Rampant conflation

The newspaper industry is fighting a two-front war. Some newspaper companies are fighting on three fronts. Most observers see only a single struggle for survival, and they’ve all but consigned us to the dustbin of history.

That’s premature.

On one hand, we’re fighting against long-term structural changes in the way people get news and advertising information. We’re also fighting a brutal recession, arguably the worst since newspapers were pretty much the only show around. And many newspapers are fighting on a third front, against unsustainable financial leverage.

All of these present real and urgent challenges. In particular markets, any one of these challenges could present an existential threat to traditional print newspaper publishers.

But the chaos we see today in the newspaper industry is not simply an internet-led rout of newspaper market positions. That’s the conventional wisdom, but it’s too simplistic. What we’re seeing is a structurally vulnerable industry meeting a bone-crushing business climate while, in many cases, companies groan under massive debt. It’s worth teasing these three factors out a bit for a more realistic assessment of the industry’s future.

First, the recession:

Newspapers (and other ad-supported media, for that matter) always have been barometers of economic conditions. As much as we may talk about the value of advertising through hard times, at the end of the month our customers still have to pay their staff, utilities, suppliers and taxes first. Advertising is, sadly, more discretionary than many other expenses, and our revenue numbers always have shown that.

Much of what is shaking the industry now, I believe, is a predictable erosion of revenue as our customers struggle.

Of course, the structural changes aren’t helping:

Newspaper circulation and readership numbers have fallen as people shift some of their information consumption online. Some of our advertising is almost certainly gone for good.

But newspapers, even good old print newspapers, retain substantial advantages. Sure, people are going online for a lot more of their news, but newspapers remain the dominant source of that news. In a very real sense, demand for our core product, news, has never been higher.

Even our much-maligned “ink on dead trees” products retain surprising strength. (I’ll tackle some of those strengths in the next blog in this series.)

The final front faced by many newspaper companies is debt:

I don’t know how much I took away from business school, but one thing I did learn is that it’s dangerous to mix high operating leverage with high financial leverage in an industry that’s susceptible to big swings in revenue. And that’s exactly what many newspapers did to themselves. Hence the string of leading newspaper companies trading at penny stock levels or even facing bankruptcy.

That’s painful for investors and owners, to be sure, but it’s not necessarily a good indicator of the industry’s future prospects. A bad investment can still be a really good business. After all, Gannet stock is a shadow of its former self despite routinely turning in operating margins north of 20 percent. There aren’t that many businesses that deliver those kinds of operating margins even in the best of times.

The simplistic view of all this is that newspapers are a mess. Their revenue is falling, some of it’s gone for good and they’re going bankrupt right and left. Therefore, the industry is history. QED; let’s surf.

Well, maybe. But another narrative goes like this:

Newspapers are a mess. The recession has hammered them, and their debt loads are pushing some of the weakest and hardest hit into bankruptcy. Most, however, are still earning decent margins, despite historic revenue declines. When the recession lifts, newspapers may never reach their previous revenue heights, because structural changes have eaten some of their advertising. But the strong papers now will get even stronger, and the weak ones will improve. The industry’s future may be constrained, but the fundamental model is durable.

The beauty of my argument, of course, is that it’s largely untestable. In subsequent posts, though, I’ll explore some of the points raised above to flesh the argument out a bit. I’ll describe in more detail how the recession is affecting us, where I see strengths in the face of the structural changes and just why newspaper debt has been such a crusher (and why the wave of bankruptcies doesn’t necessarily spell the end of an era).