the audit

Washing That Grey Right Out of Her Hair

February 22, 2005

Journalism is, for better or worse, a business, and a ruthless one at that.

Although working journalists tend to studiously ignore this fact, shunning any mention of banal subjects such as profit margins or “market penetration” in favor of sexier arguments like “old media versus new media,” the fact remains that, in the end, it’s all about profits.

We saw this just last week, when the New York Times Co. announced that it was buying About Inc. (owner of About.com) from Primedia for $410 million in cash. Compared to the Washington Post Co.’s recent acquisition of Slate.com for much less money, the deal got only passing comment from most pundits on the travails and triumphs of the press. Those that did pause for a glance focused on About.com’s 22 million monthly users and the fact that the deal, when completed some time in the second quarter, will make the Times Co. (with 13 million monthly users itself) the twelfth-largest entity on the Internet.

But it wasn’t until this week, hidden away on the back pages of the business section, that we began to find the number-crunching realities of the deal, and, in one particular case, an explanation for why the Times pulled the trigger.

In short, it looks like the acquisition carries with it a giant tax deduction for The Grey Lady. The Washington Post ran a story today by the intrepid Allan Sloan, Newsweek‘s economic columnist, that lifts the lid on a bit of accounting magic common in the corporate world. The About.com acquisition, Sloan writes, carries with it a tax break for the Times Co. “around $160 million over 15 years.” Thanks to a section of the tax code that lets the buyer of the stock of a subsidiary of another company treat that purchase as an asset acquisition, the purchasing company “can then put a value on the assets for tax purposes and take depreciation deductions on some or all of them.” Sloan quotes Lehman Brothers tax expert Robert Willens: “It’s a perfect deal. They get to deduct most of the purchase price for tax purposes but don’t have to deduct it from their reported profits.”

This comes as welcome news to a company whose stock is currently valued at a full $10 a share less than it was in February 2004, and is at its lowest point since July 2002, largely due to lower revenues and higher costs. As Businessweek.com reported this morning, the Times Co.’s corporate ratings, ostensibly a measure of financial health, are also slipping. On February 18, Standard & Poor’s revised its outlook on New York Times Co. from stable to negative. As S&P notes disapprovingly, the company is heavily dependent on the Times itself, which accounts for over 50 percent of the parent company’s $3.3 billion in annual revenues. That’s another reason to diversify — the company as a whole is at the mercy of flat ad revenue in the print sector.

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When the Times Co. released its January financial report last Wednesday, we got a vivid glimpse of the state of ad revenues at the company’s print and online properties. The New York Times Media Group increased revenues by just 2.3 percent while the company’s Internet ad revenues shot up a full 35 percent over January 2004, thanks to strong growth in display advertising and classified advertising.

As MarketWatch.com noted on Friday, “Newspaper advertising revenues have been sluggish for several quarters, and near-term estimates are for about 2 to 3 percent growth in 2005 … Meanwhile, online advertising revenue is growing steadily, as an increasing number of consumers get their information on the Web.” (Print ad revenues still dwarf revenue from online ads, but the long-term trend is clear.)

So, while the Washington Post (Slate.com) and Dow Jones (MarketWatch.com) can talk about “content agreements” and “preexisting relationships,” what it’s all about, as the Times’ snapping up About.com makes clear, is wider access to an Internet audience and a bigger slice of online ad revenues, real and projected.

No one knows yet if this is just another Dutch Tulip craze. But it occurs to us that, with old media behemoths gobbling up successful Internet ventures as fast as they can throw money at them, the crowing from the blogosphere over the impending death of dead-tree media may yet turn out to be missing the point entirely.

–Paul McLeary

Paul McLeary is a former CJR staff writer. Since 2008, he has covered the Pentagon for Foreign Policy, Defense News, Breaking Defense, and other outlets. He is currently a defense reporter for Politico.