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Friday, June 8, 2012

The End of Monopoly Money

            If you’re under the age of 30 this might sound unbelievable, but there was a time, well within the memory of many living Americans, when newspapers were considered a great investment and sold for top dollar.
            After the end of World War II there was a significant consolidation in the newspaper business. Big cities that had several papers when Pearl Harbor was bombed wound up, by the early 1960s, having two or in some cases, only one.
            Meanwhile the growth of the suburbs and the Sun Belt led to the creation of hugely profitable monopoly newspapers. Many a small-town daily that had a circulation of a few thousand before World War II found itself with thirty, forty, even fifty thousand readers by the 1970s. It happened all the way from Santa Rosa, California, to Naples, Florida.
            For a quarter of a century these suburban papers could do no wrong. As the shopping malls kept opening, they were the go-to place for display advertising. The classified advertising sections were a license to print money.  As one cagey veteran of the business side of newspapers put it to me, “You could have put a chimpanzee in the publisher’s office and still made 25 percent.”
            This wasn’t lost on the larger newspaper chains, which began gobbling up these suburban and monopoly papers. The business model they followed was exemplified by Gannett, best known as the publisher of USA Today.
            Time and again, Gannett would buy a local newspaper that had a stranglehold on its market, bring in its own people to run it, and quickly begin a steady ratcheting-up of advertising and subscription rates. Within reason, Gannett didn’t care what it paid for the paper because once it had secured the monopoly, it was no problem to set up a spreadsheet for getting the money back, and then some. During the heyday, Gannett had papers that turned a 60 percent profit.
            Perhaps this is starting to sound a bit like the housing bubble we just endured, and certainly there are similarities. Key among them was the assumption by investors that the good times, growth and profits would go on forever. Of course those things never do.
            In 1985 the small, family-owned newspaper chain I worked for (seven dailies and several weeklies) was sold to the E.W. Scripps Company. Scripps was privately owned at the time but planning on going public, and it wanted the extra newspapers on board to show investors as part of its growth strategy. I heard once that they paid more than three hundred million for the lot. Even if it was a lot less, it turned out to be too much, and today they still own only three of those papers.
            Scripps bought in at the peak of the market. Direct mail, cable TV and specialty shoppers were already starting to cut into the advertising domination, and when the internet came along a few years later, it was a new ball game. Craig’s List alone devastated the newspaper industry by showing that you could take a profit center (classified advertising) and separate it from a significant expense (covering the news). Nothing has been the same since.
            Warren Buffett, who knows a thing or two about investing, has been getting into newspapers lately, and recently bought his hometown paper, the Omaha World-Herald. I’d like to believe he’s seeing something real in the prospects of newspapers. They can probably find a way of being steadily profitable, but it’s unlikely that things will ever return to the point where they’re making monopoly money.