Don’t Panic

A media consultant on the future of newspapers

From time to time, The Audit will interview thought leaders about both financial journalism and the finances of journalism. John Rose is a senior partner and managing director of Boston Consulting Group and co-head of its global media practice. Ten years ago, he dealt mostly with traditional media companies; these days his orbit includes telecom, technology, consumer and electronics companies, retailers and even banks. I talked to him about the future of newspapers. The takeaway: There’s plenty of time, so be creative.

The Audit: Are you as pessimistic as the rest of the world on traditional newspaper companies?

John Rose: I tend to think about it less as companies that tend to be collections of different types of papers, than what the issues are for different categories of papers.
So at one end of the spectrum you have the iconically branded papers - The New York Times would be one, The Washington Post itself would be another, certainly The Wall Street Journal. But there are others actually that are iconic for certain segments of the population, and the LA Times in the entertainment community is an example.

Those papers face interesting opportunities as well as challenges because on one hand within the context of their role as traditional newspapers - covering the broad set of news and information needs within a city or community - they have the same set of issues as another category of papers I’ll come to in a minute. But because they’re actually iconic in the context of a certain set of themes, really they have the ability to take advantage of a lot of the changes in consumer behavior and technology to break out of what has been a historically bounded world for them.

TA: So what can newspaper companies, iconic ones anyway, learn from this?

JR: Well the question is, how aggressively do they take advantage of other forms of distribution? The New York Times really does have the ability to be one of the two or three national newspapers of record, which I would argue it already is, but read by a much wider portion of the population than it’s currently read by. Even if
“read” means something different in terms of online distribution.

TA: What would an iconic company do that it’s not doing now?

JR: Well it has to find a path from its core focus on the local marketplace and eventually abandon local news in order to concentrate on what makes them iconic. Right now some of these papers are straddling two objectives—local news and some other core competency—which I don’t think they will be able to straddle indefinitely. The Wall Street Journal and The New York Times still to a certain extent manage that aspiration, versus you know, The New York Times saying simply I’m going to cede the New York marketplace to the New York Daily News. I went that far for the LA Times—I’m going to cede to The Orange County Register the local coverage of L.A.—stuff that’s not related to the entertainment industry, but I’m going to create a daily that every single person in the entertainment industry has to read.
So you have one class of papers that are those, and another class of papers at the other end of the spectrum where they’re still protected in the context of their ability to collect truly local information. Those newspapers again should focus on going back to the maintaining that core reporting and journalistic information-building capability and distributing it through the paper, through the web, through mobile phone. Because its very hard for new information sources to compete at that grassroots level. As long as they continue to make sure they’re not overlooking a distribution channel for information, because the marginal economics don’t look as good as the core newspaper business, they should be able to have a very rich, sustainable robust life.

It’s the guys in the middle that you get worried about. The guys whose territories are large enough so that there are legitimate, significant, alternative sources of information at a local level.

TA: What type of paper do you have in mind?

JR: Like The Miami Herald, The Philadelphia Enquirer, to a certain extent The Boston Globe, the San Jose Mercury News, The Hartford Courant. I mean, newspapers that are in cities but not - I mean what makes The Washington Post theoretically different is that it covers Washington D.C. [the government] in a way that no one else can and that can make it the U.S. political source of record with a brand that naturally attaches to that. If you look at Chicago or you look at Boston or you look at Hartford…

TA: I worked for The Anniston Star and The Providence Journal, before The Wall Street Journal. It sounds like you’re saying the Star will be okay but the Projo will not. Why will the small-town papers do better than medium-size ones?

JR: One of the problems that you have with the medium sized ones is you have other news organizations who have the ability to have access to the national and the international wires, and also to build reporting staffs. And so, if you have a twenty-four-hour cable station, which, yes, is unlikely, but three TV stations that are able to have news reporting staffs that are covering the local market, some of those are going to be aggressive about putting information out on the web. The question is, how strong a community is Providence and how rich is the mine of unique news and information that’s about Providence? Because as soon as it goes off to be about Boston and New England there are tons of other folks who are covering it. As soon as it goes down to being about a community within Providence, frequently there’s someone else who’s organizing and covering it.

