March 2, 2006
All the Risk that's Fit to DiscloseBy Thomas Lifson and Jack Risko
A notable decline in the core business of the New York Times Company has been underway, and yet is not reported in a straightforward way in the company's official filings�with the Securities and Exchange Commission. The SEC �requires companies to file Form 10—K every year, to provide�
The SEC's 10—K official rules�require companies�to
At the beginning of its�2005 10—K annual report to the Securities and Exchange Commission, the New York Times Company proudly said this about its flagship newspaper:�
Circulation and risk
The Times' statement is not just about bragging rights.� Circulation size is a key determinant of the rates it can charge advertisers. Advertising revenues rise and fall with circulation. Of course, so does direct circulation revenue, the portion of the cover price received by the publisher.
Securities holders and potential buyers of a newspaper company's securities assess the business risk of the company in part based on a fair understanding of its circulation performance and prospects.
The newspaper industry has been troubled by considerable outright fraud in circulation claims by newspapers. The past decade has seen severe declines in circulation among major metropolitan dailies. Investors have reason to be concerned, and the industry is roiled by the possible purchase and break up of Knight—Ridder, a major player.
In comparison with dismal industry circulation trends, the Times' ability to hold onto and even expand circulation appears impressive. In 1999, its daily circulation was 1,109,700 and in 2005 its daily circulation was 1,135,800, up 2.35%.�
Almost every other large newspaper publisher in the country,� has shown declines of late.
Are these NYT guys good or what?
Not what it seems
The circulation performance of the Times flagship is not what it seems at first glance. The plain English in the 10—K does not mention that the circulation of its core franchise is in serious decline. The growth in the national circulation of the paper, served via contract satellite printing plants, has masked the decline in and around New York City.
The nucleus of the business, the New York City and 31 county Metropolitan editions of the New York Times newspaper, have plunged in circulation.� Overall advertising revenue is soft. Discounting of both circulation and advertising rack prices has been needed to maintain revenues.
The serious decline in the fortunes of its core franchise is unreported by the New York Times Company in any straightforward way.
Investors need to know because non—core businesses of the New York Times Company have very different business characteristics, including levels of competition and profitability. If the heart of a business is in trouble, some investors might reasonably consider it a risk factor.
The decline of the core business
In just the past decade circulation has fallen 16% in the NYT's home market, from 665,000 to 556,000. The information is not misrepresented, but you can't find the numbers in the Company's 10—K.� Rather, you have to perform some arithmetic gymnastics on assembled old and new 10—K's to uncover the figures about poor performance in its 31—county home market.
You can find it if you pay attention, dig for data, assemble it and construct the big picture for yourself. We have examined the last ten years of New York Times Company 10—K filings and other published data to extract and calculate the information necessary to see what is happening to the metropolitan print editions.
The Times has seen its comparable core metropolitan circulation decline by 27% since 1993 (the first year that such figures were available online), when it had a circulation of 758,000.�� Its current 556,000 circulation places it a dismal number three in its home market behind the�New York Daily News (689,000) and the New York Post (663,000).
Some of this circulation decline has been intentional. The Times has raised its newsstand price substantially, generating more circulation revenue per copy, and dropping less affluent or less loyal readers.� Presumably, advertisers would pay more per thousand for a more upscale crowd.
But when a business raises prices steadily, above inflation and above its competitors, it is often said to be harvesting the business. Profits may go up, but the business is not likely to experience market share growth.
Local newspapers have historically been able to charge high rates for advertising to local advertisers. Most metropolitan newspapers are local monopolies. The Times is not.
But within the New York market, the Times enjoyed a near—lock on upscale daily newspaper readers. If an advertiser needs to reach most of the affluent shoppers in the New York City area in print advertising, real alternatives hardly exist. That sort of localized bargaining leverage translates into pricing power.
The historically large and lush advertising market allowed the New York Times to spend lavishly on unequalled coverage of national and world affairs. The paper, under the stewardship of the Sulzberger family, has enjoyed only modest overall profitability. The company invested in its editorial quality. When satellite printing plants became technologically feasible due to improvements in telecommunications and computers, its strong editorial content and prestige enabled it to launch a national edition, whose circulation has grown, while the home market has shrunk.
But national advertising markets are different, with many more competitors able to reach affluent educated consumers across America, the very sort of people who read the national editions of the New York Times. National advertisers are generally able to command more bargaining leverage than local metropolitan advertisers. If the Times charges too much to national advertisers, the same consumers can be reached through magazines and other national media. And national advertisers tend to be bigger and more sophisticated than many local ad buyers.
