Unless newspapers can figure out how to reduce their high fixed costs of printing and circulation, their already low credit ratings could fall even farther, Moody’s Investors Service warns in a report relased Thursday.
The newspaper industry’s fundamental problem, Moody’s Vice President and Senior Analyst John Puchalla writes in the report, is that is spending far too much on producing and delivering a printed paper than on creating its content and selling the product.
Moody’s calls it a “structural disconnect” with just 14% of cash operating costs, on average, devoted to content creation, while about 70% of costs are devoted to printing, distribution and corporate functions. The remaining 16% of costs are related to advertising sales — another example of devoting too few resources to the principal revenue driver.
“This disconnect is a legacy of the industry’s vertical integration beyond content creation and into the production and distribution of newspapers,” Puchalla said.
The high fixed costs — combined with high debt among many newspaper companies — is squeezing cash flow as revenue declines.
“Ultimately, we expect the industry will need to reverse the vertical integration strategy through cross-industry collaboration and outsourcing print production and distribution processes,” Puchalla said. “Although newspapers may lose some of their in-house control over press time, they would also release resources to beef up investment in content and technology.”
Moving to an online-only model is probably not practical right now, Moody’s adds, but it says a “hybrid model” combining a greater emphasis on Web content with reduced print frequency might be the answer.
Moody’s says this “structural disconnect” also threatens the credit ratings of newspaper companies, which are already depressed compared to historical levels. Nearly all publicly traded newspaper companies now have credit ratings considered below investment-grade, or “junk” — including such respected chains as The New York Times Co. and Gannett Co. Inc.
Low credit ratings increase the cost of borrowing, and reduce access to money not just from lenders but from institutions that will not hold stock in junk-rated companies.
The bad news, Puchalla said is that as low as newspaper credit ratings are now, “additional downward pressure remains.”
“If newspapers can’t monetize the content in new digital channels at the same level as with print, or cut structural costs enough to keep up with the changing competitive environment, the prospect of additional recapitalizations or shutdowns will grow, adding further pressure to
ratings,” he added.