You’ve heard about the housing bubble. And the dot-com bubble. I’m here to tell you about The Journalism Bubble.
Anybody who’s paying attention to the state of journalism in the US is aware of the financial crisis facing the news industry. And there’s wide agreement on the cause of the crisis: advertising revenue for print and broadcast is declining, and advertising revenue for internet offerings is not rising fast enough to make up the difference.
That’s true.
It’s also a completely inadequate explanation for the waves of layoffs, bankruptcies, and outright closures of news organizations.
There is a journalism bubble. And the bubble has burst.
First, what is a bubble?
An investment bubble occurs when investors speculate on a particular class of company (like newspapers) or asset (like houses) in a way that causes their value to rise far above what that company or value will be worth later.
Investment capital started to flow into US news organizations in the wake of deregulation of the media and telecommunications industry during the early 90’s. This deregulation, which lifted limits on how many newspapers, television stations, and radio stations a single company could own, paved the way for radio chains like Clear Channel and Infinity. Radio wasn’t the only industry transformed by “rollups” — efforts by investors to create economies of scale by buying many of the same type of company and putting them under a single umbrella. During the same time period, many newspapers, particularly regional dailies in smaller cities and local weeklies — were unified into megachains by investors, who then tried to sell the “rolled up” assets at a profit.
Marquee names in the news industry did not have to depend on private equity for investment dollars; they could go direct to the public equity markets. The New York Times Company and the Washington Post had IPOs and issued stock. Some of the rollup properties, like GateHouse, were able to do the same, while other rollups were sold to public or private media chains.
So what’s bad about that? Private and public equity exists to let companies raise money to invest in things that they hope will grow their business, right? Well, yes. But what if the company can’t meet the expectations of their investors, or can’t pay back the debt they take on? Bubbles create unrealistic expectations for the future earnings of a company (or the future paychecks of a homeowner). When the investments don’t meet expectations, investors often punish as irrationally as they invested, pummeling a company’s stock price, or foreclosing on a home. As a result, the decline of a company — or a person’s life — happens more hastily and destructively than it would have without the influence of speculators.
Shorter: Big money — big fall.
You might wonder where the money came from that investors used to plow into the news industry. Many private equity firms get some proportion of their investment capital from pension funds. The largest pension funds in the US are public employee pension funds.
So the bitter icing on this cake is that if you’re a US citizen, you’ll likely pay twice for the journalism bubble: once for the destruction of your hometown paper, and twice in the form of increased taxes to refill the pension piggybank.
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After Matter:
After Matter itself shamelessly cribbed from the fabtastic PressThink.
Today, the Journalism Bubble; yesterday, The Journalism Cloud.
Wikipedia has an entry on economic bubbles, and Moneyterms.co.uk has a cogent discussion of bubbles too.
For a look at how public and private equity has played out in the Boston media scene, see The Long Strange Trip of Grandma’s Nickel. The best source I know about on the business of Boston media is Dan Kennedy, who blogs at Media Nation.
View Comments (6)
Couldn't agree with you more. It is a bit of a worry.
well said. One small quibble. You said "Private and public equity exists to let companies raise money to invest in things that they hope will grow their business, right?"
Actually yes and no. Much of the money invested was in the hopes of getting in and getting out. It was not about growing business. It was about growing the perceived value of paper so that the paper could be sold for a profit.
Not that different from auto or mortgages. It happens every twenty or thirty years.
The good news is that we are now coming out of that time. Lots of mess to clean up. But we can all now get back to business.
Michael, agree completely -- tons of the capital going in and out was about flipping.
But most investors aren't like the bank that holds the loan on a house (I speak here of traditional local consumer lending, not the whole subprime speculation mess). They need to get the money back in a lot less than thirty years. Both the investor, and the management of a company that's taking that investment, ought to know that a private equity firm is going to want their money back in 3 to 7 years, with a profit, and that public equity markets -- the stock market -- is going to be even less patient about producing a profit. Newspapers let themselves get talked into taking investments they couldn't pay back.
Good article, I agree that the burst investment bubble is a big part of the news industry's travails. "Big money, big fall," as you say. I'm curious for views on the cause of disconnect in real vs. speculative valuation, though, and the way that deregulation is connected. Is it that the bubble would inevitably burst: that cost savings from economies of scale were exaggerated and that customers' taste for 'megachains' and syndication instead of truly local papers was misjudged by distant speculators? Or is it that this news industry which had suddenly become big was just as suddenly, and unexpectedly, derailed by growth on the internet—growth without which the journalism bubble might not not have burst and thus not been taken for a bubble? Maybe it was a combination, that news companies overexpanded and weakened themselves at just the time that viable competition emerged online? I don't know that one can authoritatively judge this, but I think the interplay between all these things is fascinating.
Joshua, I'm not sure we can really know the answer to your question. I think that in some cases there was legitimate hope that newspaper chains could provide advertisers a way to make an ad buy across a wider geography, to buy print advertising much the way the same advertisers bought broadcast advertising. That is, the early waves of rollups were just about creating economies of scale on the existing businesses, not on print.
The two people who I think could provide real insight are Alan Mutter and maybe Fred Wilson, although Fred is in a different sort of investment world than the private equity firms that specialize in rollups.
But, just to take a crack at it, let's take an example from my backyard. Where I live, Fidelity Investments (yes, the 401k company) funded a rollup of 80+ local papers in the Boston suburbs. They sold it to Pat Purcell, the publisher of the Boston Herald, who was bankrolled by a trio of private equity firms -- Audax, Halyard, Weston/Presidio.
Now, I figure those three had a three to seven year timeframe before they wanted their money back, and they wanted at least 30%. So Purcell really had to sell, didn't he? I mean, how was he going to find the total value of 80 papers, plus thirty percent, out of running those same papers?
So that's the other thing that buyouts do -- they almost always seem to make a new sale inevitable.
But, Joshua, ultimately your question goes to motive. Most of these deals were private, and even in the ones where a company raised the money on the public equity markets, we'll never breach the privacy of the mind that the people behind the deals have. So we might never know exactly what the cynicism quotient behind these deals was. Maybe it was low; maybe it was high -- in any case, we can take a look at the results and see that no matter what motivated it, or who made money, it didn't work out well for the papers in question.
My two cents is that it has less to do with motivations than with technological change and the environment of business. Actually a very similar thing happened between 1920 and 1945.
The following is from Press And America, by Edwin Emory. It was published in 1954.
"Many reasons can be listed for the decline in numbers of newspapers published, for the curtailment of competition imn most communities and for the increasing concentration of ownership. The fall under seven general headings: 1. economic pressures stemming form technological changes in the publishing pattern. 2. pressures resulting from competition for circulation and advertising revenues. 3. standardization of the product, resulting in loss of individuality and reader appeal; 4. lack of economic need for some newspapers; 5.managerial faults; 6. effects of wartime inflation and general business depressions; 7. planned consolidation of newspapers for various reasons.
The general argument is that newspapers evolved in an world of mass production. One way to look at what is going on now, is that mass production is changing to something else. Newspapers are merely evolving for that new environment.