| Moody’s
debt analyst John Puchalla analyzed the state of newspapers
today. Conclusion: The sun rises in the east, usually in
the mornings. In other words, newspapers are still doomed.
Despite the report’s obvious conclusion, it’s
worth reading for Puchalla’s analysis of the cost
structure that newspapers deal with. Here’s an excerpt
from the press release announcing the report: Currently,
a structural disconnect exists in the newspaper industry’s
cost structure. Just 14% of cash operating costs, on average,
are devoted to content creation — the primary value
creation activity — while about 70% of costs support
the print distribution model and corporate functions. The
remaining 16% of cash operating costs relate to advertising
sales — another critical task that drives the majority
of newspapers’ revenue. The overall imbalance limits
the industry’s flexibility to overcome competitive
threats. …
Most
newspaper companies have moved only slowly away from in-house
print production and distribution, said Moody’s. Thus,
high operating leverage for the industry remains, and is
creating intense pressure on cash flow as revenue declines.
“Ultimately, we expect the industry will need to reverse
the vertical integration strategy through cross-industry
collaboration and outsourcing print production and distribution
processes,” said Puchalla. “Although newspapers
may lose some of their in-house control over press time,
they would also release resources to beef up investment
in content and technology.”
While
Moody’s does not anticipate a widespread shift by
issuers to an online-only business model as the revenue
loss is too significant at this point, such a change would
meaningfully lower operating costs. Reducing the frequency
of print editions is a hybrid approach that may result in
cost savings while preserving newspapers’ value-added
service for advertisers, said Puchalla.
The upshot? Newspapers must “monetize” their
online content (can we think up a real English word instead
of “monetize?”) at the same level as print and
keep cutting costs, or else their credit ratings will suffer
and more of them will shutdown.
This
seems to leave managers with only one way to stay in business
for now. If you want your credit rating not to fall further,
lay off a few hundred or thousand more employees and make
sure the newspaper features a bunch of under-edited news,
lame stories and mostly wire copy. Repeat process as often
as possible until shareholders and bondholders have a chance
to cash out. Then look for another job, maybe as a McKinsey-style
efficiency consultant.
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