The Future of Print

One Banker’s Plan to Save the Newspaper Industry – Deal Journal – WSJ

Posted in Boom by futureofprint on March 20, 2009

In the past few weeks, the newspaper industry has endured its own version of what happened to Wall Street after the fall of Lehman Brothers. The Rocky Mountain News? Gone. Tribune Co., owner of the Los Angeles Times and the Chicago Tribune? Filed for bankruptcy. The Seattle Post-Intelligencer? Now online only.

And just Wednesday, the San Diego Union-Tribune was sold to a private-equity firm.

Deal Journal spoke with Jonathan Knee, an investment banker who advised on the San Diego deal and who has covered the media industry for over 15 years. Knee is the director of the media program at the Columbia Business School and the co-author of “Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies?”, which is to be published by Portfolio Books this year.

Highlights of Interview

  • Knee: Unfortunately people confuse dysfunctional capital structures with dysfunctional business models. The reason why most newspaper companies have gone bankrupt or appear perilously close to it is that they have too much debt, not that they have stopped being profitable. For the reasons I have already described, they are certainly less profitable than they used to be, but compared to most media businesses like movies and books, most newspapers still have higher profit margins. Unfortunately, many of these companies maxed out on available debt during a bubble in the debt market just before the debt bubble popped and their own profit margins precipitously declined. That does not mean that these companies cannot continue to generate significant cash flow once restructured into a sustainable capital structure.
  • Knee: There is widespread confusion and has always been regarding the source of the shocking historic profitability of many newspapers. The most profitable newspapers have tended to be monopoly markets with circulation of 20,000 to 100,000 readers. These are not sexy papers like The New York Times and The Wall Street Journal, which have historically have significantly low margins.
  • Knee: The good news is that the bloated cost structures that grew up in that environment of overwhelming plenty do allow for radical reductions that will help mitigate many of the challenges that are faced by the industry.
  • Knee: You have seen people outsource everything from printing to editorial and indeed, any kind of journalism where your scale in the local community does not provide you with an advantage should be gotten elsewhere.
  • Knee: You have to focus on your competitive advantage, which is local. When the smoke clears, the local newspaper, which may not be the sexiest part of the newspaper industry but is overwhelmingly the largest and most profitable part of the industry, will be a smaller and more-focused enterprise whose activities will be directed to those areas where their local presence gives them competitive advantage and they will continue to generate as a result better profits
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