Saturday, January 06, 2007

The Creative Destruction of the Newspaper Industry

In this article reprinted below, Mediacrity contributor Bruce Kesler of the Democracy Project provides a sharp analysis of the future of the newspaper industry:

Back when I was an exec at Crown Zellerbach, a Fortune 100 company, I told others that a buy-out artist could scoop up the company for pennies on the dollar of assets and cash-flow, break it up for sale, and pocket a hefty profit. I was poo-poo’d. After all, CZ was a 100-year old leader in the pulp & paper industry, although lately a laggard. In 1984, Sir James Goldsmith did what I predicted, to large gains. This was typical of the wake-up call delivered throughout American industry in the ‘80’s.

Today, the same tide of creative destruction is beginning to reach the shores of newspaper beaches.

As the term was coined,

Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of industrial transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power….

The current example of the Minneapolis-St. Paul Star Tribune newspaper fits the mold.

(With HT to Powerline for the link) The Star is almost worth more dead than alive, due to its real estate and other holdings.

Basic point is that the printing plant and it's "expansion land" is still worth it's original $100 million. As for the Metrodome six blocks I'd guess that that is worth $100 million to $200 million. Let's take the middle, $150 million. With the printing plant that's $250 million. Throw in a few other "non core newspaper" assets and you have half of the $530 million purchase price. That would put the Star Tribune and it's "core" square block office building at $265 million. Apparently the Star Tribune gets over $100 million per year in "net revenues".

The purchasers of the Star are experienced vulture capitalists. ( subscription required)

Avista mightn't be a household name, but its founders, Thompson Dean and Steven Webster, have been well known in the buyout community for more than a decade. They ran a group that generated returns of about 50% from buyout investments for Donaldson, Lufkin & Jenrette, which was acquired by Credit Suisse in 2000. The pair left Credit Suisse 18 months ago to start Avista, which they hope will manage $1.5 billion....

Mr. Dean wouldn't address whether Avista will slash costs or lay off employees. "Newspapers have to recognize that they are operating in a different environment, with different pressures, declining readership and advertising pressures," he says. "We have to get additional revenue growth and do things more efficiently, but that may not be about staff cuts."

They’ll get a hefty return from an investment that may net out at only about 2 ½ times cash flow, a fraction of the cost of cash flow return from other investments.

Avista has brought in an experienced newspaper publisher, Chris Harte. (A Democrat, if anyone is wondering whether the editorial line at the Star will change. In 2001, he considered a Democrat challenge to Maine’s Senator Collins.) Chris Harte and Avista are keeping the current management of the Star, Avista harvesting the cheaply bought cash flow, and Harte making the usual promises of revival expected of a new leader.


Avista has promised to invest in the Star Tribune, and to retain its publisher, Keith Moyer, and its top management. But industry observers worry that it might have to cut costs if advertising or circulation revenue don't improve.
Mark Neuzil, a journalism professor at the University of St. Thomas in St. Paul, said the deal could be a prelude to a classic "strip and flip" for profits, or it could herald the beginning of more public newspapers going private to avoid the pressures of Wall Street.

If other newspapers try to go the going-private route, they’ll only be throwing good money after bad, to the extent they try to hold their dead-tree monopoly. If they have any long-term future, it’s in Internet delivery of news, where they have to compete with new entrepreneurs and deliver a product the readers want and view reliable.

The all-but-private (due to super-preferred stock) New York Times just sold off another chunk of itself to funnel it into keeping the Gray Lady floating, and trying to get returns from still small but at least growing Internet news businesses.

The New York Times Co. it sold its broadcast group, including nine television stations, for $575 million to private equity firm Oak Hill Capital Partners in order to concentrate on its newspaper business….

New York Times Co. Chief Executive Janet Robinson said in a statement that the sale would allow the media company to focus on the "development of our newspapers and our rapidly growing digital businesses."

Most newspapers are between the rock and the hard place: Keep churning out unreliable reporting that readers increasingly don’t buy, in order to maintain their ideological stranglehold on American news, or be bought out and otherwise be consigned to capitalism’s ash heap.

Bruce Kesler

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