February 17, 2005

Reading the Vanishing Newspaper, 10: How Newspapers Were Captured by Wall Street

The explanatory title of this chapter of "The Vanishing Newspaper, Saving Journalism in the Information Age" is a bit of a tease (Tell me, tell me, how did it happen?) because Wall Street didn't capture newspapers - in fact, it was barely interested in chasing them. A more accurate heading would be: How Newspaper Owners Surrendered Their Souls to Wall Street in Order to Preserve Capital.

It is fashionable these days to link the decline of newspapers to their transition from enterprises owned mostly by families to ones subject to the quarterly pressures of public investors, who, critics argue, demand ever-increasing profits at the expense of good journalism.

I like my title better because it shifts the responsibility away from Wall Street, which is only applying to newspaper companies the same standards to which it holds all other sorts of companies. (Of course, it is equally stylish these days, and rightly so, to criticize investor obsession with 10-Qs and the short-term thinking it produces.) Let's put the blame on the party who initiated this bad marriage - the newspaper companies.

Philip Meyer quotes Merrill Lynch newspaper analyst Lauren Rich Fine (all emphasis throughout is mine):

"The real genesis of all the problems here is newspaper companies went public for the wrong reason. They didn't care about shareholders, they did it for their purposes. My frequent point that I've made is that if don't like what it means to be a public company, you don't need to be public because, here's the good news these companies generate a lot of free cash. Not one of them, not one needs to be public. Hey, I didn't tell you to go public, but as long as you did, I expect a return."

As Meyer points out, newspaper companies went public because they wanted to preserve or raise capital.

Gannett broke the IPO barrier in 1967 with the intent of growing through acquisition. And it did. At the end of the 1960s, according to the company, Gannett owned "33 dailies and 12 weeklies, six radio stations and two television stations." A decade later the tally was "78 daily newspapers in 33 states and Guam, a national news service, seven television and 14 radio stations, outdoor advertising plants in the United States and Canada, 21 weekly newspapers and the research firm of Louis Harris & Associates."

Knight (before it was Knight Ridder) and McClatchy went public to protect family holdings, with the latter also preserving the McClatchy influence over the company through a two-tier system of stocks that kept voting control within the family.

History lessons aside, Meyer addresses the question of whether Wall Street's insistence on growth and ROI has hurt the quality of journalism produced by these newspapers. He arrives at an answer similar to that found by Rick Edmonds when he analyzed staffing at publicly held vs. privately owned newspapers: It depends.

The variable is the culture of the company. Meyer looks at the way several companies handle staff size when the economy sours.

Gannett, for example, routinely seen as, "went through the 2001 downturn without layoffs" because "there was nowhere to cut. Its staffing had been bare bones to start." On the one hand, Gannett is Scrooge; on the other, its routine tight-fistedness spared newsrooms the demoralization of layoffs.

McClatchy also didn't layoff during the recession, but CEO Gary Pruitt tells Meyers his newspapers "did not needlessly bulk up" during the '90s boom and managed to shrink newsroom budgets through attrition.

Knight Ridder made the most news - and not the kind PR folks welcome - with its layoffs in 2001, most notably those that led to the very public departure of San Jose Mercury News Publisher Jay Harris. Meyer quotes from Harris' speech to ASNE in 2001:

"What trouble me, something that had never happened before in all my years in the company, was that little or no attention was paid to the consequences. There was virtually no discussion of the damage that would be done to the quality ands aspirations of the Mercury News as a journalistic endeavor, or to its ability to fulfill its responsibilities to the community."

Unlike McClatchy, Knight Ridder's newspapers did add staff during the 1990s and what the company did with its cuts 2001, said Edmonds in his study, was "bring staffing levels closer to the industry norm."

Meyer asks a good question here: "But what if the 'norm' is the wrong strategy?"

I come away from this chapter thinking about corporate ownership of newspapers as I did before: There are good owners, there are mediocre owners, and there are horrible ones. (See Durham for an example of the latter.)

Some corporate executives believe quality journalism is good for business and some don't. Pruitt of McClatchy thinks quality matters. He tells Meyer why his company doesn't lay off:

"We always say to our papers, you challenge is no matter what, the paper must improve. It always drove me crazy where in a downturn, news hold cuts were made and the paper got worse. And I always thought restaurants don't make food worse in a downturn. Car companies don't make cars less safe in a downturn. Why is it OK to make a newspaper worse in a recession? That's your excuse for making your product worse? It makes no sense."

Meyer asks analysts: "If newspaper companies can find a few quality indicators that could be measured and published periodically, would Wall Street care or even pay attention?"

Not really. Although Fine of Merrill Lynch says she has no problem viewing newspapers as value investments, those that don't necessarily provide quarter-over-quarter returns. She says:

"I'm going to make money with you if I invest over time, and I recognize those times where you're not going to look as good as somebody else. But a few years out you'll look better."

It seems newspaper companies can concentrate on quality and profit if they manage Wall Street instead of letting the market manage them. Pruitt explains:

"We had, to some degree, tried to shape the type of shareholders we had, and have by defining the company differently and not wanting to have certain types of shareholders that would be upset by our actions."

I don't want you think I completely disregard the financial pressures newspaper companies place on newsrooms. I've written and managed newsroom budgets in good times and bad and there's nothing worse that cutting, especially when it involves someone's job.

I do, though, think journalists need to be wary about blaming the industry's woes on Wall Street. As Meyer as pointed out repeated in The Vanishing Newspaper, long-term systemic changes in media, the economy and society are behind much of the decline in influence newspapers once had. That's why all of the work he's done for the book has only found indicators that can limit circulation loss rather induce readership growth.

Good companies, journalistic or not, do good work. And good companies, public or private, are led by managers who value quality, play fair and respect their employees. Here's a coda from Meyer:

"Newspaper reporters have a cynical expression that helps them cope with the inherent frustrations of the profession: 'Good things happen in spite of management.' For the best of the top managers, parallel idea might be, 'Good things happen in spite of Wall Street.'"

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Posted by Tim Porter at February 17, 2005 07:39 AM