Newspapers Aren't Dying, They're Just Turning a Page

By JAMES FLANIGAN

March 19, 2000 12 AM PT

When Tribune Co.’s proposed acquisition of Times Mirror Co. was announced last week, many people saw it as a mere inevitability.

Consolidation in a fading industry, commentators called it, pointing out that overall newspaper circulation in the U.S. has been declining for decades. Newspapers’ share of total advertising spending also has slipped in recent decades. And as everyone in the high-tech industry knows, the Internet is about to make newspapers as extinct as the dodo bird.

But the evidence says that what “everyone knows” is wrong, as usual. First, there is the price that Tribune, the publisher of the Chicago Tribune and other papers and the owner of 22 television stations, is paying for Times Mirror, publisher of the Los Angeles Times and other papers: $93 to $95 a share, a 100% premium over the previous stock price.

And that’s a pattern. In recent years, prices paid for newspaper companies in Minneapolis and Kansas City, Mo., have been two and three times the previous stock price.

That’s because the newspaper business is more profitable than the average for U.S. industry, analysts point out. The average pretax operating profit for newspapers is 20% of revenues, compared with roughly 13% on average for all industry. Also, with circulation and advertising revenues coming in every day, newspapers are renowned as good cash-flow businesses.

Newspaper companies appear to believe in the future, too. In the last five years, the dozen major newspaper groups have all increased capital investment in their own business. If the Internet is about to make them dead letters, are they nuts to be so optimistic?

No. The truth about newspapers is that they are not a fading or failing industry, but a “transforming” one, as one expert puts it. And they have an opportunity to succeed greatly on the Internet if they can adapt their content to the new medium.

Obviously there are challenges. That’s why investors give newspaper stocks a skeptical eye and relatively low prices.

But some investors take a longer view. “Newspapers still reach millions of people, and they have content” that could be valuable on the Internet, says Steven Rattner, an investment banker and onetime reporter who now is founding Quadrangle Group to invest in media ventures, including newspapers.

Rattner is right. More than 4,000 newspapers in the U.S. reach 55 million to 60 million people every day and garner $48 billion in ad revenue--one-fifth of the overall total but 46% of all local advertising.

Newspapers are the masters of local “content,” an overused word that conjures up gray columns of type on paper but which refers to far more. Content is people, specifically those among the nation’s 450,000 newspaper employees who gather information from every city hall, school board, police station, legislative hearing and every other activity in town, state and nation and process that information for the public.

“Newspapers are the only industry organized economically to gather and process that information,” notes John Morton of Morton Research, a Silver Spring, Md., firm that has long studied the industry.

Radio, television stations and news-oriented Web sites largely depend on newspapers for local information. Microsoft found out just how expensive it is to set up such a local information system several years ago when it tried to establish a local entertainment and listings service called Sidewalk.

To be sure, newspapers will have to adapt their content to the broadband, interactive Internet that is coming in the next five or so years. That’s when personalized information will come to each individual through combination computer-TV sets.

“They can’t simply put newspaper page forms on the screen,” says James Bellows, a man who spans the media ages as the founding editor of Excite@Home and who was also editor of the long-folded New York Herald Tribune and Los Angeles Herald Examiner.

Can newspaper content work on the Internet? Evidence even today is that it can. The Wall Street Journal’s online edition now has more than 400,000 subscribers and is increasing by 15,000 a month. The online Journal costs $29 a year if a customer also subscribes to the paper version, $59 if not.

Knight Ridder Inc., the publisher of the Miami Herald, San Jose Mercury News and other papers, reports that its Real Cities Web sites are often first in the number of online visits in their local area.

“Sports, financial news, local news all work. Newspaper Internet sites rank high in numbers of visitors,” says analyst Douglas Arthur of Morgan Stanley.

When Tribune and Times Mirror complete their merger, their combined Web sites will attract more readers--3.4 million--than any other newspaper company sites.

Of course, how people ultimately will want online information will only be determined as Internet usage and ease of use grows.

But businesspeople already are in no doubt about the potential of the business. Simply put, distributing information through the Internet could be done at dramatically lower costs. To understand, consider that more than 40% of the cost of bringing a newspaper to the subscriber or newsstand lies in the paper, ink, printing, loading on trucks, unloading, delivering to houses, etc.

Electronic delivery could lop billions of dollars off each major company’s operating costs. The Internet could truly transform newspapers into a whole new “content” business.

At the very least, the potential is a big reason newspaper companies are investing heavily in digitizing their archives and using electronics more thoroughly in their handling of information.

It is also the reason newspaper companies are buying one another and buying broadcast, cable and Internet start-up companies too. The thinking in the industry, and in the Silicon Valley, too, is that ultimate success will go to those with a place in many forms of media.

Sure, there are imponderables as the newspaper industry, not to mention television, magazines and all other forms of communication, move into a new age.

But if there is risk in uncertainty there is also opportunity. That’s why Tribune is buying Times Mirror and why you’ll see many deals and mergers in this “transforming” industry.

James Flanigan can be reached at jim.flanigan@latimes.com.

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Profitable Reading

Newspaper companies have enjoyed rising earnings in the last five years, despite a slippage in the industry’s share of total media advertising spending. A look at the advertising market share and the earnings-per-share growth of the nine major newspaper companies in the United States:

Newspapers are attracting a smaller share of ad dollars ...

2000: 21.9% (estimated)

... but their earnings have continued to grow in the last five years.

Company 5-yr. avg. EPS growth

Dow Jones 3.5%

Gannett 15.1

Knight Ridder 16.9

McClatchy 10.2

New York Times 15.3

E.W. Scripps 5.9

Times Mirror 29.0

Tribune 16.3