Tuesday, August 06, 2013

Dispatches from the Tar Pits

If you need proof that the dinosaur media establishment is in its death throes, look no further than the recent sales of the Boston Globe and the Washington Post.  

The New York Times Company unloaded the Globe last week, selling it to Boston Red Sox owner John Henry for $70 million dollars.  As Matt Drudge quickly calculated, that's a 93% loss, considering the Times paid more than $1 billion for the paper just 20 years ago.  Even when you factor in the profits  generated over the years by the Globe, the Sulzbergers still took a bath on the deal.     

But the real shocker was yesterday's news that the Washington Post Company is selling its flagship publication  to Amazon.com founder Jeff Bezos for $250 million, ending 80 years of control by the Graham family, which built it into a journalistic powerhouse.  Bezos is expected to take the  Washington Post private (along with other publications acquired in the sale).  The Washington Post company is expected to change its name and continue with its other enterprises, including a TV station group and Kaplan University.

According to Bloomberg, Bezos paid a "friendship" premium to acquire the Post, meaning the agreed-to price is well above the paper's actual value.  Major metropolitan dailies typically fetch three or four times profit; by plunking down $250 million, Bezos will pay roughly 17 times the adjusted annual profit of the Washington Post newspaper group.

It is important to note that Mr. Bezos is paying for the purchase out of his own personal funds and (apparently) plans to run the papers as a separate enterprise.  With an estimated net worth of $25 billion, stroking a check for Katie Graham's old paper should be a relatively simple process.  Amazon.com is not connected to the newspaper purchase, so conservative hopes that the Post would morph into a weekly shopper touting Amazon's best deals are (regrettably) unfounded.

And, since the paper's new owner is decidedly liberal in his politics, don't expect any changes on the editorial page.  But that reality still ignores the $250 million question: why would Bezos (or any other billionaire) sink a large sum of money into a business that is careening towards oblivion.

In his first letter to Post employees, Mr. Bezos emphasized the need to "invent" and "experiment" in exploring the future of journalism.  Some media analysts have hailed the purchase, noting the Amazon.com founder has demonstrated extreme patience in building his businesses.  His pioneering e-commerce site didn't turn a profit until 2001, seven years after its launch.  Getting Amazon to that point required billions in venture capital--and a willingness to wait for consumers to embrace the model.

And there's the rub: in the internet age, readers have rejected the daily newspaper model--in droves.  Circulation, advertising and revenue totals have plummeted in recent years, prompting a number of media companies to expand diversification efforts, or get out of the print business altogether.  The Tribune Company's newspaper portfolio (which includes the Los Angeles Times, Chicago Tribune and a number of other bellwether publications) is up for sale, but a serious buyer has yet to emerge.  By one estimate, the value of the entire newspaper group has plunged to only $920 million, a fraction of its value just a few years ago. 

Against that landscape, Jeff Bezos faces a daunting challenge: can create a newspaper--online or in print--that people actually want to read?  The jury on that one will be out for a few years, until consumers and advertisers return, or Mr. Bezos gets tired of eroding profits, and decides to end his journalism "experiment," once and for all.

If you need another indication of the current state of the newspaper industry, consider this: a little over two years ago, Minnesota-based Hubbard Broadcasting paid $505 million for 17 radio stations owned by Bonneville International, a subsidiary of the Mormon Church.  The crown jewel of that acquisition was Washington's WTOP-FM, the dominant all-news outlet in the nation's capital.  By some estimates, WTOP's value represented one quarter to one-half of the selling price.  That's because the station is one of the most successful in the nation, billing upwards of $50 million in on-air and on-line advertising each year.  Never mind that all-news is a very expensive format, or that radio is another media form that is supposedly headed for extinction. You wouldn't know that from the profits generated by outlets like WTOP.

Put another way: a single radio station was (arguably) worth more--in 2011--than the entire newspaper division of the Washington Post Company.  And here's another salient fact: Hubbard is already making a significant return on its investment.  It will be a long time before Jeff Bezos can say the same thing about his acquisition of the Post. 
ADDENDUM: As the media world tries to make sense of the Post's sudden sale, Chris Kirkham of the Huffington Post is offering a rather interesting analysis of the economics behind the Graham family's decision.  Turns out the fate of the iconic newspaper was directly linked to another WaPo property, a chain of for-profit schools known as Kaplan Higher Education.

Kaplan was a small, test-preparation service when it was acquired by the Post during the 1980s.  Eventually, it grew into a full-fledged, for-profit university--and critical source of revenue for its parent company.  As readership and advertising revenue plummeted at the Washington Post, Kaplan became an important cash cow, allowing the company to paper over losses at the paper, which were approaching $150 million a year.  Using aggressive recruiting tactics (that some likened to a boiler room operation), and fueled by millions of dollars in federal student loan money, Kaplan was generating operating income of more than $400 million a year by 2010, enough to cover losses at the  Post, and offer a slight return to share-holders. 

But Kaplan's decline was even more precipitious than the newspaper division.  John Nolte of Big Journalism notes the ironic twist of policy--and politics--that resulted in the sale of the WaPo:

"..as for-profit student loan default rates climbed, in 2010, the government closed in to tighten regulations. And it was Washington Post Co. chairman Donald Graham, who became the most high-profile lobbyist pushing back. The Huffington Post reports that Graham's company spent $1.3 million to keep their cash cow alive.

But in a delicious twist, the very same Obama administration that the Washington Post newspaper sold its soul to put in the White House is the very same Obama administration that would eventually help to bring about the end of the Post's sugar daddy.

Apparently, President Obama's administration did agree to water down regulations that would have hurt a newspaper company that just two years later would do so much to re-elect him. But the negative publicity the uproar generated probably did as much damage as any tightened regulations."   Yet in the end, it was the Post that went up for sale, not Kaplan.  Go figure.              

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