Wednesday, February 25, 2009
Why Are Newspapers Going Bankrupt?
Several reasons, really. The economy, particularly the slide in retail spending and related advertising. The internet, which "spiked" newspaper classifieds. Irrational bankers, and all the money they loaned based on unrealistic growth projections. And in some cases, greed.
Philadelphia. Seattle. Los Angeles. Minneapolis. San Francisco (See the latest WSJ story on possible closure of the Chronicle) . In all these cities, papers are either facing bankruptcy or already there.
Much of the immediate problem has to do with the heavy debt on those institutions. It is amazing to me that banks loaned such HUGE amounts at incredibly high multiples of EBITDA(cash flow). They did it before 2001 (my company benefited from it) and then even after losing millions in the last downturn, they did it again. Not anymore.
Didn't anyone at these banks think the economy might sour or the internet might devastate the print business. (Oh that's right, those were the same bankers making home loans to people without proof of any income.)
Didn't anyone at those newspaper companies think they might not be able to service the debt?
Alan Mutter's Reflections of a Newsosaur offers an excellent summary of the debt of major newspaper companies. Particularly like his Default-O-Matic chart. (Above.)
I've had some personal experience with the problems of huge debt and declining cash flow. It ain't fun. But it can be overcome.
In 2001, our B2B publishing company, 101communications, which exclusively served the technology marketplace, faced a severe meltdown in advertising spending. Then in the aftermath of 9/11 folks stopped traveling to our trade shows. And the anthrax scare killed our direct mail, list rental business. We had $50 million of debt on the business and couldn't make the interest payments.
But we survived. We learned to distinguish between "essential" and "nice to have". We had to downsize by 30%, and stopped publishing six of our 16 magazines. We renegotiated our debt. And the reality of a possible bankruptcy made us aggressively shift to web publishing and innovative ways to attract internet revenues. Then we grew profits at a rate of more than 20% per year for about five years. So it is possible to survive, recover, and thrive.
Unfortunately, it may be too late for some of our newspapers.