Wednesday, March 28, 2007

What newspapers don't tell you about the newspaper business

Posted By on 03.28.07 at 06:02 PM

The Tribune Company is in the news these days with Sam Zell's $8 billion bid to take it over (which might happen this week; h/t Beachwood) combined with reports that its revenues are off from last year. The five percent decline in revenue from last February is significant, particularly the 13 percent decline in classified revenues, but what I haven't seen in a single article I've read is any discussion of revenues in the context of profits and expenses.

The Tribune's profits and expenses for this February aren't available on the company's web site, but the most recent quarterly report is (PDF), which reflects a 23% profit in Q4 2006.

The newspaper industry, nationwide, has come to expect a profit margin far and above most other industries, as Lauren Rich Fine, managing director of Merrill Lynch, pointed out in a 2001 interview:

"Well, it's never enough, of course. This is Wall Street we're talking about. I think the expectation is that you can improve your margins over time. And what happens is each company is compared to its peer group. And so you indicated there's a range of 22 percent to 29 percent. If somebody's at 22 percent, you want to see a clear path of how they're going to move their profits to 29 percent margins. And certainly adjustments are made for the type of properties that you own. When you're in larger metropolitan areas, it's hard to achieve those profitability margins, but there is an expectation that over time you can improve them."

Which makes her sound like the Grim Reaper, but she makes a pretty good point later:

"But Wall Street isn't really that evil. Companies don't have to be public, and the newspaper industry in particular is an industry that generates a lot of free cash flow. And most of these companies don't need to be public, unless they plan on making acquisitions. And so I think companies need to reassess, if they're not prepared to do what it takes from a weak economy, they should reconsider whether they want to be public or not."

The classifieds model is probably in permanent decline, but when your local major daily starts freaking out about the sky falling, it's worth remembering that the newspaper industry's expectations of 20% profit margins are about two and a half times the average American industrial profit margin.

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