Mr. Knee’s article in Barron’s is entitled “This Dying Medium Has Plenty of Life”. In the article, he points out that newspapers are still more profitable than other types of consumer media. Although profit margins have fallen from levels exceeding 30% to the mid-teens today, this still exceeds margins for movies, music, and books which have often struggled to reach 10%. Ultimately, he believes that “news junkies should anticipate an era of unprecedented plenty”.
Inappropriate Capital Structures
One of the main arguments presented in the article is the idea that newspapers remain good businesses but many are encumbered with high levels of debt that are no longer appropriate based on lower levels of profitability:
Even good businesses can have bad capital structures. Many newspaper companies took on debt that could have been easily supported if profitability had been maintained. The problem is that current earnings, even if superior relative to those of other media businesses, are far below what anyone had anticipated.
Mr. Knee goes on to discuss how companies such as McClatchy still had margins of 20% in 2008 but debt service consumed all profits. During earlier times when margins were 30%, this debt was serviceable but ceased to be appropriate as profitability fell. Eventually, the capital structure issues will be worked out one way or another:
One way or another, the capital structure crises at newspaper companies will be resolved, by paying back the debt over time, negotiating with creditors, or by bankruptcy.
The Internet
The internet is obviously the most visible threat to traditional newspapers, not only in terms of the characteristics of instant delivery of information but also because much free content is available. However, Mr. Knee believes that the information overload created by the internet provides opportunities to media entrepreneurs who will figure out how to develop compelling products to guide consumers through the noise.
National vs. Local Papers
One aspect of the article that I found particularly interesting is that Mr. Knee seems to be more bullish on prospects for local papers than on national papers such as the New York Times, the Wall Street Journal, and USA Today. This is curious because the Wall Street Journal in particular seems to be one of the few newspapers that have been able to successfully charge subscribers for content.
According to a recent story that reported on the Wall Street Journal surpassing USA Today as the top-selling daily newspaper in the United States, the Journal’s online subscriber base was estimated at 350,000. Few local papers that I know of are able to charge for online content. Perhaps this will change if Mr. Knee is correct about opportunities to guide consumers through the vast amount of free local information that is now available online.
Differentiation Is Key
I continue to believe that the most successful newspapers will be those that provide content that is not readily available elsewhere. This is why the Wall Street Journal seems to be able to charge for online content. The news is unique, widely trusted, and well presented. Even those who read the print edition can justify the additional cost of an online subscription based on updated news throughout the business day.
Although The Economist is not a daily newspaper, it provides another example of a media company that has embraced the idea of making online content enhance the print edition experience. While The Economist includes the online edition with the cost of a print subscription, many additional features are available such as audio and video presentations and interviews. One feature that I recently discovered is the Economist audio edition which is available for download each Thursday shortly after the weekly magazine appears online. The audio edition is well put together and pleasant to listen to for long periods. I will be using it extensively on long road trips that start on a Friday or Saturday before my print copy arrives.
As a news junkie, I already know that we are experiencing an era of unprecedented plenty. How this plays out for traditional newspapers will depend on the degree to which organizations embrace the internet in a manner that complements, but does not replace, their traditional printed products.
Ravi Nagarajan
[www.rationalwalk.com]
Ravi Nagarajan is a private investor and writer focusing on the application of value investing techniques to find securities trading well below the intrinsic business value. Ravi has over 14 years of experience in the financial markets and started investing on a full time basis in 2009. Over the past 13 years, Ravi held a number of executive level positions in the commercial software industry. Ravi graduated Summa Cum Laude from Santa Clara University with a degree in finance. Visit his website www.rationalwalk.com.
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