Newspaper Killers and the “Death of Journalism”: Postmedia’s Attempts to Slash and Burn its way to Excess Profits

This has been another week of bad news about newspapers in Canada.

The largest newspaper group in the country, Postmedia, announced a set of deep cuts across its chain of ten major city daily newspapers and the National Post. The Montreal Gazette and Ottawa Citizen currently have about 105 staff each; after the cuts both will have twenty less. Three weeks ago, the company closed its national news wire service, shedding twenty-five news workers as a result. No foreign news bureaus were closed because other than the two it has in Jerusalem and Washington, there are none.

Postmedia’s CEO Paul Godfrey also announced that the company will no longer publish the Sunday edition of the Ottawa Citizen, Edmonton Journal and Calgary Herald, or print the National Post on Mondays. Production will be centralized at Postmedia Editorial Services in Hamilton, a company subsidiary shorn of pesky unions, where layout, editorial decisions and some printing functions will now reside. It’s the model pioneered in Canada by Quebecor in 2006.

Paywalls will be going up sooner rather than later, building on those already put into place last year at the Montreal Gazette and the Victoria Times Colonist (before the latter was sold last October), and already planned for the Ottawa Citizen and Vancouver Sun. While focusing on getting people to pay for news online, Postmedia will also focus on “reducing unprofitable circulation” – that is, shedding less well-off readers – states a memo from Montreal Gazette editor-in-chief Alan Allnutt.

Godfrey also railed against “foreign-owned and controlled 
digital companies who, without any regulation, are accessing Canadian
 audiences and eroding Canadian media revenues”. He was referring to Google, Facebook, eBay, Apple, Amazon, and others of this kind.

Godfrey may have legitimate concerns about these internet giants’ capacity to parlay their dominant positions in search, social and online retail and publishing into the ability to set the terms for the distribution of news and advertising revenue online. However, the claim that they are cannibalizing newspapers revenues is wrong (see below) and his not so thinly-veiled call for regulation smacks of the same tactics that commercial broadcasters in Canada have been pitching for years with little to show for their efforts.

The current round of retrenchment and cuts represent a continuation of woes that have beset Postmedia since it took over the troubled newspaper chain from bankrupt Canwest in July 2010. Immediately after taking-over the newspapers, Postmedia eliminated 750 jobs and has maintained standing buy-out offers for journalists across the chain ever since. Add the sixty-five jobs axed this month, and approximately 1,800 jobs have been eliminated since 2008.

To be sure, Postmedia is faced with tough times. Daily newspaper circulation in Canada fell to 3.8 million or so in 2011, a far cry from peak levels reached in 2000 when 5 million copies a day were sold. Industry-wide revenues have swooned as well, dropping from $5.7 billion in 2000 to an estimated $4.1 billion (in inflation adjusted “real dollars”) today. People are still reluctant to pay for news.

Nonetheless, Postmedia’s internet revenues are growing and last year they accounted for 9 percent of its revenues (p. 71), a respectable amount compared to Torstar (10.8%) and the U.S. average (11.7%). The problem, however, is that it only earns a single ‘digital dollar’ for every $4 it loses in traditional print revenue. While this is considerably better than trends in the U.S., where the ratio is $7.50 to $1, it is still not nearly enough.

Perhaps reflecting these uncertain prospects, the company’s stock market capitalization has plunged from an all-time high of $685.4 million in June of 2011 to roughly 1/10th that amount ($70.6 million) today. So maybe Godfrey is right? Perhaps there is no choice but to swallow bitter medicine in order to set things aright?

That times are tough for Postmedia and newspapers in general is beyond dispute, but there are a few surprising facts amidst this portrait of doom and gloom that have not received the attention they deserve. The two most important facts relate to profits and debt, and when we look at these factors, the consensus view of things begins to unravel.

You might be surprised, but Postmedia is a profitable company.  It operating profits in 2011 were 7.6%, just below the average for all industries in Canada (8.7%). In fact, over the past twenty years, the company has been very profitable, except for one year (2010), and well above the average for industry as a whole. The following figure illustrates operating profit levels at Postmedia and its predecessors in relation to Torstar and Quebecor as well as the average for all industries since 1995.

Postmedia Operating Profits vs. Torstar, Quebecor and Average for All Industries, 1995 – 2010  (%)

Source: Company Annual Reports;  Statistics Canada. (various years). Financial and taxation statistics for enterprises. Cat. no. 61 219-x. URL: http://www.statcan.gc.ca/pub/61-219-x/61-219-x2008000-eng.pdf

Given that Postmedia is actually profitable, why the insistence on the slash and burn approach?

