An Era of Massive Change

Westcott Rochette, Standard & Poor’s publishing & advertising equity analyst, says that “the newspaper industry has gone through massive disruption in the last decade, and the business model is still being adjusted due to new economic realities. The industry is working to find the right balance between attracting readers and advertisers. The good news for the industry is that beginning in 2012 most newspapers have set up some form of paywalls in order to cover the costs of content. Total circulation revenues in the US actually grew in 2012 for the first time in eight years.”

Paywalls remain a controversial issue for many; however, papers continue to look for alternatives. The Dallas Morning News, for example, recently announced a new plan that will create a “premium” site for subscribers next month, following the lead of the San Francisco Chronicle, which established a premium site (SFChronicle.com) in addition to its free site (SFGate.com) less than 6 months after establishing a paywall system. The New York Times dismantled its TimesSelect web service in 2007 after 2 trial years, replacing it with a subscription plan that gives readers access to a limited number of articles a month free of charge per year.

“The industry continues to evolve,” says Rochette. “Print continues to decline and the way that users consume news is also changing due to smartphones and to generational changes in users. The predominance of smartphones, beginning with the iPhone release in 2007, was a tipping point that materially changed the equation for newspapers. The same disruptive forces of the internet combined with the mobile devices made ubiquitous access at the convenience of the user possible. It really democratized internet access to a far wider audience but at the cost of the printed newspaper format. By moving content to the web, newspapers were undercutting their own product. Craigslist was another key factor. Online classified ad services accounted for about 34% of revenues in 2000, but had fallen by 77% by 2012.”

Bezos isn’t the only billionaire with an interest in newspapers. In July, Warren Buffett’s Berkshire Hathaway added The Press of Atlantic City to its portfolio of 30 daily newspapers and related weekly newspapers in Virginia, North Carolina, South Carolina, Alabama, Florida, Nebraska, Iowa, Texas, and New Jersey, more than 25 of which were acquired in the past 2 years. A former paperboy, Buffett noted that “in towns and cities where there is a strong sense of community, there is no more important institution than the local paper,” yet he admits that “generally it pays to stay away from declining businesses. [The] newspaper business is a declining business and we will pay a price to be in that. That is not where we will make real money at Berkshire.”

In 1993, the New York Times Co. bought the Boston Globe for $1.1 billion (one of the highest prices ever paid for an American newspaper) and sold it earlier this month for $70 million to the principal owner of the Boston Red Sox. “Every paper is unique, so you have to look at each newspaper sale on a case-by-case basis to determine the value it will bring,” says Rochette. “There is commercial value as well as ‘public good’ to consider. The Globe is a local paper, tied to a geographical area and not very expensive, so the risk is less.”

Rochette also says there will be more activity ahead: “Models for future stability are still being developed as the papers try to find the right balance between attracting readers and charging for content. There are huge generational gaps in the way people consume news and in their willingness to pay for it. Newspapers are still looking for ways to bridge that divide. There’s a lot of change and movement in the industry today, and little certainty for the long-term, so we will see more activity in this area.”

Rich Past, Uncertain Future

“What is happening now is that the acquisition costs have fallen enough so that a paper can return a profit on a very small operating margin—which is typical for a high-turnover product. Smart buyers can see this,” according to Philip Meyer, University of North Carolina professor.

The sale of the Post hasn’t been the only recent ownership change in the newspaper industry, but the Post is important far beyond the D.C. area with a rich 136-year history. The paper is one of the few remaining American papers with foreign bureaus, and its coverage of national politics has been exceptional: It has received 47 Pulitzer Prizes, 368 White House News Photographers Association awards, and other highly prized recognitions for quality and professionalism.

Marc-Olivier Goyette-Côté, doctoral student at the University of Quebec at Montreal, sees the Post as a good buy: “It’s always hard to say if it’s a good deal or not. First of all, in terms of prestige, it’s seems a good buy. The Post has a certain reputation, a good readership (considering the decline in readership) and a long history, in other terms, a well-known brand. If you compare it to the Boston Globe deal, the acquisition of the Washington Post comes at a much higher price, but considering the reputation, the potential money, the groups’ assets, and the owner’s hypothetical desire to influence the public agenda, it comes at the cheap.”

According to his letter to Post staff, Bezos notes that “journalism plays a critical role in a free society, and The Washington Post—as the hometown paper of the capital city of the United States—is especially important. I would highlight two kinds of courage the Grahams have shown as owners that I hope to channel. The first is the courage to say wait, be sure, slow down, get another source. Real people and their reputations, livelihoods and families are at stake. The second is the courage to say follow the story, no matter the cost.” Referencing the Watergate scandal, Bezos notes that “while I hope no one ever threatens to put one of my body parts through a wringer, if they do, thanks to Mrs. Graham’s example, I’ll be ready.”