Profitable newspapers

Google the sentence "the business model for newspapers is broken" (in quotes) and you'll get 19,000+ results. This statement has become widely accepted as true, and it's now used as a jumping-off point for a discussion of what comes next for journalism. We may be moving too quickly, though. There seems to be plenty of value left in the newspaper industry.

This Advertising Age article from last February reveals that most daily papers are still making a profit, and it’s the parent companies that are posting losses because of high debt.

A few highlights:

“Not a lot of papers are operating at a loss,” said John Morton, the veteran industry analyst. “There are roughly 1,400 daily newspapers. We only hear about the top markets That leaves at least 1.300 papers out there.”

Publicly owned newspapers averaged an operating profit of 10.8% in the first three quarters of last year [2008], Mr. Morton said. That’s not the margin enjoyed by newspapers when they were monopolies, but it’s not nothing either.

The owners, on the other hand, are variously posting huge losses, at least on paper; watching their stock prices plunge; and crucially, struggling to make payments on debt they took on under projections that didn’t pan out.

Some owners even borrowed that money to double down on newspapers, which aren’t engines of growth even when their balance sheets are healthy.

...Take a look at Lee Enterprises, which operates papers primarily in midsize markets but reported an $899 million net loss for the 12 months ended Sept. 28. Its loss primarily reflected a huge acccounting write-down as the company adjusted its estimated value. It’s not that $899 million of cash flowed from the coffers just to make payroll and keep the presses running.

...In a similar fashion, McClatchy is freezing pensions and hunting another $100 million in budget cuts. The company, publisher of papers including the Sacramento Bee and the Fort Worth Star-Telegram, is struggling under more than $2 billion in debt, much of which it assumed in 2006 to buy Knight Ridder--doubling down on newspapers at a cost of $4.6 billion.

But look past the interest, taxes, depreciation, amortization and charges such as severance; they matter, but they affect the owner’s balance sheet more than they reflect newspapers’ viability. McClatchy’s underlying newspaper portfolio just delivered a 21.5% operating profit margin.

Before Congress allows anti-trust exceptions for papers, or philanthropic dollars begin to prop-up news operations, let's not overlook this lesson: poor business decisions can break any model.