Profits and the Press
[Sorry, the video for this story has expired, but you can still read the transcript below. ]
TERENCE SMITH: In a move that stunned the newspaper industry earlier this week, Jay Harris, the publisher of the San Jose Mercury News, resigned. Harris had been ordered to cut costs at the Knight Ridder paper, in an effort to boost its profitability.
Profit margins across the newspaper business, which can range from 22 percent to 29 percent, have been sagging this year due to depressed advertising sales. This has increased the pressure on papers across the nation to produce quality journalism on significantly tighter budgets.
In his resignation letter to Tony Ridder, the CEO of Knight Ridder Corporation, Harris said that the planned cost-cutting would “necessitate deep and ill-advised staff reductions at the Mercury News.” And in a memo to the staff, Harris said that attempts to meet profit targets could not be made “without risking significant and lasting harm to the Mercury News as a journalistic enterprise.”
In the wake of Harris’s resignation, Tony Ridder advised the Mercury News staff that there would be “no layoffs of full-time newsroom employees” and said that management “hoped to avoid layoffs of full-time employees elsewhere” at the paper.
TERENCE SMITH: Joining us to discuss the newspaper industry story are David Yarnold, executive editor of the San Jose Mercury News, who on Tuesday reassured the newsroom staff by ripping up a list of proposed layoffs; Lauren Rich Fine, a Merrill Lynch managing director who analyzes the publishing and advertising industries; and James Naughton, a former executive editor of the Philadelphia Inquirer, a Knight Ridder paper, he is now President of the Poynter Institute for Media Studies in Florida.
Welcome to all three of you.
Jim Naughton, you know the Knight Ridder organization.
JAMES NAUGHTON: Yes, do I.
TERENCE SMITH: You know Jay Harris, and you know something about the pressures that can be brought on editors to reduce costs and improve profits. What is Jay Harris’ resignation say to you?
JAMES NAUGHTON: Well, I think it’s hugely important to journalists everywhere and to people who care about journalism because there are a lots of people in newsrooms who have been saying for some time that they were increasingly alarmed about the stress that was being put on profitability and, in their judgment, often at the expense or potentially at the expense, of content. And for Jay Harris, who is, by reputation and, I would agree, by in fact one of the most entrepreneurial, most capable publishers in America, to say that he was concerned about these very same threats to the journalism I think is just hugely important.
TERENCE SMITH: David Yarnold, in his resignation letter, Jay Harris wrote, “much greater priority is given today to the business aspects of our enterprise than is given to fulfilling our public trust.” Is he right?
DAVID YARNOLD: Well, I think Jay was fearful that the balance had shifted, and I think, I hope, that we’re still a company that believes that good journalism is good business, and I believe that goes the case. But the pressure’s brought about by an economic downturn are, without question, severe.
TERENCE SMITH: Did his action, his resignation surprise you?
DAVID YARNOLD: Not really. I think I had seen signs of it coming. I think Jay had a number of long-held, deeply felt concerns, and I think this was a trigger more than anything else.
TERENCE SMITH: Lauren Rich Fine, newspaper profit margins are higher than many other industries. Why the pressure, the continuous pressure to keep them up or even increase them?
LAUREN RICH FINE: Well, I think that comes with being a public company. I think it’s the same with every industry. Shareholders invest in companies for growth, and so even though we’re in an economic downturn and there’s a lot of pressure on ad revenues, shareholders expect companies to contain their costs and do what they can to maintain their profitability, if they can’t improve it at the time like this. And so I think the real issue here comes from trying to serve the public in a high-quality fashion, but at the same time being beholden to shareholders.
TERENCE SMITH: Well, Lauren Fine, what profit margin does Wall Street expect from a newspaper, a publicly-held newspaper company? If they average in the 20s, is that enough? What does it have to be?
LAUREN RICH FINE: Well, it’s never enough, of course. This is Wall Street we’re talking about. I think the expectation is that you can improve your margins over time. And what happens is each company is compared to its peer group. And so you indicated there’s a range of 22 percent to 29 percent. If somebody’s at 22 percent, you want to see a clear path of how they’re going to move their profits to 29 percent margins. And certainly adjustments are made for the type of properties that you own. When you’re in larger metropolitan areas, it’s hard to achieve those profitability margins, but there is an expectation that over time you can improve them.
TERENCE SMITH: Jim Naughton, what is being lost? Explain to us what is being lost in a situation like this where the market, the advertising market certainly seems to be turning down, and, yet, the pressures continue to increase? What is at least potentially being lost in terms of the reader and the paper?
JAMES NAUGHTON: Well, there are judgments being made right now about whether to eliminate content and to respond to the continuing pressure on profitability in the midst of a down economy by eliminating, as one Knight Ridder newspaper is considering, four pages of content in its Monday edition. And in San Jose, they have taken steps to avoid layoffs, but there will be doubtless be consequences, such as combining zoned editions or eliminating some content that is already in print.
