The ownership crisis

Yet more evidence of the deepening ownership crisis at American newspapers: the Philadelphia Inquirer's owners are technically in default of their loan terms.

This is one of those things that's likely to be oversimplified, so let's be clear: The Philadelphia Inquirer is not losing money in the simple sense that you and I might think of it. Neither is the Minneapolis-based Star Tribune, another big paper sold to investors by McClatchy after it (foolishly, it seems) stepped in and grabbed the falling Knight-Ridder empire.

These newspapers are clearly declining, but they bring in more than they spend on business operations every month.

The problem isn't whether there's a positive operating margin, but rather the debt-burdened ownership. In addition to operating expenses, they have to pay crushing loan payments.

It's not terribly different from the real estate crisis. In effect, the new owners bought these newspapers by taking out huge mortgages based on assumptions about future income that turned out to be overly optimistic. The operating income is still a positive number, but it's dropping below a level the primary bankers consider healthy.

Unlike your mortgage company (which won't know you're in trouble until you're really in big trouble), the primary bankers are watching these newspapers closely. So they intervened.

This is the downside of the consolidation phase of the newspaper industry. In the last century, giant corporations sucked up the vast majority of American newspapers, and they did it with borrowed money that came from selling stock, selling bonds, and bank loans.

This drove the "market value" of newspapers to staggering heights. When I worked for the Star Tribune and McClatchy bought it for more than a billion dollars, it was a jaw-dropping figure. It was a bit like California real estate, where the median price of a home went from under $100,000 in 1980 to over $450,000 a couple of years ago. In the big picture, it was a bubble.

There's no question in my mind that the old product definition of a "newspaper" is obsolescent, that the future is much more about digital services than print, that the Internet is disconnecting news from advertising messages, and that these forces are dragging down newspaper companies.

But it's the debt load that's the immediate and most bitter problem. Newspapers can make the transitions that face them. But in order to do so, they need to starve the past and feed the future. You can't feed the future if you don't have and can't get capital.