ASK DEEPER QUESTIONS ABOUT FINANCIAL CONDITIONS

Many observers tend to conceive any changes in media businesses as trends that are irreversible or to combine them with other changes to make sweeping generalizations about industry conditions. The results are often wrong and distract observers from asking deeper more appropriate questions about longer-term developments and how media companies use the resources they have.

To understand changes one needs to consider developments separately to determine their origin and expected duration. This allows one to determine what are the result of external trends and what are the result of company choices. Only then can one begin combining them with other observations.

Thus, one needs to consider whether the ratings increase for AMC is due to people spending more watching cable channels or an effect of the AMC's investments in quality programming and the popularity of programs such as Mad Men? If it is the former, one can enjoy benefits with little effort or extra investment; if it is the latter, the company will want to consider additional investments in other programming.

Is the decline in broadcast television advertising in the first half of 2008 a harbinger of a advertisers moving expenditures out of broadcasting or a reflection of the current economy and the condition of the automobile industry and its declining ad budget? If it is the first, long-term trouble is brewing and companies will need to give significant thought to their business models and cost structures. If it is the latter, the financial difficulties caused by the reduction may be short- to mid-term and will merely have to be endured until conditions improve.

Is the decline the in national newspaper advertising the result of reduced spending by advertisers or because of changes in the number of national advertisers and the ways they allocate their budgets. The latter requires rethinking income potential and expenditures for selling national advertising, whereas the former will create less longer-term trauma.

Many observers also seem to think that budgets cuts are necessarily bad and unusual for companies, but they are normal occurrences because of the cyclical nature of advertising expenditures. When ad dollars are flowing vigorously, media companies expand their budgets; when that flow lessens, companies reduce their budgets.

What is important about budget cuts is that they be instituted in strategic way to leave the core capabilities of the firm intact so the firm can benefit when conditions change and not miss critical time and financial benefits by having to rebuild those capabilities when better times occur.

It is alo important that budget cuts not be made equally and across the board, but that they be made by clearly analyzing the necessity of existing cost structures and operations. The challenge for many traditional media is that they are labor intensive and labor costs often are the one of the leading portions of their expenses. If one must cut labor, it should be done considering which employees can easily be replaced later, whether all operations, products, and services need to be maintained, and whether outsourcing some functions is an option.

Many companies also forget to look at the top as well as the bottom of their operations when cost cutting occurs. Today, for example, many newspaper companies need to be asking whether expensive corporate offices, private jets, and high corporate salaries and perks are warranted and necessary or if they should cut those corporate expenditures and the management fees they lay on local newspapers to pay for them.

In times of change, one needs clear vision of what is happening to an industry and company and to ask broader questions than are typically asked in firms and by industry observers. Those who do so benefit; those who don't pay a price.

DISSAPEARANCE OF A FINANCIALLY GOLDEN NEWSPAPER PERIOD

Voices in and around the newspaper industry would have us believe the industry is falling apart and taking its last gaps. Investors are fleeing newspaper companies, publishers are decrying the lack of newspaper advertising growth, debt challenges are plaguing many companies, and there are layoffs and buyouts everywhere.

If one rationally looks at the industry, however, one sees that it is fundamentally sound, but that a unique, financially golden period in its history is ending. It is that change which is creating the bulk of the turmoil in the industry, but the biggest problem is that those working in the industry have short memories about the newspaper business and don't remember it any other way.

The generation leading newspapers and newspaper companies today has only experienced a period in which extraordinary growth of advertising increased newspaper revenue across the nation. That growth, combined with the development of local monopolies, created a period that enriched papers highly. This, of course, created great interest in investors and produced capital that allowed public companies to grow and acquire papers, driving up newspaper prices and the value of newspaper assets.

Today, the conditions that drove the growth of the past 3 decades are ending, wealth is being stripped from the industry, investors are losing interest, and publishers are struggling with negative and low growth.

Things are terrible, right? They are worse than every before, aren’t they?

Those views are only true if one takes a limited historical perspective and conceives the industry as a way to riches, something few newspaper owners did in generations past. With the exception of a few major cities, one could not get rich being a newspaper owner. Publishers nationwide could make a living in newspaper, but much of their reward came from being socially influential in the community. Before the extraordinary profitability of the last quarter of the 20th century, newspapers were relatively unprofitable and breaking even was the primary financial goal of most publishers.

Contemporary developments are taking us back toward that situation, but even with the u-turn in the business, we need to recognize that newspaper revenue today is better than it was in 1950s, 1960s, 1970s, 1980s, and 1990s. In fact, adjusted for inflation, newspapers in 2007 had two and a half times the advertising income that they had in 1950. In terms of employment, there are still twenty percent more journalists working in newspapers than in the highly profitable years that fueled the growth of corporate newspapering.

Those working in the newspaper industry need to be realistic and understand what the effects of contemporary changes mean. They don’t mean disaster, but they mean changes in the business of newspapers, the way the industry has operated for the past three decades, and how they need to perceive the industry.