From AJR,   October 1994

Why Are Newspaper Profits So High?   

The nature of the business, not greed, is the reason.

By John Morton
John Morton (mortoninc@msn.com), a former newspaper reporter, is president of a consulting firm that analyzes newspapers and other media properties.     

Newspapers are renowned, and sometimes villified, for their high profits. Even during recessions, when the profits of many other businesses fall sharply or disappear, newspapers usually still post more-than-respectable earnings.

There are exceptions to the rule, of course. The weaker dailies in those few cities with more than one newspaper never enjoy large profits, and often make nothing at all. And occasionally even a paper that dominates a market can slip into the red if there is a severe slump in the local economy.

üut overall, daily newspapering is financially rewarding. I regularly track the profitability of 19 compa- nies' newspaper operations. Last year, taken together (in other words, adding up all their revenues and profits), these companies' newspapers kept 15 cents out of every dollar they took in before taxes. By contrast, the Fortune 500 companies together earned about 5 cents.

The corporations I follow include those whose newspaper operating profit margins (the percent of each dollar of revenue remaining after operating expenses are deducted) ranged from a low of 7.1 percent at Times Mirror Co., owner of the Los Angeles Times, Baltimore's Sun, Newsday, the Hartford Courant and smaller newspapers, to a high of 34.6 percent at the Buffalo News, the sole newspaper owned by Berkshire Hathaway.

High profitability levels explain why newspapers, compared with most other businesses, are so valuable. A single newspaper in one of the nation's larger cities, say Louisville, Boston or Baltimore, will often command a price higher than the sale price of a major airline, manufacturer or retailer.

Newspapers' high profitability is a frequent target for media critics. It also is often attacked by plaintiffs in antitrust lawsuits against newspapers who charge that any business so profitable must be engaging in illegal monopolistic practices. According to these views, simple greed is the major reason newspapers make so much money.

Greed may be a factor at some newspapers, but the real reason newspaper profitability is high is how a newspaper is organized. To a large extent, a successful newspaper cannot help having higher profit margins than most other businesses because newspapers, to use economic jargon, are more "vertically integrated" than most other businesses.

Consider a department store. It buys the products it sells from wholesale suppliers, who have their own profit margins to maintain. In turn, the wholesalers acquire the goods they sell to the department store from manufacturers who have their profit margins to maintain (often there is also a profit-seeking distibutor between the manufacturer and the wholesaler). The manufacturer, of course, makes its clothes or appliances or whatever from materials it buys from suppliers, which also have profit margins to maintain.

Thus there is a series of profit margins taken before the department store has something to sell. Then the department store marks up the cost of the goods it has for sale to achieve its own profit margin. In effect, the department store has had to pay for all those previous profit margins, which is the principal reason department store profit margins are low.

Now consider a newspaper. The only materials it needs to acquire on an ongoing basis are newsprint, which it normally gets directly from the manufacturer, and newswire and feature services, which are minor cost items.

Almost everything else that adds value to the final product – news and advertising content – is created in-house. Hence the newspaper is spared paying for most of that long string of profit margins that keeps department store margins down. In effect, these profit margins have been moved in-house.

üoreover, a newspaper not only creates most of the value of its product in-house, it also retails its manufactured product – the newspaper – directly to its custo- mers. The principal cus- tomers in this sense are the advertisers, who with minor exceptions (the small amount of revenue that comes from national advertisers is an example) buy space directly from the newspaper without any profit-seeking wholesaler in between.

The other customers are the readers, who provide the remaining 25 percent of a typical newspaper's revenue. Newspapers typically deliver a small portion of their circulation to wholesalers for delivery to newsstands, and some newspapers still rely on wholesalers for distribution, but the trend has been to handle distribution in-house as well.

What all this means is that newspapers earn most of the various profit margins that drive up the operating costs of most other businesses. This is why newspapers are inherently more profitable than, say, most Fortune 500 companies. It can be argued, as I often do, that newspapers should spend more of these high profits on editorial quality, but it is not logical to condemn them for something that in fact is dictated by the very nature of the business. l