The Trouble with Papers

A few months ago, when I was still working in the newspaper industry, they crowded the editorial staff of CNC South into a little room in Marshfield to talk about how the financial picture was shaping up. I honestly didn’t pay much attention, I was rather busy attempting a circulate a petition demanding that we be treated to some kind of pizza while we sat in that room and heard about how this latest Internet push would fix all of our fiscal woes.

They trotted out the usual bogeymen that have been haunting the dreams of publishers for the past decade.

There was Craigslist which, in spite of the murderers and scams, was eating our classified lunch because people could post for free and even post pictures of their used lawnmower. You could also find freaky sex with a few clicks of the button, which I’m sure wasn’t sitting well with the purveyors of alternative publications that run their own little red light districts of escort ads and no-strings-attached hookups.

The rest of the Internet was also eating our lunch. The Boston Globe was trying to build its own “hyper-local” site poached from our content, threatening to give all the important information and then link back in case people wanted something other than all the pertinent information. That case was eventually settled after from saber rattling, but neither economically exhausted company really wanted to fight a battle that might come back to bite them later on.

The Web was also threatening for many other reasons. With “News Now” and multimedia initiatives (none of which were ever well supported or well implemented throughout the company) we were trying to drive eyeballs to our Web sites where ad revenues were dramatically lower. Sure it’s supposed to be the future and you don’t have to pay for paper, but you still have to pay for the reporters (though not all that much to be quite honest, I was making $11/hour with no raise in sight).

There was the economy, which had trashed the real estate and car sales markets. If you’ve ever opened up your local newspaper at random, there’s an 85 percent chance that you’d open up to an ad for a realtor or a used car lot. Since none of those were moving, and the results of that advertising were always dubious at best, clients were pulling back their ad buys.

One item that they breezed over as people were starting to fall asleep, that they didn’t blame for anything was debt service.

It was only a few years ago that Gatehouse Media New England was several independent companies spread around the state. These, in part CNC and MPG Newspapers, were themselves big fish that had gobbled up smaller fish and independent papers to try and dominate the media landscape and achieve the mythic “economy of scale.” Once everything was gobbled up under the Gatehouse banner there were layoffs and newspapers disappeared or were rebranded to minimize overlap.

This happened through the power of hedge funds and cheap credit.

The Tribune Company applied similar logic to their own expansion, as did several other media empires. The problem with this is that some enterprises can only scale so much and when you’re trying to run local newspapers you need boots on the ground, and piling so much national bureaucracy on top of things doesn’t make the newspapers better.

The problem is the same for companies as it is for all those homeowners that were playing with cheap credit in the past decade. You can use that leverage to add value, or you can use it to cover short term expenses. In newspapers you can add reporters, build new presses or snazzy web sites, or you can buy out other newspapers until you’ve got a fat stack.

The first problem comes when you pay a bubble price (which is likely when there’s a free flow of cash, even if inflation is low). With a price that doesn’t reflect reality, it certainly doesn’t help the kind of math you have to do when you’re making due diligence for an investment. Certainly it doesn’t help that an asset is worth less than you paid for it in real terms right off the bat.

The second and most fundamental problem is that you have taken on a debt and debt service but you haven’t created any additional value. For Gatehouse that meant paying $24 million a year in debt service on more than $1 billion in debt.

How do you pay for that when your circulation is going down, your ad revenues are dropping more than 10 percent and operational expenses are increasing?

You can start by freezing wages, telling your employees that you just can’t afford to pay them more. For the employee it’s actually a pay cut, but they’re reporters so they have a little trouble with the math. You cut back on staff, dropping photographers (after all you already have the reporter in the field) and anyone else you can think of because it will save you on wages and benefits. Then you can cut wages for everyone else and change around your benefits scheme, to wring even more blood from the stone.

All of these of course don’t do anything to serve customers. Fewer staffers means fewer stories, or stories written in a rush with a lot less depth. After all, when you’re paid only a little better than someone flipping burgers a pay cut doesn’t make you want to run out and do a great job it makes you want to do 90 percent of the job you were doing before.

So what’s the solution? It sure isn’t additional media consolidation and it isn’t charging people more for less. The only way out is to do a great job and make it something that everyone absolutely must see and must read, even if it in only at your Web site. That or I’m just bitter about unemployment.

That petition for pizza disappeared once it reached a few rows forward, some people may have been a little afraid for their jobs if they got too uppity.