Journal Register can't afford for legacy costs to derail Digital First progress
Journal Register filed for Chapter 11 bankruptcy protection Wednesday. Hey, aren't these the same folks who have been touting as breakthroughs each step along the way of their fast-track digital transition?
Well, yes. Some will view the bankruptcy filing, the company's second in three years, as evidence that Journal Register has been blowing smoke about how much digital revenue is there for the taking. And some will suggest that CEO John Paton may want to step back from his conference circuit role as avatar of the industry's future.
Paton, not surprisingly, doesn't see it that way. His public and in-house announcements contend that the digital transition has been going well and should continue without a course correction. The problem, he said, is legacy costs that cannot be reduced quickly enough.
In an e-mail July 17 and in subsequent conversations, Paton told me he believes many other companies face the same financial pressures. He wrote:
All newspaper companies have legacy issues to deal with. The Digital First part – concentrating on new digital product lines, processes and news culture, etc – is the easy part. The hard part is dealing with the legacy infrastructure – costs, buildings, leases, pensions and debt. All of that was incurred on a much bigger revenue base. And all of that has to get worked out.
That seemed startling to me at the time. Hadn't Paton been saying that half-steps to digital were not working and that a massive refocus with talented people not wedded to print traditions was essential -- even if it entailed drastic disruption? Hardly easy.
My read is that Paton meant what he said and will continue as a digital evangelist, in a lower key, who practices what he preaches. But this juncture shows another side of Paton. He is also a financial guy, who worked for some years as a deal-making investment banker and created his previous company, ImpreMedia, in part by assembling disparate Hispanic-targeted media businesses under a single roof.
So I don't find it surprising that he is a congenial executive for Alden Global Capital, the hedge fund that owns Journal Register, a controlling interest in MediaNews, and Digital First, an umbrella management company for both. A related Alden company has already bid to take back control of Journal Register if it emerges from bankruptcy as planned within 90 days.
Paton's diagnosis of cost challenges, while unwelcome in an industry struggling to find a positive business story about itself, seems to me largely on point.
Newspapers are typically half the size (in revenues) that they used to be but still comfortably profitable on an operating basis. So far, so good. But a reasonable margin on a much-reduced revenue base brings an assortment of problems.
Most obviously: Debt incurred with expensive acquisitions before the 2007 revenue crash are a ball and chain. Some papers -- the Philadelphia Inquirer and the Star Tribune of Minneapolis -- went into bankruptcy protection, as did chains like Tribune, Freedom and Morris. McClatchy still applies most of its earnings to paying down interest and principal on its 2006 Knight Ridder acquisition. With a round of refinancing coming around in 2013, Media General was forced this spring to sell its newspaper division to stay in business.
Pension obligations (similar to acquisitions) were taken on in better times of high profits. Not only are much smaller companies stuck now with these generous benefit packages, investment returns have fallen drastically. Companies face a legal obligation to keep the pension plans adequately funded. Requirements for this year were eased by Congress over the summer, but that just pushes the problem ahead a year or two.
Also, newspapers typically have much larger buildings than they need now that their operations are so much smaller. A number (Philadelphia, Atlanta, Ann Arbor) have moved from showcase downtown headquarters to generic rented office space, especially if they outsource or relocate printing. Paton is the first executive I have heard to suggest this is a systemic industry problem -- and that some papers may effectively be stuck where they are with long-term leases.
As is typical with bankruptcy filings, plenty of the details of what is next for Journal Register are not yet on the table. Clearly, however, the object of the exercise is to reduce debt (currently $160 million, according to Paton), bargain out of some of the pension obligations and break some leases.
To date, none of the Journal Register publications have reduced to three-day-a-week print frequency. Nor has Paton embraced digital paywalls, preferring to assemble as large an audience as possible and place his bets on the national advertising possibilities that opens.
Later this month will mark Digital First's birthday as a company and its takeover of management of MediaNews, a much larger company than Journal Register. Digital revenue growth has been strong at these newer properties too, Paton told me. But an obvious question for another day is whether MediaNews, itself emerging from a quick bankruptcy reorganization in 2010, will need to follow the same path to shed legacy costs.
Josh Benton of the Nieman Journalism Lab, in a knowledgeable post, asks whether the bankruptcy could be a prelude to Alden and Paton trying to engineer further acquisitions or management agreements once back on their feet. Dean Singleton, who built MediaNews and remains its executive chairman, told me a year ago that one of the attractions of Alden as an investment partner was that its principals share his view that more consolidation will be needed for the industry to prosper.
Without naming names, Paton suggested in our conversations that other newspaper companies may need to seek reorganization as debt refinancing and pension liabilities hit next year. If so, he is again the industry iconoclast, out front of the pack -- but on a different, largely financial issue.
Conversely if Journal Register and MediaNews do not deliver sustainable results in 2013 and beyond, while peers scrape by, expect a chorus of I-told-you-so's -- print had a lot more economic more life left in it, at least for most papers -- than Paton has supposed.