It Could Be Worse   

Although not nearly as profitable as in the past, the newspaper industry is still making money.

It's no secret that this is a stressful time for the newspaper business. Already struggling with the challenge of the Internet, it now also confronts a grim economy. With revenue, profit and circulation plummeting, the result has been buyouts, layoffs and downsizing on a massive scale.

Just how seriously has the industry's financial performance been affected? Using the publicly reporting companies as a suitable proxy for the entire industry, revenue through the first nine months of 2008 was down more than 11 percent, and operating profit was off nearly 40 percent. These figures were derived from companies that had reported as of this writing, which account for 70 percent of the public universe's revenue. The remaining companies' results are likely to follow the same pattern.

Dispiriting as these results may seem, they sparkle compared with the staggering losses reported by, say, the domestic automobile companies and the airline industry.

Here's how I analyze the health of newspapers: First, in looking at public-company results, only newspaper operations are considered; I exclude data from broadcasting and other non-newspaper operations that some companies own.

Second, I also exclude write-downs of the value of goodwill and mastheads, which have become commonplace in the last three years as the value of newspapers has fallen. Accounting rules require that these write-downs be charged against income, but they are paper transactions — no cash goes out the door. Third, severance payments from layoffs, which do represent cash out the door, are excluded because they are one-time events that do not affect the underlying structure of the business. Indeed, they are intended to improve financial efficiency by reducing future payroll.

My goal is to determine how the fundamental business is performing after stripping away unusual items that do not reflect day-to-day operations. Included in such items in addition to write-downs and severance payments are one-time gains or losses from the sale of assets.

Now, it is quite possible for a company that owns a collection of profitable newspapers to get into trouble during a recession. Chiefly this happens because the company has borrowed a lot of money to make acquisitions (Lee Enterprises, McClatchy, Tribune Co.), and the company's newspapers, while still profitable, throw off lower profits during a recession.

This can mean that a company encounters difficulty meeting debt obligations and meeting lenders' requirements for cash flow coverage of interest payments and the like. A company can respond by renegotiating its debt (Lee Enterprises, McClatchy), which raises the interest rate; by eliminating or cutting its dividend payments to shareholders (Lee Enterprises, McClatchy); and by unloading assets (Tribune's sale of Newsday). And, most common, a company can lay off employees, eliminate special features and sections, tighten news space and cut back circulation to reduce newsprint and distribution costs.

Those actions, of course, diminish the standing of newspapers in their markets and to some extent undermine efforts to transfer strong brand names and advertising efforts to the Web. The long-term impact of these actions is yet to be learned, but it is unlikely to be beneficial.

Eyeballs increasingly are shifting from print to the Internet (causing at least part of the growing decline in print circulation), and they are not always landing on newspaper Web sites. The proliferation of online rivals for news and advertising is sure to mean that the newspaper industry will emerge from the current recession weaker than it was before, and the current downsizing will be part of the reason.

Still, the newspaper industry as a whole remains profitable. Companies that have reported results for the first nine months had a weighted average operating profit margin (the total of operating profit divided into total revenue) of 11.3 percent. This is still above what is typical for most non-media businesses, but well below newspapers' average for last year's first nine months (16.6 percent) and continues the decline in average profitability that began after 2002's peak of 22.3 percent. The previous lowest average in all the years I have been keeping track was 13 percent during the 1991 recession. Cost-cutting, not better business, kept the current average margin from dropping even lower.

There is anecdotal evidence that some individual newspapers, mostly with large circulations, are losing substantial amounts of money. Privately held Advance Publications, for example, has said its Star-Ledger in Newark is losing more than $30 million a year, and there have been reports of other large dailies in similar condition. It's not possible to know how these losses were calculated and whether write-offs and other accounting manipulations were in play.

Examining the books of some smaller dailies with circulations of 40,000 and under suggests these papers are faring much better than larger ones. Some have even managed to equal last year's revenue, largely because they have closer connections with readers and advertisers and face much lower levels of competition.

Overall, the beleaguered newspaper industry's financial health has been weakened but remains healthy by most measures. In this environment, that is an achievement.