Industry News

How many newspaper buyers will miss the boat?

Cribb, Greene

Mid and small market newspapers have held their own through the Great Recession, and their executives predict growth in both revenues and profits in 2011 (CG Publisher Confidence Survey Spring 2010). Many newspapers in this category have kept their EBITDA percentage at 5% to 15% of revenues - down from 15% to 25% margins but far, far higher than many other industries.

The recession has taken a tremendous toll on newspapers, and digital media competition has gutted some categories of newspaper revenues - like classifieds. What is unknown is how much damage has been caused by the recession and how much has been caused by digital competition. With the recession apparently coming to an end, it should be clearer what the damage is from digital media competition.

In any case, newspapers must embrace digital information distribution, and newspaper executives need to work with their own websites and other digital delivery systems on a daily basis. It seems that newspaper executives still aren't spending the necessary time and effort to understand digital information distribution.

The idea that all conventional newspapers will disappear is ridiculous. Large metro newspapers have been at high risk because much of their news is national/international in scope and has been commoditized, and this segment of the newspaper industry continues to take a tremendous beating. Mid and small market newspapers face the same type of issue, but there is far less competition to produce quality local and regional news. Mid and small market newspaper franchises are in a much better position than their larger brethren because they are the only viable professional news gathering organizations in their areas. Local radio and TV provide some coverage, but primarily repeat what newspapers report.

What this means is that newspapers have the only real reporting structure in virtually every mid and small market. Couple this with a steady consumer appetite for news and it is clear that the product newspapers create is not an obsolete "buggy whip," but a product that is actively sought.

The problem is "monetization of digital information flow," or how to make money with newspaper websites and other digital information distribution. Certainly, there is no quick answer to this question and it is likely to be a combination of fixes. This is why newspaper executives' increased use of their digital information systems is crucial - the better understanding newspaper people have of the digital side, the more they will understand the revenue opportunities.

It is also likely that the overall fix for newspapers is a combination of traditional print approaches and digital distribution approaches. Frankly, printed products are just too convenient and useful to go away (ask any pre-print advertiser about this). Digital delivery is so convenient, expandable, and cheap to not take complete advantage of. There is a mix of these delivery types (or probably many mixes) that will both serve the consumer and make money for the publisher.

In the panic to get out of the newspaper business, some franchises have been ruined, and some sold at remarkably low prices. Some of these franchises would have failed anyway, and there is no clear path to a solid business model for large market papers.

Mid and small market papers have been tarred with the same brush, yet most are operating profitably even through the double onslaught of recession and digital competition. EBITDA valuation multiples have not fallen as far for these newspapers, but are still well down from a few years ago. This represents an excellent time to acquire these properties.

Is the entire newspaper industry really going to fail? This seems pretty unlikely. Are mid and small newspapers poor businesses at 5% to 15% profit margins in recessionary times? Ask your local grocer, retailer, auto dealer what their profit margins are and suddenly newspapers look like excellent businesses. Conventional banks have been absent from newspaper lending (and lending in many other industries as well) but they will not ignore an industry with steady profits forever. When financing becomes more available the pool of buyers for newspaper properties will balloon, and the competition to purchase good mid and small newspapers will increase.


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