Given the Sulzbergers' track record as market timers, today's report that their New York Times Co. is shopping the money-losing Boston Globe to prospective buyers could mark a bottom and the beginning of a rally for newspaper stocks.
It's easy to cheap-shot the Sulzbergers, seeing as the Globe is worth only a fraction of the $1.1 billion they paid for it in 1993. What is it worth? An industry analyst told the Boston Business Journalin April that the paper could sell for as much as $113 million—if it could find a taker. But the Sulzbergers aren't alone when it comes to overvaluing newspapers in recent years. Just five years after the Globe purchase, newspaper analyst John Morton was still heralding the deal's soundness, writing in the American Journalism Review, "The New York Times Co. has profited handsomely from its acquisition of the Globe, despite the price tag."
In the same AJR column, Morton slathered praise both on the Knight Ridder chain for having grabbed four newspapers owned by the Disney Co. for $1.65 billion in 1997 and on McClatchy Newspapers for dropping $1.4 billion on Cowles Media, owner of Minneapolis' Star Tribune. McClatchy, run by Gary Pruitt, one of the most highly regarded executives in the business, went on to buy Knight Ridder and sell a couple of its titles. Today, McClatchy, which publishes 30 dailies—including the Miami Herald, the Sacramento Bee, the Kansas City Star, the Charlotte Observer, and the Fort Worth Star-Telegram—has a market cap of just $60 million.
The Globe-for-sale news is only the latest chapter in the newspaper drama unspooling in Boston. In April, predicting a looming annual loss of $80 million, the Times Co. threatened to shut down the Globe if Newspaper Guild members didn't approve pay cuts and concessions. This week the guild nixed that proposal, and the Times Co. responded by imposing a 23 percent wage cut. The guild is promising a legal challenge.
To appreciate the abruptness of the Globe's fall from fiscal grace, consider that just three years ago, former General Electric CEO Jack Welch was reportedly ready to buy it from the Times Co.for $600 million, an offer the Sulzbergers must wish they had pocketed. Nobody is throwing that sort of money around for newspapers anymore, nor are they likely to anytime soon. The last big newspaper sale, of the San Diego Union-Tribune to a private-equity firm, went for less than $50 million, according to the Wall Street Journal. The only reason the figure was that high, it's thought, was that the deal included prime real estate the Union-Tribune owned—not because the paper itself was worth it. Cox Communications can't get anybody to offer more than $50 million for its Austin American-Statesman, reports the Silicon Alley Insider. And the value of that paper's real estate? About $50 million. The Globe'sreal estate? You had to ask. The Boston Business Journal estimated that a pure-asset sale of the Globe, including real estate, "could yield roughly $85 million."
Additional newspaper crackup data points: The Rocky Mountain News and the Seattle Post-Intelligencer, kept alive all these years by "joint operating agreements," in which a failing paper harnesses itself to a less-failing paper to survive, have given up and croaked. The newspaper division of the parsimoniously operated Washington Post Co.—owner of Slate, by the way—reported a $24.9 million operating loss in 2008. Meanwhile, the Hearst Corp. earlier this year vowed to fold its San Francisco Chronicle, which loses $50 million a year, if it didn't win staggering concessions from its workers. (Counting purchase price and operating losses, Hearst has invested more than $1 billion in the Chron since buying it in 2000, the Wall Street Journal reports.) What did San Francisco Mayor Gavin Newsom say about the Chronicle's possible closing? "People under 30 won't even notice." Ouch!
That many average dailies aren't worth much more than the dirt they own today makes sense when you analyze newspaper value from the ground up. After talking to newspaper analysts for his 2004 book The Vanishing Newspaper: Saving Journalism in the Information Age, Philip Meyer reckoned that only 20 percent of the value of a newspaper was locked up tangible assets—land, printing presses, delivery trucks, buildings, computers, desks, paper, ink, etc. The other 80 percent of value was to be found in a newspaper's "goodwill"—that is, the marketplace's assessment of the newspaper's trademark, history, reputation, and standing in the community.