The core business is still the metropolitan daily. The national edition is more like a daily magazine in terms of its business model. It is less the New York Times than The Blue State Bugle. USA Today, another national newspaper, became profitable only after years of losses, but spends far, far less on its editorial content than the Times.
The NYT Media Group (mostly the Times and the International Herald Tribune) reported advertising revenues of $1,264,800 in 2005, up 6.1% from 1999's $1,192,000.�
Not even close to the 16%—17% inflation over the same years.
Yet in the same period, the Times followed an extremely aggressive policy of raising advertising rates.� If the 1999 revenue had increased at the rate the Times announced that it was raising its rates, 2005 revenue would have been $1,610, 000. Factor in the complete acquisition of the International Herald Tribune. Its advertising revenue wasn't included in the 1999 figure, and certain other revenues were also added.
The softness is worse than being 10 points behind inflation over six years.
Since 2000:� overall advertising rates have climbed each year: 7%, 7%, 6%, 7%, 6%, 5%.� Roughly two or three times the annual rate of inflation.�
Discounting announced advertising prices and /or falling real ad volume must be at work. Most likely, some customers have been driven away and others have demanded price concessions. Just as the Times has been harvesting its local circulation, it appears to have been pricing some advertisers out of the market.
A one—shot item boosts advertising and circulation revenues
The New York Times Company bought the 50% of the International Herald Tribune it didn't already own from the Washington Post for� $65 million on�� January 1, 2003.� Because of the way accounting rules operate, that purchase permitted the Company to add $35.5 million or 3% to its advertising revenues and $38.8 million or 7% to its circulation revenues in 2003, at a time of weak advertising and circulation performance.
The national edition's declining growth
The national distribution strategy worked well for a period, but appears to be past the point of diminishing returns. The best opportunities for growth have all been exploited.� In 1999 the New York Times sold 443,000 or 40% of its daily newspapers out of its home market, printed at 13 remote locations.� In 2005, the New York Times sold 579,300 or 51% of its daily newspapers out of its home market, printed at 20 remote locations.�
The effectiveness of this strategy is faltering. The Times has to go to smaller and smaller markets in the future to continue this strategy, so the circulation per print location has declined markedly.�In 1999 each remote printing location represented an average of 34,000 newspapers; in 2005, each location averaged 29,000 newspapers, a decline of 15%.� Interestingly, the New York Times Company in its 2004 10K said that the
But it has since reduced that schedule without explanation.
Giveaways, low—cost subscriptions and bounties
To keep gross circulation figures up, the Times has had to (in effect) lower prices via various gimmicks.� In 2004, the Times did not open any new printing and distribution facilities to support its national distribution goals.� Faced with possibly declining circulation figures, the Times kept circulation nearly flat (1,125,000 versus 1,132,000) by cutting prices in certain markets.��
Thus it�reported in its 10—K
The Times offers steep discounts for students, and offers a free subscription to professors who require their students to subscribe. Bribing professors into drafting new readers into the army of the New York Times readers adds an unknown number to circulation. Subscription discounts in the metropolitan market are not broken out.
Shareholders be damned
No fraud exists in the 10—K reports of the New York Times Company. But there is certainly spin. Late last year, publisher Pinch Sulzberger appointed a new President and CEO of the New York Times Company to replace retiring Russ Lewis. He chose 54—year—old Janet Robinson, a 22 year employee who worked her way up through advertising sales. According� to Business Week
Management in a public company spinning such data might face a hostile takeover or shareholder revolt.
Not the New York Times.
The New York Times Company's common shares are divided into separate classes, with the holdings of the founding Sulzberger clan able to elect a majority of directors, despite accounting for a single digit share of total equity. The family gets to call the shots, and so far they are sticking with Pinch Sulzberger, who dreamed up the national circulation strategy, along with some other growth and diversification moves (buying the Boston Globe and investing in the widely unwatched Discovery Times cable channel) which have not exactly set the world on fire.
The way that the Times reports its numbers — so obliquely as to draw attention away from its decline — shows that it does not run itself for shareholders as a normal public corporation should.
But the way the Times reports its business risk does bear a certain uncanny resemblance to the way the Times reports many political issues on which it has a party line. Facts are presented, but in ways intended to persuade the reader to swallow a partial or even misleading truth, because management wants them to believe something dubious.
One man, Arthur Ochs Sulzberger, Jr, chooses those who write the editorial content and 10—K reports. Consistency in approach between the news and business sides of the enterprise�is not really surprising, and likely reflects his personal leadership.