Wednesday, April 9, 2008

It sounded good at the time...

Ok, more business news.

This week writer Louis Hau weighs out media ownership.

On the plus side, there's the ludicrously-high profit margins, which despite shrinking ad revenues are still the envy of most other industries.

On the other hand, there IS the matter of that pesky decline in readership and advertising dollars. John Puchalla, credit analyst for Moody's, describes it as a "downturn," which sounds a lot less serious than the suits would have you believe. Is it as bad as management suggests, as mundane as Puchalla implies, or somewhere in between? I don't know, but Hau sidesteps that issue to make another point: Newspaper ownership isn't a vehicle for quick profits, and overleveraged companies with massive short-term loans will be hard-pressed to see enough of a return to meet their obligations. At least, that's the theory for publicly-traded companies, burdened by shareholder expectations.

Which brings us back to 2006. Believe it or not, once upon a time privately-held companies like MediaNews were heralded as a potential savior for the newspaper industry in publications like the Columbia Journalism Review. CJR writer Douglas McCollam argued at the time that private investors might be capable of reversing the debacle of public-ownership, and the ceaseless need to appease shareholders that has nearly run the entire industry into the ground.

In many ways, Singleton and others observe, newspapers are ideal candidates for leveraged buyouts because they have such high operating margins, meaning they can service a lot of debt without drowning in it...a private investor who buys into newspapers at this point is likely to understand the challenges the industry faces, and at the very least will get the newspapers off the quarterly earnings treadmill that currently drives so much decision-making in the industry. Because private ownership need not be driven by short-term profits, it has the potential to give newspapers desperately needed space to plan and invest in long-term strategies, on both the business and editorial sides.

That's right, MediaNews was supposed to be the company that would give us time and money to grow. It seems almost ridiculously naive now, but only because the information has been there all along, and everyone assumed that MediaNews understood the simple reality of life as a newspaper owner. CJR spelled it out as plainly as possible:

...Wall Street cares about one thing: growth. It’s not interested in how you’ve done or how you’re doing, only in how you will response, many newspapers are desperately trying to convince the market that they, too, are sexy, hi-tech companies. To please the market, companies like Knight Ridder have done almost everything their large shareholders have asked — slashing staff, making stories more “reader friendly,” searching for Internet strategies that might magically transform newspapers from dead-wood deadbeats into new-media darlings. To date, none of it has worked.

It hasn’t worked precisely because the real appetite of shareholders is for greater short-term profitability, not long-term strategic investment...As Paul Ginocchio, a media analyst with Deutsche Bank, put it: “It’s easier to increase short-term operating profits with cost-cutting now than to grow future revenues by making strategic investments that hurt profits in the near term.”

Sound familiar?

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