Lee Enterprises: A poster child for the ownership crisis

Newspapers face three different, but interrelated, economic challenges.

One is the technology-driven restructuring of the news business, in which the Internet is a major force that is disintegrating the traditional product model. That's a very real long-term process. It's not the biggest immediate source of trouble, but it's a factor.

Two is an acute cyclical global economic crisis, brought about by widespread criminal practices in the U.S. mortgage-banking industry, which has knocked the legs out from under the traditional sources of advertising revenue: car dealers, real estate agents, businesses seeking to hire employees, and retailers seeking foot traffic in local stores. When your customers hurt, so do you.

Three is an ownership crisis that combines with the first two to set us up for disaster in 2009. Owners -- corporations, entrepreneurs -- borrowed heavily back in the days when banks were passing out cash like candy at a Christmas parade. They borrowed not to build toward an Internet future (which they should have done), but rather to grab more of the past by taking over other newspaper companies. And they borrowed against assumptions of obese profit margins that have been snatched away by points one and two.

If you don't understand the ownership crisis, Alan Mutter has a detailed explanation in the form of an analysis of Lee Enterprises, which is the poster child for this particular form of woe.

He writes:

While Lee is in a distinctly unpleasant position with respect to its shareholders and lenders, it is important to note that the business generated $207.2 million in operating profits last year on sales of a bit more than $1 billion. Its operating margin of 20.1% surpasses that of Exxon Mobil Corp., which generated a 19.1% margin in the last 12 months. And Lee’s profitability positively blows away Wal-Mart, the largest Fortune 500 company, whose margins were only 7.4% in the prior 12 months.

What? Lee Enterprises is profitable? Yes, it is -- until you count repayments of the $1.4 billion in debt it has on its books, much of it from buying the St. Louis Post-Dispatch at precisely the wrong moment in history. Read the ugly details.


This exact same scenario is playing itself out here in Seattle. The Seattle Times borrowed approx. $230M in 1998 to buy a chain of papers in Maine, and that debt has been crushing them ever since. In that time they have not taken any forward-thinking technologies seriously, and have put forth no long-term strategy for survival other than cutting costs and selling/mortgaging all the land it has left to keep operating. Since they are privately owned nobody can tell how profitable they would be without that obligation, but their online network is very strong (or was until recent events.) They also have JOA issues, which are ironically just making things worse after keeping some papers alive for so long. I have to say, as a technologist with a journalism background its really hard to snuff my feelings of "I told you so" and focus on the future and building new products. Your recent work looks really promising and I'm glad to see signs of hope in other areas as well.

The core problem here is that Craigslist is killing classified ad revenue, and free news on the Internet is killing ad revenue. Until that is figured out, newspapers can borrow, acquire or do whatever they want, but it's just moving around deck chairs on the Titanic.