The grim reaper is breathing down the US newspaper publishers’ necks. Tribune Co. is selling assets to stay afloat. Sacramento, California-based McClatchy Co. is struggling. Even the august The New York Times has posted worrying revenue figures. Certainly, some are better off than others. But with revenues plunging across the sector, publishers — especially those of smaller papers that carry large debt — are at serious risk.
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To see why, it pays to tick through McClatchy’s results. It owns 30 newspapers in markets as large as Miami and as small as Gulfport, Mississippi. Like all publishers, McClatchy’s problems stem from debt and operating leverage. Expenses are hard to cut at newspapers. They can slim down newsroom and sales staff, but there’s a limit, and newsprint and distribution costs are hard to pare.
With little latitude to cut costs, each dollar their revenue declines is magnified in their operating profit. McClatchy’s revenue fell by 16% last quarter compared with the previous year. Expenses stayed nearly the same. Yet McClatchy’s operating income was only 37% of the previous year’s figure. And, after accounting for some non-cash expenses including depreciation and amortization, the quarter’s interest expense absorbed nearly 50% of McClatchy’s operating cash flow.
That’s better than some competitors, such as the Journal Register Co., a Pennsylvania-based publisher whose interest expense mopped up over 70% of its second quarter operating cash flow, a rough calculation suggests.
If newspaper revenues continue to decline, in just a few more quarters, some publishers may not be able to service their debt. Indeed, Journal Register recently had to cut a deal with its lenders to delay loan payments. Meanwhile, investors are heading for the exits — McClatchy’s stock is off about 70% this year alone, and Journal Register’s market capitalization languishes under $1 million (Rs4.38 crore).
If it looked like a company’s prospects could improve, the fact that its operating costs could soon outstrip revenues might not be as worrisome. McClatchy has been cutting costs, which might help next quarter. But its prospects are limited by the relatively small size of its newspapers, which makes them more dependent on classified advertising, a fast-declining business.
The dim revenue prospects for publishers of smaller newspapers, when combined with big debt loads, mean tough decisions are ahead. Even for newspaper companies that appear in ostensibly good shape, the last edition may be delivered sooner than they expect.