This roller coaster goes only one way

Newspaper layoffs fail to trim expenses faster than ad revenue is declining

19 Nov 2008

The longest, steepest pitch of a roller coaster comes at the very beginning, each subsequent dip becoming progressively more moderate. The newspaper industry, alas, is no roller coaster.

Instead, with each passing month the news gets worse, as layoff notices mount, advertising revenue constricts, circulation wilts and newspaper credit ratings explore heretofore unknown parts of the alphabet.

Among the latest job cuts announced at Guild-represented operations over the past few weeks: 27 at the Commercial Appeal in Memphis; 36 at Dow Jones; 18 at the Pittsburgh Post-Gazette; 50 at the Knoxville News Sentinel, part of a Scripps-wide slashing of 400 employees; between 130 and 150 at the Seattle Times and its sister publications; 42 at the Boston Globe; and an increase to 50, from an earlier announced 38, at the Cleveland Plain Dealer. Eight more jobs also were eliminated Nov. 14 at the MediaNews papers in northern California that recently unionized under the BANG-EB banner.

Gannett, meanwhile, said it will lay off 10% of its newspaper employees chainwide, or about 3,000 total. A new round of cuts of indeterminate size is being planned at the Tribune-owned Sun in Baltimore, just four months after it slashed 100 jobs. Time Inc. is looking for 100 volunteers to give up Guild-represented editorial jobs at several of its magazines, a first step in eliminating 600 positions worldwide. CanWest said it will eliminate 560 positions across the organization, including approximately 350 on the print side and 210 in broadcasting.

All the carnage is forcing publishers to become ever more inventive in figuring out how to create widgets with fewer widget-makers. Dean Singleton, chief executive of MediaNews, triggered a hail of outraged protest by disclosing to a publishers’ group that he has been thinking of creating a single news desk for his dozens of newspapers—and possibly off-shoring it, to further reduce costs. The idea quickly resulted in a map of India, marked with offices for the Contra Costa Times, San Jose Mercury News and other MediaNews properties, popping up on union bulletin boards.

CanWest, meanwhile, has started inserting business pages produced by the Financial Post in its other Canadian dailies, shrinking the amount of locally-produced content at the Montreal Gazette, for instance, from five pages to less than three. The Gazette’s copy editors and managers are barred from making any changes in the replacement pages, which include market commentary. In ongoing contract negotiations, meanwhile, CanWest continues to demand the freedom to move the Gazette’s production work to non-union shops.

Such measures seem not to be fooling either readers or advertisers. Circulation continues to erode, down 4.6% daily for the six-month period ending in September and down 4.8% Sundays. That compares with a drop in daily circulation of 2.6% for a similar period the previous year, marking an ugly trend.

Advertising revenue, meanwhile, also is trending downward despite the slumping economy—retail sales dropped 1.2% in September—which arguably is a time when advertising should be increased. Ad spending across all media probably will fall 1.8% this year and 3.6% in 2009, according to a Nov. 10 report from Citigroup—a sharp revision from its earlier projections of a 0.2% increase in 2008 and only a 0.3% decline next year. But that’s the good news. The bad news is that newspapers are being hit especially hard, with advertising dollars plunging a projected 16.3% this year and 12.5% in 2009.

The impact on top lines has been significant. Gannett, for example, reported that third-quarter revenue skidded 9% compared to the same period last year, almost matched by the New York Times’ drop of 8.9%, while McClatchy’s revenues were driven down 16.4%. Top-line deterioration usually has an outsized effect on bottom-line results, with Gannett disclosing that third-quarter profits fell 32%. McClatchy posted net income of 5 cents a share for the quarter, which looked at first blush like a remarkable turnaround when compared to a loss of $16.42 a share in the comparable quarter last year—until one realized that the year-ago loss was attributable to a major write-down of goodwill, and therefore not reflective of its actual performance.

The deterioration prompted Fitch Ratings to push McClatchy’s debt even further into junk territory, an increasingly common affliction for a growing number of over-leveraged newspaper publishers.

The New York Times, meanwhile, beat Wall Street expectations but still skidded so badly that Moody’s Investor Services warned it may downgrade the company’s unsecured debt to junk bond status. Standard & Poor’s didn’t wait, lowering the Grey Lady’s credit rating three notches, to BB-, which is below investment grade. With $1.1 billion in debt, its stock at a 13-year low and the market for possible sale of its assets highly iffy, Times management said it will consider cutting the dividend that keeps its controlling family shareholders happy—potentially setting up a sequel to the sale of the once similarily situated Wall Street Journal.

Other newspaper companies battered by the continuing downdraft include Gatehouse Media, which was delisted by the New York Stock Exchange in late October. Lee Enterprises raised delisting concerns as well, as its share price continued to sink—off approximately 90% for the year—and its market cap treaded dangerously close to the Big Board’s minimum of $70 million. The company responded by announcing it was suspending dividend payments and paying higher interest rates on its debt to gain more flexibility with lenders.

Journal Register announced it would close two of its Connecticut dailies—the Bristol Press and the Herald of New Britain—by January unless it can find buyers, which seemed unlikely. Sun-Times Media Group reported a $168.8 million loss in the third quarter, prompting its CEO to announce he will seek to cut expenses another $45 million or more in 2009—matching the cuts of this past year.

Tribune Co., which reported a $121.6 million loss in the third quarter, was downgraded yet again, with S&P rating its debt at CC—a level deep enough to cause the bends, and amid warnings that more downgrades may be coming any day. A CC rating means a company’s debt is “highly vulnerable to nonpayment,” which makes Tribune, with $11.8 billion in long-term debt, the Titanic among newspaper companies sailing suddenly Arctic seas.

Being Canadian is no help. CanWest, the country’s largest media company, now also is trading at penny stock levels. Shares of Canada’s other large newspaper companies, including Torstar and Quebecor, dropped an average 42% over the year ending in September.

The prognosis for the near- and middle-term, unfortunately, is that conditions will continue to worsen despite all the hacking at payroll and all its attendant grief. “Relentless expense reductions at America’s newspapers have failed to stay ahead of falling sales and uncontrollable fixed costs, eviscerating the industry’s profitability and suggesting that more drastic cuts may lie ahead,” writes blogger Alan Mutter, among the industry’s more astute business observers.

Indeed, the graph at top right, replicating one Mutter posted on his Reflections of a Newsosaur web site (newsosaur.blogspot.com), shows average newspaper profitability in the third quarter tumbling 18.5 times faster than the drop in sales. In a three-month period in which advertising and circulation revenue dropped an average 10.3% over the same period a year earlier, the average operating profits of the 12 analyzed companies plummeted a horrendous 198.3%.