What recent newspaper transactions (and nontransactions) tell us is that potential purchasers of newspapers—which include other newspaper companies, of course—believe that the goodwill value of many dailies is trundling toward zero. One would think that the inevitable reversal of the current advertising depression would encourage more entrepreneurs to bid for struggling dailies on the block. But no. The new conventional wisdom in the industry belongs to Warren Buffett, who expressed it in a 1992 letter to shareholders in his Berkshire Hathaway Inc. (which owns the Buffalo News and a large stake in the Washington Post Co.). In it, Buffett declared that "newspaper, television, and magazine properties" were losing their status as "economic franchises": No longer could they charge to the hilt because they provided a desired product or service that had no close substitutes. In his 2007 shareholder letter, he predicted that newspaper profits would continue to decline. They have.
Philip Meyer also recognized early on that the newspaper's privileged position between advertisers and consumers, which made 20 percent profit margins and those fantastic billion-dollar sales of newspapers possible, was coming to an end thanks to the arrival of new competition. "A newspaper that depends on customer habit to keep the dollars flowing while it raises prices and gives back progressively less in return has made a decision to liquidate," Meyer writes in The Vanishing Newspaper. "It is a slow liquidation and is not immediately visible because the asset that is being converted to cash is intangible." Meyer believes that asset is good will.
"Slow liquidation" shows up in the winnowing process at many local and regional dailies today: fewer reporters, fewer comics, fewer sections, fewer features, smaller pages, smaller news hole, and higher home delivery and newsstand prices.
Writing again last year in AJR, Meyer plotted an "elite newspaper" strategy for the slow liquidators. His plan is no resurrection prayer for dying dailies, but it makes more sense than running a newspaper down, down, down until it has one subscriber paying $5 million for home delivery, and then he dies.
Meyer thinks newspapers should accept that their mass audience is drifting away. (In the most recent reporting period, Globe circulation was down almost 14 percent over the previous year.) They should accept that non-news readers have stopped reading dailies, accept that newspapers can no longer satisfy everybody all the time with an "all-you-can-eat" buffet, and concentrate on publishing content of higher value. And they should "peel back" to their core functions of news, investigation, analysis, and interpretation "in a print product that appears less than daily, combined with constant updating and reader interaction on the Web."
I don't really expect any of these options to resound in Sulzberger ears. I'd probably fire me if I worked at the Globe and presented such a plan. But the Times Co. can't possibly imagine that the Globe will ever return to the peak revenues of $663 million that it enjoyed in 2004, especially now that all the economic indicators are moving in the other direction. (Estimated 2009 revenues: $377 million.) And given the severe debt problems facing the Times Co., losing more money in the short term at the Globe in hopes of making it back in the long term isn't feasible. Nor is a pure-Web path the way out. According to the Boston Business Journal, Web revenues make up only about 10 percent of the Globe's haul.
The dailies in jeopardy today aren't little, local ones, which serve specialized audiences with little competition, or the nationally distributed papers. It's regional papers based in big cities like Boston, San Francisco, Atlanta, Philadelphia, and San Diego. As plunging circulation proves, the masses no longer think a metropolitan newspaper is an essential tool for urban living. (Elsewhere—Los Angeles, Chicago, Baltimore, and Minneapolis—owners have simply packed on too much debt.) As a lover of newspapers, I hope this squeezing of Globe costs cuts losses, that advertising reblossoms, that readers return, and that black ink flows as wide and steady as the Charles once more.
As a realist, I know better.
Addendum: My friend Dan Kennedy covered several of these points smarter and earlier in a March post. Much recommended.
At this point, would a Globe fire sale even attract a single fire engine? Catch me Twittering or send me e-mail email@example.com. (E-mail may be quoted by name in "The Fray," Slate's readers' forum; in a future article; or elsewhere unless the writer stipulates otherwise. Permanent disclosure: Slate is owned by the Washington Post Co.)