Investors Misreading Future of Newspapers

Many years ago, a veteran editor at what was then the Chandler-owned Los Angeles Times made the following observation about that family and its dividends from this newspaper:

“They’re either rolling in it, or they’re really rolling in it. And when they’re only rolling in it, they start to panic.”

The era when insufficiently huge newspaper profits would give the shivers only to the members of a wealthy family seems quaintly distant today. With most major American newspapers, including this one, now owned by publicly traded corporations, the conniptions are more likely to be thrown by Wall Street securities analysts and institutional money managers.

Among the latter is the investment partnership Private Capital Management, whose chief executive recently urged Knight Ridder Inc. to put itself up for sale. Knight Ridder, the publisher of 32 daily newspapers, many of them monopoly franchises in mid-sized cities, is doing so, although it’s unclear whether anyone will be buying.

Private Capital’s move reflects the conventional wisdom that newspapers, as investments, are white elephants. The bill of particulars is distressingly familiar: The young don’t read newspapers like they used to, the public doesn’t trust them like it used to, rival sources of information are proliferating and advertisers are growing more interested in the Internet.

That’s not to say newspapers are losing money. The average 2004 operating margin of publicly owned newspapers -- that’s the profit margin before such items as taxes, interest and depreciation -- was 20.5%, according to the industry analyst John Morton. That’s roughly double the average margin of the Standard & Poor’s 500. (The operating margin for Tribune Co. papers, including The Times, was 17.6% last year. The Times recorded operating revenue of more than $1.1 billion, suggesting that its operating profit could have approached $200 million.)

Still, stockholders as a class don’t take comfort in the present; they worry about the future. They think the newspaper industry is in long-term decline, and they’re bidding down its shares.

It’s worth remembering that Wall Street is not the best place to turn for forecasts of the future. Investors are always looking for a hot new story and shunning, well, yesterday’s news. Right now the hot story in the information biz is Google, whose stock trajectory looks like the mirror image of newspaper stocks (magnified, too -- its price-earnings multiple is roughly 90). To judge from these charts, all newspapers might as well close up shop now, because sooner or later Google will own every eyeball in creation.

Haven’t we heard this before? Scarcely five years ago, the hot story was Amazon.com. Barnes & Noble’s bricks-and-mortar bookselling model was supposedly a dead duck. But B&N; didn’t disappear. Indeed, if you’d held on to both stocks for the last five years, your return as of this week would be nearly identical -- you would have doubled your money. But the ride would have been a lot hairier with Amazon, including a 92% collapse that started precisely at the point of maximum euphoria. The reason is that investor “knowledge” about Amazon’s prospects was conjectural, while Barnes & Noble had been a major chain for a quarter-century.

Newspapers shouldn’t draw succor from the history of investment fads, however. The readership base is narrowing and aging. The public’s dependence on a daily newspaper for TV listings, movie times and stock quotes is evaporating fast -- this information is now readily available on the Web, in real time. It’s becoming more common for people to read newspapers online (truth to tell, that’s what I do), but publishers haven’t yet figured out how to make as much money from the Web as from print advertising. Some advertising, notably classifieds, may leave the newspaper model altogether, migrating to Web-only aggregators.

With few ideas about how to grow readership and revenue, publishers have taken the easy path of cutting costs. Tribune Co., Knight Ridder and the New York Times Co. have all reduced staff and shrunk their newspapers. In many of their publications the sports stories are shorter, the national news report skimpier. The city councils of smaller municipalities don’t get covered. The editorial pages get planed smooth and positioned delicately on the opinion spectrum so no reader can take any imaginable offense at an identifiable political “tilt.”

This can yield marginal gains, for a while. But judging how much to spend on professional news gathering, past a certain threshold, is a subjective exercise. Lawyers are evaluated by their billable hours and garment workers by the piece, but full-time reporters aren’t paid by the word. No reliable formula exists for translating a newspaper’s literacy, investigative daring, Pulitzer Prizes or (for that matter) political tilt into circulation or advertising revenue. So some publishers will continue to slice away until there’s noticeable deterioration in the quality of the product. A few, having reached that point, will keep going until they see an effect on readership and ads.

The more farsighted will invest in new technology to make their online offerings as compelling as the bicycle-delivered versions once were. But in the near term that will cut into operating margins. Many newspapers are no longer the properties of families that collected not just money but also intangible benefits from their ownership -- social prestige and local political power, chiefly. For corporate owners, as Morton observes, newspapers are expected to deliver tangible profits measured in dollars, or else.

Newspapers and corporate ownership aren’t inevitably a poor fit, but further adjustments in the marriage contract surely lie ahead. Newspaper people argue that you can put out a terrific paper -- and invest in new technologies -- if you’re willing to settle for a 10% margin, not 20%. Unfortunately, the prices that some corporate owners paid for their properties were probably based on projections closer to 20%. At their annual shareholder meetings, they’ll find it hard to justify taking the haircut. So they’ll operate to preserve that margin or they’ll sell, possibly to someone willing to settle for the lower number. Knight Ridder’s fate may tell us if the latter option is plausible, and the fate of its newspapers, and hundreds of others, will show us what will happen if it’s not.

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You can reach Michael Hiltzik at golden.state@latimes.com and read his weblog at latimes.com/goldenstateblog.