Two years ago, Sam Zell took Tribune Company private, leveraging the $8.2 billion necessary to buy out the stockholders. Since then, the economy has tanked, and newspapers got hit by the double-whammy of the recession and an obsolete business model, neither of which Zell apparently saw coming. Now that Tribune’s declared bankruptcy, Zell allows that he made a “mistake” (via Romanesko, graphic by Media Bistro):
Tribune Co. Chairman and Chief Executive Sam Zell told Bloomberg Television today that his heavily leveraged 2007 acquisition of the Chicago Tribune parent was “a mistake” in that he did not anticipate the steep decline in the newspaper business.
“By definition, if you bought something and it’s now worth a great deal less, you made a mistake and I’m more than willing to say I made a mistake,” Zell said. “I was too optimistic in terms of the newspaper’s ability to preserve its position.”
Zell, who took Tribune Co. private in a leveraged $8.2 billion deal, reiterated that his goal is to emerge from Chapter 11 bankruptcy proceedings begun in December to manage its $13 billion in debt with its assets intact. But the billionaire investor also said the company is looking at “all options.”
Zell has since learned that the business model for newspapers doesn’t fit in the digital age. Most of us knew that looking at the industry from the outside in 2007, when Zell bought out the shareholders. Zell wasn’t the only one miscalculating that year, though; McClatchy bought the Minneapolis Star-Tribune in 1998 for $1.2 billion and sold it for less than $600 million just days before 2007 began to Avista Capital Partners, who declared the paper bankrupt in January of this year, right after Tribune’s bankruptcy.
Sometimes the money isn’t smart enough to see the writing on the wall, but Jack Shafer reminds us that newspaper owners haven’t always put monetary profit as their primary motive. Many owners didn’t mind losing money as long as they got to wield political and cultural influence. Unfortunately, when corporations bought newspapers, and when newspapers bought other newspapers to become corporations (such as with the New York Times and Boston Globe), profit became a much bigger motive — just when the business model ran out of gas.
Shafer points out another interesting pattern in newspaper failures, one I haven’t seen much reported:
The enduring—and unintentional—lesson of the Villard piece is that a little newspaper death is a good thing. For example, the newspapers at greatest risk in recent decades have been the weakling titles kept on life support by joint-operating agreements. These agreements permitted rival newspapers to skirt antitrust laws and behave like partners instead of competitors, as Daniel Gross explained in a 2003 Slate piece. In the usual progress of a joint-operating agreement, two newspapers suck up the monopoly profits until the weaker one is finally allowed to die. In the last decade, the Post-Intelligencer, the Rocky Mountain News, the Albuquerque Tribune, the Cincinnati Post, and the Birmingham Post-Herald have all suffered this fate.
The tragedy of the joint-operating agreements is that instead of making the stronger paper stronger, the arrangement tends to weaken it. Freed for almost a decade from the long-running joint-operating relationship it had with the San Francisco Examiner, the once-stronger San Francisco Chronicle is in such terrible shape that it has threatened to snuff itself unless it wins concessions from its workers. Had the Chronicle and the Examiner been forced to compete on the business side in 1965 instead of to collaborate, a clear victor would have a fighting chance at surviving in today’s environment.
Perhaps. However, in our market, that hasn’t been the case. The Strib has had a competitive relationship with the Pioneer Press at all times, and the competition hasn’t done it much good. Before the Internet, that may have been true, but I think all newspapers now face the same business pressures regardless of whether competition exists to keep them in fighting trim. Zell and his colleagues will have to find a business model that works — and I’m going to guess that it will not rely on costly presses, ink, paper, and manual delivery.