I flipped nostalgically through an exhaustive new report on the newspaper industry by two analysts at Morgan Stanley and wondered if it really arrived in 2001, not 1998. Douglas Arthur and Gregory Fowlkes spilled enough ink to fill 70 pages, suggesting that "the strategic importance of the Internet has never been greater."
Tellingly, however, Arthur and Fowlkes, "old-media" analysts for the investment bank that gave you the New Media by Mary Meeker, rank all nine newspaper companies in their coverage as neutral even though the nine --
Dow Jones(DJ Quote - Cramer on DJ - Stock Picks),
Gannett (GCI Quote - Cramer on GCI - Stock Picks),
Journal Register(JRC Quote - Cramer on JRC - Stock Picks) ,
Knight Ridder(KRI Quote - Cramer on KRI - Stock Picks),
McClatchy(MNI Quote - Cramer on MNI - Stock Picks),
New York Times(NYT Quote - Cramer on NYT - Stock Picks),
E.W. Scripps (SSP Quote - Cramer on SSP - Stock Picks),
Tribune(TRB Quote - Cramer on TRB - Stock Picks) and
Washington Post(WPO Quote - Cramer on WPO - Stock Picks) -- have each taken different approaches to the Internet. The authors think some will fare better than others. What's surprising is that after all the pain of the past year, when scores of half-baked publications have gone belly-up and thousands of journalists have lost their jobs, Morgan Stanley remains rhetorically so hopeful, if analytically downbeat.
After all, it was just two years ago that
Intel founder Andrew Grove was
telling a gathering of newspaper editors that the Internet represented one of his famous strategic inflection points and that if the industry didn't go online it would be dead. Newspaper companies panicked and started spending willy-nilly on standalone companies they would never take public. Print journalists -- like this one -- left influential jobs at newspapers and magazines to jump aboard Internet start-ups. No one was louder or more eloquent about the Internet opportunity than
James J. Cramer, who co-founded
TheStreet.com in 1996. His scorching of the "dead-tree" press became required reading for former and remaining ink-stained wretches.
We now know that the dead-tree types had a proven, if soporific, business model that was tough to attack. The combination of subscriptions (to offset costs and prove readers were willing to pay) and advertising (to market to a committed readership) has proved to be the killer application for media properties. In case you missed it, that's the one that's been around for decades.
There are exceptions, of course, and the Morgan Stanley report notes them. Dow Jones has done a good job selling its quality content online through
Wsj.com. The authors correctly point out that no matter how valuable the brand name of
The Wall Street Journal, it's the quality of the journalism that brings in paying subscribers. Similarly,
eBay (EBAY Quote - Cramer on EBAY - Stock Picks) truly has a unique and effective answer to local classifieds in regional newspapers. These are the exceptions, however, that prove the rule: People like the Internet, but only to a point.
And yet, here are the Morgan Stanley analysts making arguments that sound so very three years ago.
"Better technology, widespread Internet access, and a growing audience less connected with the print medium will make it increasingly difficult for newspaper companies to maintain their relevance and ultimately their audience," they write. "We envision a time in the not-too-distant future when commuters on their way to work will access news content via devices such as a wireless, flexible laminate page. Ultra-light, portable, and easy to read, it will combine all the functionality of today's devices in a much more user-friendly package. It will provide the benefits consumers attribute to newspapers, but without the bulk of newsprint or the ink stains on your fingers."
Gee, it still feels so gosh darn good to read that stuff. If only it were true. A
Palm just isn't the best way to sink your teeth into a long article in the newspaper, let alone to take in lots of sports scores or enjoy a comic strip. Broadband, well, it still isn't here. And shoot, I
like the ink on my fingers!
Seriously, though, the Morgan Stanley analysts defeat their own arguments. They note that "based on discounted cash flow, we estimate that none of the Internet businesses of the newspaper companies we cover is worth more than 5% of the parent's current market value. This is due primarily to our estimate that most of these Internet businesses are at least two years from cash flow profitability, and despite relatively strong projected growth rates in the next five years, we do not believe that these businesses will achieve significant scale in the near future." If we've learned nothing else since the bubble burst, it's that cash-flow projections too far out into the future are worthless, and the near term is bleak.
The Internet is here to stay, but it's mostly a nice add-on to existing businesses, not the transformative medium we once assumed. It can add editorial flare and revenues for companies like Dow Jones, and it potentially can provide a platform for a smaller company like
TheStreet.com(TSCM Quote - Cramer on TSCM - Stock Picks) (mentioned only in passing in the Morgan Stanley report) .
But it doesn't change everything. That kind of thinking is for dreamers and, of course, investment bankers.
A year ago I polemicized
here against the stock buyback as publicity event. The poster child then was consultant
MarchFirst, which had $370 million in liquid investments, had recorded $227 million in first-quarter revenues, but whose stock had fallen in a year from more than $52 to $15.75. Frustrated, MarchFirst said it'd buy back 7.5 million shares "from time to time," and the stock jumped 5% on the news. According to MarchFirst securities filings, by the end of June the company had bought 3 million shares of its common stock for $65 million.
That squandered cash is a distant memory now, as the company ran out of steam, filed for Ch. 11 bankruptcy protection (since converted to Ch. 7 liquidation proceedings) and sold off assets to pay creditors. The lesson at the time, however, is worth repeating. To wit, buybacks in and of themselves aren't bad. But buybacks used to demonstrate management's opinion that the stock is cheap and as a way to generate publicity are horrible. When a CEO says, as MarchFirst's Robert Bernard said then, "We believe our company has an incredible asset and represents an incredible investment," take a deep breath and disregard it. All Bernard knew was that he had the cash to try to make the shares go higher. It didn't work. He knew nothing about the relative value of his company.
Incidentally, two bigger companies got hurt in the process. As noted a year ago,
Novell (NOVL Quote - Cramer on NOVL - Stock Picks) had warrants to buy MarchFirst shares at $35.98. It announced last week that it had written down $100 million related to the MarchFirst investment.
Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) held warrants to buy MarchFirst shares at $31.90. It too, presumably, will write down their value, though the amount likely isn't material to the software giant. Microsoft didn't provide any information on the MarchFirst investment by press time.
Adam Lashinsky
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