So if you take a look– and I agree that Wall Street is not asking anything different of newspaper companies than it’s asking of other companies, but the level to which newspaper companies have climbed in profitability is just quite unusual, I think. In the last decade, the average profit margin of newspaper companies has gone from 13.5 percent in 1991 to 21.5 percent last year. In Knight Ridder, which is clearly trying to improve its margin and impress Wall Street, the average in Knight Ridder in 1995 was 12.5 percent. Last year, it was 20.8 percent.
TERENCE SMITH: So they’re doing quite well, given that comparison?
JAMES NAUGHTON: They’re doing quite well.
TERENCE SMITH: David Yarnold, are you under pressure to make economies of the sort that Jim Naughton was talking about, reductions in content or collapsing editions?
DAVID YARNOLD: Certainly we are being asked to cut costs and that is the way newspapers work in any downturn. I think the bigger point is that profits have a constituency and the constituency for profits is Wall Street. And the constituency for quality would be readers, and they’re represented by editors and publishers and newspaper company executives. And I think what Jay was trying to do was to issue a wake-up call to the pillars of journalism, the Tribune Companies and the Knight Ridders and the New York Timeses and the Washington Posts to draw a line around high standards and to stick to core values and not to let an economic downdraft blow you over that line.
TERENCE SMITH: David, was it taken as a wake-up call? In other words, was there discussion, is there a discussion at the newspaper about the line where such cuts begin to affect the product?
DAVID YARNOLD: Those discussions happen whenever we make any change to the product. I think the larger point is, is that I think it’s going to put the issue squarely on the front burner for editors and publishers across America.
TERENCE SMITH: Lauren Fine, I would assume from these numbers that are being tossed around here that the newspaper business is a pretty good investment.
LAUREN RICH FINE: Well, numbers can be somewhat misleading. I think the problem is choosing 1991 as a starting point for margins. That was in the ad recession of 1991 when the industry’s profits were down 20 percent or more. And so that was choosing a very low point from which to compare.
The industry has been very healthy. They, too, have enjoyed a good economy over the last six to eight years. And they’ve done a very good job of managing their costs, making the appropriate investments to improve the quality, to improve their production efficiencies, and they have been good investments.
But typically this is not viewed as a high-growth group. It’s viewed as an early cyclical group. And so investors today are looking at this group and saying “Wait, classified is starting to turn down. That’s typically my signal that we’re getting close to an economic bottom, and I can buy the group fairly soon in hopes that I get the operating leverage on the way back up in the cycle.”
But I think a couple of things that haven’t come up here is that newspapers do have two revenue streams. They don’t just have advertising; they have circulation revenues, as well. And what we’ve seen a number of companies do is try to raise their circulation prices in hopes of finding alternative revenue sources to cover the cost right now and to cover the shortfall in advertising.
I think, again, one of the issues you face and thinking of what David just said about a different constituency, which are readers, readers have been unwilling to pay higher prices for newspapers, and therein lies the big issue. Readers do want quality, but they’re unwilling to pay for it.
But Wall Street isn’t really that evil. Companies don’t have to be public, and the newspaper industry in particular is an industry that generates a lot of free cash flow. And most of these companies don’t need to be public, unless they plan on making acquisitions. And so I think companies need to reassess, if they’re not prepared to do what it takes from a weak economy, they should reconsider whether they want to be public or not.
TERENCE SMITH: Jim Naughton, listening to this, it’s obvious newspapers live in a different world today. They have to be attended to shareholder concerns.
JAMES NAUGHTON: There’s no question about that, Terry. They have always, I think, been attendant to the realities of the marketplace. And what’s different today is that those realities are more insistent and unrelenting. And what I think Jay was reflecting in part was a frustration on the part not just of people in the newsrooms in these companies, but also in the business offices in these companies, that being public, as I believe is absolutely correct, puts pressures on them that 20 or 30 years ago when these companies began going public, they had not fully understood or anticipated. And now that they’re in this position, they don’t seem to know quite how to get out of it.
TERENCE SMITH: Okay, a final word, David Yarnold, can you tell us what the impact of this was on the morale, on the staff, on the atmosphere in the San Jose Mercury News this week?
DAVID YARNOLD: Well, Jay is much revered and respected at the Mercury News, not just in the newsroom but across the entire company. Everybody was shocked, and saddened and took heart with his words, that we should be able to use this to our advantage and to learn from it.
TERENCE SMITH: So perhaps he got his message across.
DAVID YARNOLD: I’m sure he did.
TERENCE SMITH: David Yarnold, Jim Naughton, Lauren Fine, thank you very much.