TA: So The Pawtucket Times will be okay and The Providence Journal will shrivel? Hmm.

JR: That would be the argument. And so one of the things that I think you do if you’re The Providence Journal is get into the debate that’s is going on now, which is I think is fascinating one, about the removal of the cross-media ownership laws.
One of the things you could do to make a very powerful model is create an organization in a city that really does integrate across radio, TV, and newspaper newsgathering and reporting. Because the ability to run a news organization that would be able to have those three broadcast outlets, plus possibly a twenty-four-hour news cable news channel, which I’d argue you could make work off the economics of the other three. So now you have the sort of unparalleled reporting organization in the market the size of The Providence Journal.

TA: And these would be sort of quasi-monopolistic models?

JR: [Yes, but] the fundamental difference between the role of the monopolistic organization forty or fifty years ago when people were writing these rules on cross ownership, and today, is that if you’re an important part of the Providence, Rhode Island government, or you’re somebody who is working somewhere in Providence, that has a, sees a set of misdeeds that are governmental, or whatever of nature, that some formal big government, big corporate entity would want to quash, the reality is it’s pretty easy to get the story out there today. And it wasn’t forty years ago. And if you did get it out there now, it would get picked up by national papers which would make the monopolistic non-responsive large news organization Providence Journal in Providence part of the story in and of itself.

TA: So The New York Times would be a foreign policy/national politics and government specialist, and whatever else they want to do—arts, say?

JR: And then you can start saying, “Wait a second, if that’s what we are should we actually have other publications and do other things under that brand around that? Should there be a monthly magazine? Should there be a series of TV programs?”

TA: You realize that if we print this they’ll be setting fire to my office [laughter]. I mean,
giving up local coverage?

JR: I think there’s tremendous value in local reporting and I don’t think local newspapers themselves are going away in any way, shape or form. I do think the issue is it’s an economic value issue for owners more than it is anything else. Meaning there is more than enough margin in the news paper business to run newspapers for another 20 years and this notion that newspapers are going out of business is nuts.

TA: Is that true?

JR: Absolutely. The problem is actually a more subtle one. The problem is most newspapers exist at a market value. They are run by individuals whose primary goal and mission is to return shareholder value to investors, and the trends we’re talking about are happening on the margin slowly, not quickly—gradually declining revenues and slow, routine cost increases that will drive down profit margins, but over many years.
What you have is a gradual compression of margin. I want to be clear. It’s gradual, that’s why I think newspapers should be around forever. But there’s this gradual shrinking of profit margins driven on one hand by some fall off in readership, although not huge; some migration of newspapers advertising spending to other places, but not huge; and some slight increase in costs because basic costs will rise over time.

TA: Where’s all the panic coming from?

JR: The panic is coming in terms of market value. Most newspaper organization four years ago, were saying to the public markets that they were five percent per year, cash growth flow companies. If you take a business that’s projected to grow at five percent compounded cash flow growth, free cash flow growth, to now flat to minus one-two percent cash-flow growth, what ends up happening is you can lose thirty, forty, fifty percent of the underlying enterprise value of the business.
There’s a capital crisis in the newspaper industry that is not an operating crisis, and that would arguably be the entire story.

TA: Right. There were no losses we’re talking about.

JR: They were the opposite of losses. We’re talking about twenty-thirty percent margin businesses with tremendous cash flow characteristics. So we’re not talking about Jaguar which was reported to be sold recently to Tata, and it looks like they lost $10 billion. Ford lost $10 billion on Jaguar after its purchase. We’re talking about highly strong, good margin cash flow businesses. They’re operating very far away from the edge.

TA: Oh.

JR: But they have market values that require that growth increase. And by the way, it’s not just about the management teams who are running them and whether that’s right or wrong. It’s about all of the people in the broader population whose pensions and everything else are actually invested in the equity that is the newspaper. So it’s a complicated systemic problem that has to do with a re-correction that’s occurring in value. And that’s why everyone’s running around, cutting costs.

TA: They’re trying to prop up the value?

JR: Yeah. So if you can run a well-run newspaper in a market profitably, you’ll still run it forever. I’m sure that there’s some time at which some things happen that are really bad but they’re not the next ten to twenty years.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.