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That Federal Help For US Newspapers That We Suggested Six Months Ago Doesn’t Sound So Farcical In Today’s World

Six months ago when the federal government started throwing huge amounts of money around for various federal bailouts – (Fannie Mae and Freddy Mac, the banks etc,) we suggested that maybe it wasn’t such a bad idea for newspapers to get some help, too, and, yes, we understood all the complaints from naysayers about the media beholden to a government that it is supposed to criticize.

US moneyBut we said then this was becoming a matter of survival and, my, what a difference six months has made. Already you have Benjamin Cardin, the Democratic Senator from Maryland, offering up the Newspaper Revitalization Act that would give newspapers special status under the US tax code as non-profit organizations for educational purposes; advertising and subscription revenues would be tax exempt and donations given to support news operations would be tax deductible.

The Boston Globe – the same Boston Globe that owner New York Times Company has said must find $20 million in savings real fast or be shut down – wrote of Cardin’s Bill that it would allow revenue from both profit and non-profit sources and while “This particular Bill may not be the answer, given the drawbacks of other alternatives, the dual-track approach it embraces is worth a serious look.”

(Although it really didn’t get anywhere, a couple of years back then French Culture Minister Renaud Donnedieu de Vabres proposed that “newspapers of opinion” establish either an industry-wide Foundation or that each newspaper establish its own Foundation and he would officially interpret contributions made by individuals or companies to such foundations as tax free.)

Massachusetts Democratic Senator John Kerry – remember, Boston is in Massachusetts – has now announced that the Senate Commerce Committee will hold hearings beginning May 6 on the financial condition of the newspaper industry. He has written to Globe union members that he wants to ensure the “vital public service newspapers provide does not disappear.”

It’s not that the government is going to be handing our barrels of cash to newspapers, but it could well be that newspapers might be in a position to get some hefty tax breaks. There is no doubt the industry as a whole is in trouble – five big newspapers companies are now in Chapter 11 bankruptcy, not forgetting their major newsprint supplier -- and the debt of many newspaper companies is now classified as junk.

On the other hand let’s not forget what Gannett, the largest US newspaper chain, and McClatchy, the third largest, are still saying – that they still make good money, not as much as before but good money, but their big problem today is that the advertising downturn means there’s not enough cash flow coming in to handle the terms of their debt.

Before the advertising downturn, of course, newspapers were cash cows with margins exceeding 20%, sometimes more than 30%,  and that’s something the lawmakers should keep in mind – that whatever tax benefits they give away to newspapers today can be rescinded whenever they return to cash-cow status, whatever the definition of that might be. And for good measure it won’t hurt to impose those same salary restrictions that the government is imposing on banks that take a bailout – there’s enough newspaper CEO’s and other senior executives out there making more than $500,000 for that to be applicable.

Back in September when we suggested some federal help was needed the shares of Gannett stood at $16.42, McClatchy was at $3.18, and New York Times Company was at 13.84. On Tuesday, Gannett closed at $3.09 – that’s down 81% from September, McClatchy closed at $0.55 – down 82%; and The New York Times closed at $4.94, down 65%. Those are not the figures of a healthy industry.

The New York Times Company on Tuesday announced Q1 numbers that were far worse than analysts had been expecting, a net loss of $74.5 million, with advertising revenue down 27%. Fingers pointed to the Boston Globe as the real problem child.

Last week Gannett announced its Q1 profits were down 60% from a year earlier with net income in the quarter at $$77.4 million compared with $191.8 million a year earlier. Publishing advertising revenue was down 34%. The good news was that the company still eked out a Q1 profit, but to do so it has closed newspapers, culled staff, placed staff on unpaid furloughs and anything else it can think of as it tries to restructure its debt.

And debt is the big bugaboo.  Moodys announced this week it would probably sink Gannett’s debt deeper into junk territory, fearing the company could be in violation of debt covenants by the end of the year because profit levels may fall too far and also that Gannett may not be able to maintain required cash flows low advertising income could continue for another two years.

For print readers the big concern, of course, in this kind of cutback environment is what kind of print newspaper gets delivered every day (that is, if it continues to get delivered every day as per Detroit) with all the cutbacks newspapers are making just to survive. As the big boys are showing, it’s not enough just to be making some profit, but their loan covenants require specified cash flow, specified profit and if those terms are broken the loans could be called. It’s really serious out there.

So is the government the solution? One line of thinking goes that the newspaper industry got itself into this predicament by themselves, so let them get themselves out of it. But then there is the position of Senator Kerry in his letter to Boston Globe employees that said, “America’s newspapers are struggling to survive and while there will be serious consequences in terms of the lives and financial security of the employees involved, including hundreds at The Globe, there will also be serious consequences for our democracy where diversity of opinion and strong debate are paramount.”

Newspapers left to their own means will probably conduct more and more culls – Seattle and Denver have lost newspapers and companies have shown they are not shy to take the bankruptcy route – Tribune, Journal Register to name just two. The fact is that legacy employment contracts that were negotiated in the good times and built upon ever since just are not sustainable in today’s print world – witness Hearst’s ultimatum at The San Francisco Chronicle (unions appear to be giving in there) and the NYT to The Globe (no givebacks yet).

Newspaper companies got themselves into trouble because they borrowed heavily in the good times in the belief cash flows would easily take care of debt payments, running the newspaper, and providing good profit too. That business model broke as advertising monies started flowing to the Internet and then advertisers just plain cut back as they found themselves in big trouble (auto industry, for instance).

There should be courses in business schools across the US studying what has happened to the newspaper industry over the past 10 years so that everyone can learn for the future, especially pinpointing what terms newspapers should have had in their loan agreements that might have spared them so much grief if things were to turn sour? (Is that the kind of insurance trouble that AIG got into?)

Meanwhile, it does no harm to remind ourselves of the open letter we ran six months ago that Chicago columnist Phil Radner wrote to then US President Bush.  “The leaders in our industry have made decisions so incredibly dumb they seem incomprehensible to rank-and-file employees who have absolutely no business sense…Our leaders decided to give away the product we used to sell – making all newspaper stories available for free on the Internet.

“Why are we doing this?” I remember saying years ago. “It’s the future,” I was told. Everyone in the business is doing it. We’re not going to be left behind.” “But how are we going to make money?” I said, not having a head for business. “We’ll figure it out,” I was told,

“Of course, no one has figured it out, and young people no longer are buying newspapers. No one in the newspaper business can figure out why that is. Mr. President, I contend that an industry led by people who give away its product for free, a business that cannot figure out why young people no longer buy a product that’s free, is ripe for a federal bailout.”

 

 


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