NEWSPAPER RESTRUCTURING IS PAINFUL, BUT NECESSARY

Financial pages are full of developments and changes at newspaper companies and these are being commented upon anxiously by those in the industry. Unpleasant conditions certainly abound, but these development are not indications that the industry is dead or dying in the near future. What they signal is that things which worked in the past are not working now, that newspaper companies are badly in need of restructuring, refocusing, and renewal, and that the boards of the companies and the company managers are taking badly needed action.

The techniques for restructuring are no mystery. First, you need some cash. This can be obtained by attracting new capital through investment or loans. New York Times Co. did this recently by borrowings $250 million from Carlos Slim. Other firms are looking for friendly investors with liquidity.

Another way of raising cash is by turning assets into cash. A classic move made by many types of firms is the sell their building and lease back any space that is needed. Media General and New York Times Co. are currently employing this tactic. Financially troubled companies can also be expected to shed some of their poorest or best performing holdings to raise cash, so it is likely that we will see a number of newspapers companies putting papers up for sale in the near future.

Reducing and restructuring existing debt lessens financial performance pressures on companies. To accomplish it, they use cash that is raised to pay obligations imminently due or to make early partial payments to debt holders in exchange for obtaining better interest rates or lengthening payment terms. Watch for such transactions in the coming months.

As part of restructuring, many newspaper-based companies will seek to refocus on core news and informational activities, divesting non-core activities to raise cash. Baseball teams, holdings in cable systems, advertising service firms, and other types of peripheral companies are being sold or considered for sale.

Few newspaper company executives have experience restructuring and reorganizing their firms to make them leaner and more efficient or strong financial management background. The current environment requires different managerial skills so many newspaper firms will be looking outside the industry for experience. GateHouse Media, for example, has now hired a chief financial officer with a financial management background at companies including PayCheck, NCR , and PriceWaterhouse.

Expect to see multiple actions throughout the industry that are parts of the restructuring of newspaper companies in the coming month. Some will be painful, but will have two effects. First, it will lessen the financial pressures of the debt many companies are carrying. Second, it will force them to rethink their newspapers and the value and quality they are or aren’t providing.

MEDIA FIRMS INCREASINGLY CHARGED WITH COPYRIGHT VIOLATIONS

First it was record companies suing Napster and peer-to-peer file sharers, and then it was media companies such as Viacom, Universal Music Group, and Agence France Presse suiting Google, YouTube, and Facebook for distributing content whose rights they owned. Now GateHouse Media has filed suit against another newspaper firm, the New York Times Co., for publishing content from its websites and papers on Boston.com.

That media companies are suing each other is a sure sign of the maturation of online distribution and that money is starting to flow—albeit slowly and at levels far below that of traditional media, which still account for more than two-thirds of all consumer and advertiser expenditures

But the lawsuits really point out the weakness of revenue distribution for use of intellectual property online. In publishing, well-developed systems for trading rights and collecting payments exist. In radio, systems for tracking songs played and ensuring artists, composers, arrangers, and music publishers are compensated are in place and working well. The trading of rights for television broadcasts and mechanisms for payments to owners of the IPRs are well established.

However, effective systems are absent in online distribution and the industry needs to move rapidly to establish them. If the industry can not create such a system on their own, more money will go to lawyers and the rules and systems for online payments will ultimately be imposed by courts or legislators who tire of the governmental costs for solving disputes and enforcing the rights.

Organizations representing print and audio-visual media need to sit down with their major counterparts in online distribution to create a reasonable mechanism by which rights are traded and revenues shared, otherwise they risk imposition of a government imposed compulsory license scheme that will be less desirable to the industry.

Companies that continually argue there should be less government regulation of media operations can’t increasingly go to government to solve their disputes without expecting it to produce more regulation.

THE CAPITAL CRISIS IN THE NEWSPAPER INDUSTRY DEEPENS

Recent weeks have not been kind to newspaper company finances, with lost value and unhappy investors plaguing publicly traded firms.

The Journal Register Co. was delisted from New York Stock Exchange because it share price remained below $1, reducing its market capitalization about $12 million, less than one-fifth the capitalization required to be traded on the big board. The Sun-Times Media Group stock also continued trading below $1 and its market capitalization dropped to $61 million, drawing a delisting warming from the New York Stock Exchange.

Although those firms have hardly been notable as the best managed firms in recent years, their problems in inspiring investors are symptomatic of difficulties facing newspaper firms in the market.

Meanwhile, Moody’s Investors Service lowered the New York Times and McClatchy Co. debt ratings and lowered the Gatehouse Media even further in the junk category.

Other firms are also having problems with capital related issues. Rumors are rampant that the Sulzberger family is seeking new protective mechanisms or partners for the New York Times Co. following its continued battles with shareholders and dissident shareholders gaining seats on the company board. A similar ugly proxy battle is underway at Media General.

About a half dozen public firms have now hired advisors to determine their “strategic options,” the business euphemism for seeing if there is any hope of selling properties, restructuring, or getting out of the business.

All this is happening not because the newspaper industry is untenable—public companies return an average of 17 percent last year—but because most are carrying enormous debt and have no believable plans for future growth and development. As a result, investors are demanding cost cutting, debt reduction, strong returns, and high dividends so they can recoup their investments.

The trouble with this scenario is that it continues stripping newspaper companies of the resources they need to develop new initiatives and businesses should their management gain some vision, become entrepreneurial, and have some inspired ideas that might enthuse investors.

What newspaper companies badly need today are not mere managers, but company leaders with the strength, enthusiasm, and vision to rebuild their companies. If they don’t start soon, they will lose too many resources to be able to do it in the future.