5 Questions with Ken Doctor

I had my say on newspaper buyouts this morning, so now its time to play 5 Questions with an expert.

Ken Doctor is an affiliate analyst with Outsell Inc., a market research firm focused on the information industry. He leads Outsells analysis and research of news publishing, focusing on both legacy print news publishers creating digital products, and on the content-enhancing companies seeking to do business with them.

1. Industry-wide profit margins for newspaper publishers supposedly look quite good, but individual margins at companies like New York Times or Tribune are barely double-digit. What are you seeing?

Overall what we see is a 20-21% profit margin throughout the newspaper industry, which is comprised of about 1,600 papers. This includes a few national papers, a couple hundred large metros and then many community papers. We have seen a drop of around 0.75% over the last yearBut the average does not tell the whole story. The market is splitting into three different tiers in terms of the impact of the Internet. National papers like USA Today or the Wall Street Journal are doing a bit better than major metros, which are really bearing the brunt of the Internet in terms of both readers and advertisers. The third segment is community papers, which are mostly holding their own.

2. Are there any major metros that have successfully defended against Internet cannibalization?

No, there are no significant outliers.

When we look at cannibalization, we look at two revenue streams: Readers and Advertisers. Reader revenue is being lost because readers particularly younger ones are getting very comfortable getting their news online. Its not that theyre consuming less news, because our research and other research shows that the number of minutes Americans spend consuming news is almost the same as it was 10 years ago. Its just the distribution and means of consumption thats different.

But the more immediate impact for publishers is from the advertising losses, because thats where the bigger money is. And, to answer your original question, less than 10% of all newspaper revenue right now is digital revenue. That is not a recipe for growth.

3. Do you believe that newspapers are good private equity investments?

Theyre tough. The private equity firms want to see either significant growth prospects and/or an ability to significantly cut costs and keep the cash machine going. But right now they arent seeing many significant growth opportunities. In terms of cost-cutting, these publishers already have cut and would have a hard time cutting much more deeply because 90% of their revenue is still coming from legacy print businesses.

If you go back and look at the Knight Ridder sale a year ago, you see shades of the current assessments being made about Tribune Co. Knight Ridder had a lot of private equity interest, but none of the firms made a binding offer. Tribune also has a lot of interest, but neither of the two non-binding offers came with a premium.

4. So will any of these deals get done with private equity participation?
I think so, but the final issue will be price Ultimately there will be certain publishers who take market prices, because thats all the private equity firms are willing to pay.

5. How about the Jack Welches and Eli Broads of the world?
Were certainly going to have vanity owners, but they should take note of the Philadelphia situation, which is scary. Tierney bought the Philly Inquirer and Daily News with local owners, but now hes saying that they wont be able to pay their debt service by mid-2007 because cash flow is half of what they thought it was going to be. Those are the economics right now, and I dont expect much improvement unless someone comes up with a real novel business model.