UPDATE: Tribune filed for bankruptcy Monday afternoon.
They all knew better, or at least should have.
When several private equity firms were looking at the Tribune Company early in 2007, they came to the same conclusion. Even though they would be taking over some of the biggest and most influential newspapers in the United States, including the Los Angeles Times, the Baltimore Sun, the Chicago Tribune, Newsday and several TV stations—the media industry was foundering and the acquisition would collapse under the pressure of the debt that would have to be taken on to buy it.
But billionaire Sam Zell was just a bigger gambler than they were. And why not? He had bet on real estate for decades and been breathtakingly successful. With this deal he even found a way to use the Tribune Company’s employee pension and stock ownership plans to finance the billions needed for the acquisition. By risking only $315 million of his own money he would still get controlling interest of a company valued at $8.2 billion. Zell also took ownership of the Chicago Cubs in the package, which he said he would sell off to insure he had enough money to pay off the debt.
But now it appears – according to reports Sunday night in the online editions of the New York Times and Wall Street Journal -- that the company has hired bankruptcy advisors to map out the next steps. It looks as if Tribune can’t maintain certain covenants that were placed on it when the company borrowed nearly $12 billion to buy the business from the previous shareholders. Essentially that means the company isn’t earning enough money (before interest, depreciation and amortization) to justify the size of the loans it has.
The biggest surprise to everyone involved is that it only took a year for this deal to crash and burn. During that year there have been massive layoffs throughout the company, Newsday was sold to Cablevision, and still the losses grew. In November, Tribune declared a third quarter loss of $124 million, vs. a profit of $85 million a year earlier. Even the sale of the Cubs has become problematic with the drop in the economy.
Many of you are familiar with this problem. It’s not all that different than having a home loan that is larger than your income would suggest you should have. It means you earn less money than it takes to make your monthly housing payment. How did that work out for all of you?
To be sure, when the potty-mouthed Zell came along there weren’t a lot of alternatives for the Tribune Company, which had given up the fight itself. They lost control of the management process and were firing editors and publishers at their marquee newspapers regularly because they couldn’t get them to support whatever corporate plans were presented in order to survive an industry downturn.
Since 2000, when Tribune went out and bought Times-Mirror Corporation and its stable of large newspapers (The Times, Sun and Newsday all came with that acquisition), it appears they were never able to absorb that acquisition and make it work. They didn’t use their new size to do what had to be done in the news business: Retrench and begin to develop new markets for their content.
But even Zell, the eternal optimist, didn’t anticipate how quickly the media industry would fall into deep trouble. In November, the company announced that total revenue for dropped 10% in the third quarter, to $1 billion, from a year earlier, while advertising was down a stunning 19%, to $584 million.
Around the country, once towering regional businesses, large metropolitan dailies like the San Francisco Examiner and the Boston Globe are losing huge amounts of money for their respective controlling companies, The Hearst Corporation and The New York Times Company. And the private companies that borrowed money to buy newspapers are all struggling. The local company that bought the Philadelphia Inquirer and Daily News, as well as the one that bought the Star Tribune in Minneapolis have recently suspended their debt payments, but neither has filed for bankruptcy.
So what happened?
The problem is that the media industry hasn’t paid enough attention to its customers. As the public continues to get more news, information, and even entertainment when they want to, as opposed to when news and entertainment companies want to give it to them, the industry didn’t moved quickly enough to react to that trend.
Meanwhile, newspapers, broadcasters and the advertising industry all under-invested in digital platforms. So while there were new messages every day – the growth of Craigslist, the dramatic uptick in digital video recording (and fast forwarding through commercials), the rapid growth of Google’s advertising platform—the media industry didn’t look outside the box for answers. By and large they kept doing everything they could to protect the huge profit margins they built when they controlled most of the distribution of their products.
To be sure, they are all trying to catch up now, but they still don’t know how to do it without jeopardizing their existing revenue streams, which while shrinking, are still quite large. The media industry needs to move quickly and learn how to create and deliver content across all platforms—and get paid for it.
The good news is that there is still great demand for news and entertainment content. And today’s generation is absorbing more content through more forms of media than ever before. Unfortunately, when it comes to developing creative, industry-changing ideas, many of our mainstream media companies already seem bankrupt.
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Larry Kramer, the founder of CBS' Marketwatch.com, spent 20 years in the newspaper business as a reporter and editor at The Washington Post and San Francisco Examiner.