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.


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 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.