Thursday, December 4, 2008

Bellows and Buzz, Part II

Davis "Buzz" Merritt's "Knightfall" -- which I had avoided because of Merritt's disastrous tinkering with the copy desk in Wichita and the loss of trust that ensued when readers found pages of misspelled headlines and nonexistent people and locations -- was worth reading just for this quote from Daniel Yankelovich on "The McNamara Fallacy":

"The first step is to measure what can easily be measured. ... The second step is to disregard that which can't be measured. This is artificial and misleading. The third step is to presume that what can't be measured easily isn't very important. This is blindness. The fourth step is to say that what can't be measured easily doesn't exist. This is suicide."

Unique visitor hits, anyone? One could say the same thing about audited paid circulation, probably, but the tortured present of Internet advertising, trying to find its balance between voluminous yet unbelievable statistics and a lack of performance for much outside of search, does seem to have Robert Sixtus McNamara looking over it.

The other great lesson of "Knightfall" to me was its view of the problem with public ownership of newspaper companies. The problem is not simply evil analysts or rapacious shareholders, but something more ingrained, which he calls the Wall Street Syndrome:

"The newspaper business is relentlessly and unavoidably cyclical... The flow of advertising varies day by day through any given week.... It varies throughout the year ... It varies with short- and mid-term economic trends: Classified advertising .... suffers quickly as the economy slacks off because employment advertising drops, as does auto advertising. ... True recessions are absolutely murderous for newspapers." In light of the determination that the economy has been in recession since December 2007, this takes on added resonance. We need not add how department store advertising is also both a bulwark and extremely variable.

"All of this was historically well understood by investors in newspaper companies whose owners and shareholders were in it with the expectation of mid- to long-term profits, which they eventually would receive when the economy bounded back." Today, though, "all companies, newspapers not exempted, are expected to deal with business cycles in ways that will keep profits steadily rising. When revenues are in a flat or down cycle, the only way to produce ever-rising short-term returns is by cutting costs" (or, as Merritt notes elsewhere, buying another paper and cutting its costs). "The top two costs ... for newspapers are people and newsprint. Cutting costs in either place immediately diminishes the size and value of the product." In an increasingly electronic era, cutting the costs of newsprint may help your online product, but cutting people has the same effect.

Elsewhere, Merritt also notes that in the old days, if you were having a bad year in Detroit, and having a good year in Bradenton, you used one to balance the other. Analysts, however, looked at each operating division and said that each must pull its weight every quarter; you could not subsidize Detroit with Bradenton's extra revenue, but must cut Detroit's expenses while holding level Bradenton's. Every dollar must justify its own purpose. Good for accounting, but bad for newspapers.

Merritt shows the difference between 2005, when he wrote, and now:

"Newspaper companies are historically solid investments for the long haul because of their hefty underlying profit margins, so they can offer a safe haven for investors even during soft times in the general stock market." Well, history does not always repeat itself. "Beginning in the 1980s, however, long-term thinking became scarce around Wall Street."

None of this would have spared the newspaper industry from the catastrophic one-two of secular change and a national economic collapse. When Newhouse slashes and burns, when Forum Communications makes major cuts, all bets are off. Could newspapers have come into the 21st century, however, in better shape had they been understood to be a cyclical business -- and not one fulfilling the promise of Al Neuharth, who made Gannett a major public company in order to raise money for his dream of USA Today, and did so by promising quarter after quarter of higher earnings -- which he was able to achieve in the 1970s and 1980s by replacing printers and hot lead with newsroom computers? Well, maybe it doesn't matter anymore. But Merritt also shows the problems of newsroom thinking, to which we will next turn.

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