Investing in Quality   

The excellence of the New York Times is paying financial dividends. Mon., December 5, 2011

A major way of gauging an industry's financial prospects is to measure top-line growth, which is finance-speak for a revenue increase. This year the newspaper industry doesn't have any. It didn't last year, either, or in any year since 2005.

The major reason for this is advertising lost chiefly to the Internet, much of it probably forever. In 2010, according to data compiled by the Newspaper Association of America, newspapers collected less than half – 48 percent – of the advertising revenue they received in 2005.

The old rule of thumb was that advertising contributes 75 to 80 percent of total newspaper revenue (it's down to about 62 percent now). Most industries losing that big a chunk of their major revenue stream so quickly probably would be in bankruptcy by now. That so few newspaper companies have sought bankruptcy protection (those that did had borrowed heavily for acquisitions just before the economy collapsed) can be attributed to two things: exceptionally high profit margins going into the downturn, and widespread layoffs and cuts in wages and benefits.

High operating profit margins provided a cushion when business turned down. A publisher might not like it when the operating margin drops from 20 or 25 percent to 10 or 12, but, hey, some businesses don't do 10 or 12 in the best of times. And sharply slowing business is the perfect excuse for downsizing the staff and the payroll; some executives call this "right-sizing" for a new reality.

As I have noted in this space before, newspaper advertising began to be negatively affected by the spread of broadband Internet access in 2005, and this, coupled with the recession beginning in late 2007, brought newspapers the sharpest declines in advertising since World War II – down 17 percent in 2008 and 27 percent in 2009. In 2010, advertising continued to fall off, but at a slower rate, dropping only a little over 6 percent – but remember, this was measured against a greatly diminished base the previous year.

Which brings me to an analysis of the financial reports for the first nine months of 2011 for the publicly owned newspaper companies, a suitable proxy for the newspaper industry as a whole. The reports don't paint a pretty picture. But they do provide evidence that buttresses my longstanding conviction that the dumbest thing newspapers can do in difficult times is to shortchange readers by cutting back.

If trends of the first nine months continue, 2011 could turn out to be a worse year than 2010. That would be worrisome indeed, given that the national economy is improving, however slowly. But there's a caveat: The fourth quarter, historically the strongest in newspaper advertising, could turn out to be robust and push 2011's numbers ahead of 2010's, but this is unlikely.

Total revenue in 2011's first nine months decreased just over 5 percent, with advertising revenue down nearly 8 percent. (Total revenue for all of 2010 dropped just over 3 percent, with advertising revenue down just under 6 percent.) Still, all but three of the companies were profitable. The three companies that lost money suffered from poor market conditions and, in one case, a heavy debt burden.

Over the years, whenever I was asked which companies published the best newspapers, I would always reply, "Look at profit margins." Although there might be exceptions, generally the best newspapers are those published by companies with the lowest ones. That list used to include Times Mirror, Knight Ridder, the Washington Post Co., McClatchy (whose margins were better than some thanks to favorable markets), Dow Jones and the New York Times Co.

The list has shrunk. The Washington Post is still a good newspaper, but not nearly as good as it was in the past. Dow Jones would still be on the list, except it's been swallowed up by News Corp. Times Mirror and Knight Ridder are gone, and McClatchy struggles with a mountain of debt. Only the New York Times Co. remains, and it's worth pondering why the Times is, as it has always been, the nation's best newspaper.

Its operating margin has always been the lowest, or close to it, in the public company universe. The reason is obvious – the company spends more of its revenue on the Times' journalism than other companies spend on their papers'. When other companies slashed newsroom staffs and shuttered domestic and foreign bureaus, the Times did not. The Times' newsroom employs 1,250, down only slightly from the pre-recession level of 1,330.

Most newspapers have cut back on the amount and breadth of their coverage. The Times has not. Most newspapers have suffered grievous circulation losses. The Times has not. And the best evidence that cutting back on journalism is dumb business shows up in the Times' financials for the first three quarters. Its total newspaper revenue and advertising revenue declined at half the rate of the average for publicly owned newspaper companies. Its profits are down, but at three-fourths the average rate of decline. Surely there is a lesson here on how to run newspapers.