They call it EBITDA It stands for earnings before interest, taxes, depreciation and amortization, and it is the crucial measurement used to gauge financial performance at the big media chains. This is the yardstick that determines who gets the bonus and who gets the sack. These days, however, it is not necessary to memorize complicated financial formulas to come away with a good grasp of what is happening in the Canadian newspaper business. However the money is counted, the national news barons are raking in more of it now than they have in almost a decade. Happy days are certainly here again. The big issue now is how long they are going to last, especially if Conrad Black launches a new paper, be it national or aimed at Toronto, the country’s most competitive newspaper market.
Newspaper profits, like happiness, can be hard-won but fleeting. Since the 1991-1992 recession, newspaper managers have been under enormous pressure to make money or find some less stressful line of work. And they have delivered. They have restructured, repositioned and refreshed, to use one of The Globe and Mail management’s favorite words, their way back from record losses to what, in a number of cases, has emerged as record profits. In the past she weeks, all the big newspaper publishers—Southam Inc. and its parent, Black’s Hollinger International Inc., along with Torstar Corp., Quebecor Inc., Sun Media Corp. and Thomson Corp.—all unveiled spectacular 1997 results. Revenues from circulation and advertising, the two main drivers of newspaper profitability, are up coast to coast. EBITDA soared, ranging from almost 22 per cent at Southam, the industry’s great financial success story, to 14.8 per cent at Thomson’s Globe, the smallest of the Toronto-based, generalinterest dailies and one that tends to be more consistently profitable but lags behind the mass-market competition at the peaks and valleys of the business cycle. Even Sun Media's Financial Post, which lost money for eight solid years after its transition to a daily paper in 1988, reported earnings before expenses of $10 million, up from $2.4 million in 1996. “It was,” in the words of Deacon Capital Corp.
Dailies cashed in last year, but will the boom last?
media analyst Bill Wolfenden, “a very good year for newspapers.”
In the meantime, 1998 is off to a good start. Torstar, whose Toronto Star has the largest circulation of any Canadian paper, has reported that the first two months showed promise, with growth in the “high single digits.” What’s more, a newsprint price hike scheduled for this spring appears to have been postponed indefinitely. Consumers are expected to keep spending, “which bodes well for newspapers,” Wolfenden adds. But all these positive factors notwithstanding, newspaper profits are not expected to keep growing at the same robust rates. Media analysts are hailing 1998 as a good but not great period in which the volume of advertising will continue to expand, but by only half of last year’s rate. Several have gone so far as to advise their clients not to buy any more shares in newspaper companies.
The fact is that however high the recent profits, much of what happens in the newspaper publishing business is beyond its executives’ control. Tinkering can fatten margins, but most analysts and media buyers agree it cannot change the fundamental reality of the enterprise, which is that delivering information on printed newsprint is not a growth industry. Quite the opposite. While newspaper companies have been doing extremely well, their success has depended primarily on cyclical factors, such as a buoyant economy, a rise in consumer spending and a decline in newsprint prices. Statistics compiled by the Canadian Newspaper Association show that circulation has stabilized after dropping roughly 10 per cent during the 1990s. This means that in any market with more than one player, competitors are scrapping over pieces of what is, at best, a precarious pie.
Look at what has been happening to advertising linage. While overall linage rose by seven per cent in 1997, retail advertising, the major source of revenue for most dailies—and one being seriously affected by department store mergers—rose only two per cent. This was only marginally above the rate of inflation. Classifieds, the backbone of the tabloids, did better, gaining almost nine per cent. The only big growth—22.4 per cent— came in what marketers call general-national advertising, the space devoted to careers, computers, cars, airlines and increasingly competitive long-distance and mobile phone services. This is the real reason why newspapers made so much money last year.
But what happens when Southam introduces a new competitor into the already-crowded daily market? “If the economy continues to be strong, it will be a little bit easier,” says Wolfenden. “But somebody’s going to lose.” Nobody in the financial community wants to be identified as pointing out potential candidates. The Toronto Star and the Globe are considered natural targets, because of the importance of the Toronto market. The big bite, however, is still expected to come out of the national advertising that runs in Southam’s own papers across the country. This was a big source of the chain’s improved profit in 1997. If the new paper goes ahead, these ad dollars could flee to Southam’s new flagship.
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