While respectable by economy wide standards, and especially in light of the fact that the world of journalism is being turned topsy-turvy by digitization and the internet, profit levels at Postmedia are not high enough for one decisive set of interests: its owners. The hedge fund holding a 28% ownership stake in the company, Golden Tree Asset Management, illustrates the point, gloating on its website that its “philosophy” is that “double-digit returns can be compounded over market cycles”.

Double-digit returns in the newspaper industry, however, are the stuff of the last half of the 20th century, when newspaper monopolies held sway in one city after another and the overall media environment was a lot less cluttered than it is today. Those days are gone, and we ought not shed a tear, except for the fact that Postmedia’s owners are laying waste to scores of journalists and journalism in their pursuit of monopoly-era profits in the 21st century. In other words, excessive expectations regarding acceptable profits, not tough economic times for newspapers on their own, are behind the current round of slash and burn at the largest stable of newspapers in Canada.

That debt is an equally pressing problem can be seen in the fact that Postmedia paid out almost as much in interest on its massive debt in 2011 as it made in profit (see here, p. 71). Moreover, a great deal of that debt is held by Golden Tree Asseet Management, and paid at high levels of interest.

Some of the $663 million debt that the company assumed when it took over the Canwest newspapers in 2010 has been reduced, but remains stubbornly high: $544 million at the end of 2011, and about $516 million today. The mountain of debt is a legacy of a decade-and-a-half of consolidation, a period when the newspaper chain switched hands from Southam to Conrad Black’s fraud-riddled Hollinger Corporation (1996) and then to the vainglorious Aspers in 2000 for $3.2 billion at the height of the media empire building age.

Bloated on debt and hubris, the latter crashed and burned in 2009-2010, even though it too was profitable (12.7%) – but not enough to pay its bankers while staying within their rules on acceptable debt levels. That legacy still hangs like a dark cloud over Postmedia, and it is that reality, coupled with excessive profit expectations – and that profits and interest payments on debt both flow into the pockets of Golden Tree Asset Management — that is hammering away at the company.

That these factors deserve greater weight in explanations of Postmedia’s woes is also put into sharper relief once we realize that advertising markets are not shrinking, as Godfrey asserts, but have been growing at a quick clip for most of the past decade. To be sure, the pace has been slower for newspapers and might be best described as mostly staying flat over the past decade. Phases of contraction have been modest, not calamitous, as the figure below shows.

Advertising Revenues in Canada, 2001 – 2011 (millions $)

Source: TVB/IABCanada, 2011.

If newspaper revenue was being cannibalized by Google et. al, as Godfrey claims, we should see the size of the total advertising pie staying constant, and a fall in newspaper advertising as revenues are diverted to those entities. That has not happened.

Of course, the fact that newspaper advertising revenues remain essentially flat in absolute terms while total advertising revenues expand means that the relative place of newspapers in the overall mix is on the wane. Still, however, the growth of internet advertising in Canada as part of the mix pales in comparison to trends in the UK, Denmark, Norway, Sweden and Germany, for instance, as the following figure illustrates.

Source: IABCanada, 2011

The upshot is that whatever blows have accompanied the declining place of newspapers relative to the internet, they have been gentler than elsewhere, giving newspapers in Canada more time and room to adapt to the realities of journalism in the 21st century. That Postmedia has failed to do so says more about its own self-inflicted wounds under three different owners in the past decade-and-a-half than a death sentence imposed by the economic crisis, slumping advertising or the rise of formidable new players like Google, Facebook, Amazon, Apple, etc.

Other newspaper publishers in Canada have pursued a similar course, but Postmedia is only matched by Quebecor in the severity of the slash and burn approach that they have taken thus far. The Globe and Mail and Torstar – undoubtedly struggling at times as well – have been able to pare things back with a scalpel rather than a hatchet.

Ultimately, the days of newspaper owners reaping double-digit returns are gone. In addition, other than high-end business and financial intelligence, people have never been willing to pay for news, and this is still the case. Just how to return the press to a stable footing is still the million-dollar question. However, rather than trying to raze their way to the promised land, Postmedia’s owners must temper their desire for excessive profits and bring the legacy of debt — a problem that was created in just such an illusory pursuit over the past fifteen years — to heel.

Only then is it likely that the largest chain of newspapers in Canada will be able to regain its footing and contribute to professional journalism alongside new players such as The Mark, the Tyee, Huffington Post, the Dominion and so on that are beginning to make their mark on journalism in this country.