Content Matters

Newspapers have always been a curious industry. From the days of William Randolph Hearst, those with money and power sought to own newspapers where they could command the attention of business and government leaders and influence public opinion. So, it's not surprising that today's business leaders find the idea of owning a newspaper compelling.

But the industry today is different than that of Hearst. Before the Internet, newspapers were a stable, if marginally profitable business. The greatest challenges came in managing labor negotiations and in riding out periodic economic downturns.

Of course, newspapers today are in rapid decline, having much of their classified business to Craigslist while losing key advertisers in the auto, housing and personal finance markets.

While few might have predicted the depth of this recession a year or two ago, it required little insight to see that declining circulation and print advertising were not going to be offset by improved online ad revenues. Yet private equity firms and business titans rushed to acquire newspaper companies as though they were a growth industry.

During times of cheap debt, the private equity business is pretty simple. Find companies that have been poorly managed; acquire them with debt, streamline the company, jettisoning underperforming businesses, then take out your profit, either by IPO or by selling the company to another PE firm.  But that model only works if either:
a) you can stimulate growth in the core business; or
b) you're playing in a healthy industry

I spent about six years at Primedia, a company that was built as a "leveraged roll up". The concept was straightforward - use debt to acquire a set of core growth businesses ("motherships") upon which you can bolt on smaller acquisitions ("minnows") while generating organic growth through new product development. The model, largely designed by Charlie McCurdy, worked well in the lab, but in practice it largely failed. That was because many of the acquisitions were tired companies, already on the downside of the growth curve. Businesses like Daily Racing Form, Katharine Gibbs and Newbridge Book Clubs were past their prime and failed to generate organic growth. Without growth, the company could not fund its debt and had to sell off assets. The leveraged roll-up became a leveraged wind-down, shrinking from $2 billion at its peak to about a tenth of that today.

So, back to the newspaper industry. Even had the economy remained stable, the newspaper industry was not going to fit the typical PE model. Revenues were shrinking at a rapid rate and even sharp cuts to editorial costs could not offset that decline. Of Zell and the Tribune, perhaps Ken Doctor says it best:

Yet Sam Zell borrowed $12 billion to acquire a declining business with no apparent path to turn the company around. Even with cheap debt, that's a bad decision. It seems a decision based on hubris, not on financial analysis or an understanding of the market.

There are no easy answers for the newspaper industry. While a handful of properties, like News Corp's Wall Street Journal, may remain profitable, most newspapers will continue to lose money and do so at a rapidly increasing rate. And so, they will ultimately end up the toys of the super-rich, who can fund their losses without the need for outside funding, or perhaps will find benefactors interested in the public good. But for companies like the Tribune, the Journal Register and others, the clock is ticking.