How I killed newspapers, Part Three: The bad news

Newspapers will find a way out of these bleak times, some journalists maintain.

Here�s hoping. But the situation is grim and there�s no clear path to a viable future. 

I like newspapers and believe they�re important on many levels. 

But they are in big trouble.

Two years ago, RBC Capital Markets started �following� Postmedia, Canada�s largest newspaper company, and issuing reports for investors. 

RBC�s first report set a target share price of $14. That valued the company at $635 million, much less than the $1.1 billion Postmedia paid a year earlier for the newspapers from Canwest, then in bankruptcy protection.

Last week, RBC knocked its target price down to 75 cents. That values Postmedia at $34 million - barely one-twentieth of the value the bank set two years ago. 

One good question is how RBC�s researchers could have been so spectacularly wrong. Any investors who relied on the bank�s advice two years ago would have lost a lot of money.

But the main point is that RBC�s analyst has decided Postmedia faces a bleak future and has no convincing plan to turn things around. It�s valuing the 10 daily newspapers, on an operating basis, at about $3.5 million each. (That doesn�t include balance sheet items like real estate.)

All newspapers face similar challenges. They are shedding circulation and revenue at alarming rates. Postmedia, as a true newspaper company, happens to provide public reports that offer a good look at the industry�s core issues.

Postmedia�s strategy is to cut costs, try to get more revenue from readers and hope some better approach to the business will be found. (Or at least that�s my translation of CEO Paul Godfrey�s statement on the quarterly report: �We will continue on this path, transforming a traditional media company into one that leverages future opportunities with a structure that supports a new model.�)

It�s a reasonable short-term strategy. But RBC is probably right not to see it as a solution.

For starters, it�s hard to cut costs fast enough these days. Postmedia, like other newspaper companies, is reducing staff, chopping publication days, centralizing production and looking for savings in every area of operation. It launched a �transformation� program last fall that aims to cut expenses by 15 to 20 per cent by 2015.

But revenue fell 7.4 per cent last year, and is down 9.3 per cent in the first three quarters of the current fiscal year. Those losses wipe out the gains of the transformation program. 

And last month, PwC forecast the Canadian newspaper would see a continuing revenue losses of almost 20 per cent over the next four years. The cost-cutting targets are already much too small.

Getting readers to pay more is a reasonable goal. North American dailies kept newspapers� cost low, because more readers made advertisers happy. In 2005, a Statscan study found, circulation provided only 17 per cent of revenue for Canadian newspapers. Postmedia hopes it will be 50 per cent in future, compared with 25 per cent today. (One way to reach that percentage is through falling ad revenues.)

Paywalls - ways of making readers pay for online content - are a key part of the strategy for Postmedia and other newspapers. Online readers will get a few free articles each month, then be forced to pay a subscription fee or be cut off.

It�s a good way to buy some time and bring in a little extra revenue. For some newspapers, it�s a sound strategy. The New York Times or Wall Street Journal offer unique content to an audience that�s willing to pay. (In part because people aren�t paying - they are charging their online subscriptions to their employers.)

But after years of free information, why would people be willing to pay for the content of most newspapers? What would convince people it�s worth paying for a local newspaper website? How much would they pay, and how - by the article, or by month, or on a contribution basis? (Postmedia�s approach has been disappointing. With 10 papers, the corporation could try different paywall approaches, including pay-per-article, or different levels of access. Instead, it has imposed a common model.)

So far, paywall revenue is not enough to fix the business model. And there is the obvious problem in reducing costs and content just when you�re asking people to pay for what was once free. 

The Vancouver Sun, for example, just cut about 15 per cent of staff through buyouts. There is no arguing with the need to cut costs. But the departures include David Baines, the skilled, experienced reporter who exposed investment scams and regulatory incompetence, Scott Simpson, an exceptionally knowledgeable energy reporter, and Craig McInnes, whose columns were smart, fact-based and untainted by conventional wisdom or cheap contrariness. 

It�s hard to ask people to pay more when you are giving them less.

Or when you haven�t thought through what you are selling. Postmedia wants to save money by sharing content on things like fashion across the papers.

But there are scads of good fashion sites, local and global. If there is no local element, why spend money on fashion coverage at all? Why would any reader pay for a generic fashion coverage from a Canadian newspaper group?

The hopefulness of newspaper stalwarts is heartening. But it is also a bit reminiscent of the Black Knight in Monty Python and the Holy Grail, insisting his chopped off arm is �but a scratch.�

What can be done? Next, enough with the gloom and at least some ideas.