. etc. Local businessmen led by former GE Chairman Jack Welch have been vocal they would be happy to take the Globe off the Times and they had it valued in the $500 million - $600 million ballpark, similar to the write-down value.

But in spite of the write-down, Times management keeps insisting that upcoming new department store openings and new shopping malls means that the advertising picture in Boston is set for improvement and it has no plans to sell.  “That regional economy has been especially hard hit, exacerbated by some of the challenging trends that have affected all of our industry,'' CEO Janet Robinson said.

The smart thing, of course, would be to sell the Globe to Welch and then management can concentrate on the New York Times which itself is not having the easiest of times, and also its growing digital operations. Many financial analysts still have a “sell” rating on NYT because although digital revenues are increasing very quickly they have not reached the scale where they are capable of offsetting the degradation in print,'' as Citigroup analyst William Bird wrote in a recent investor note.

Management needs to focus on where group finances can do the most good and that means besides the main newspaper the digital operations. Proceeds from the broadcast division sale --$575 million – will pay down some debt and be there for digital investments. Why not sell the Globe for $500 - $600 million for the same purposes? Buying a really decent site these days can well cost $1 billion and more, as Google showed with MySpace.

And then there’s The Journal-Register Company that owns 24 daily newspapers and 353 non-daily publications. It announced a $25.1 million Q4 loss after a one-time $35 million charge related to its Michigan newspapers and an investment in an online advertising company. Besides the write-down the company is selling its less profitable newspapers (it just completed an $8.3 million cash sale of three Rhode Island daily newspapers along with a weekly newspaper group).  Why the Michigan write-down? Basically, as goes Detroit, goes Michigan. With the car industry in turmoil the Michigan newspapers are struggling, and with little improvement in sight down goes their value.

Add all of this together and you get, as a Goldman Sachs analyst in San Francisco calls it, “the challenging state of affairs in the newspaper industry.”



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