It moves The Business Press Maven to tears when he is forced to stomp on the basic premise of an article he was desperate to love. So give me a moment to collect myself before I go on. There. A couple of weeks after the McClatchy ( MNI - Get Report) clutch of Knight Ridder , The New Yorker's James Surowiecki, whom The Business Press Maven normally likes, tried to pick up a rock and throw it at the big loathsome head of conventional wisdom. In short, Surowiecki attempted to make the case that newspapers were still a good investment. He started out, bless his heart, by casually calling the $6.5 billion McClatchy paid for the congenitally troubled Knight Ridder a "lowball price." I didn't agree, but, even with McClatchy selling a bunch of Knight Ridder's papers for parts, I was flush and eager to hear more. Right in the first paragraph, Surowiecki dutifully notes the reality that the Internet has "demolished the economics of the industry, allowing people to read free news from many sources..." Before we get to his second paragraph and a flaw in his thesis so big you can drive a steamship through it, let me just say that if anyone was poised to like this article it was me. For one, making a contrarian argument always makes my pulse race and, more importantly, making such an argument is one of the only ways words can make you money. Moreover, I get paid by newspapers (in addition to online publications like this one), so I benefit financially from their survival. And there is nothing that serves civilized society better than a good newspaper. But strap yourself in so we can leap the logic set down in the second paragraph, where Surowiecki tells us the McClatchy gambit depended upon one promising and overlooked fact: that newspapers have historically high profit margins.
Who cares, he says, about the lack of growth? He allows that the industry was stagnant, before calling newspapers "cash cows." In that same paragraph, quite tellingly though probably without realizing why, Surowiecki compares newspaper company margins, which can run in the 20% range, to supermarket margins, which run in the low single digits. He chides Wall Street, as journalists tend to do, for putting such an overwrought emphasis on topline growth over steady cash generation. But The Business Press Maven will let you (and Surowiecki) in on a little secret, one that can help investors understand how business works and why this is one of the few cases when Wall Street is right: It is next to impossible to maintain margins, no matter how long you've enjoyed them, when there is no topline growth over time. The Business Press Maven cannot think of a single industry in the annals of commerce that maintained its high margins when revenue flatlined due to an onslaught of competition. If you can -- if anyone can -- please enlighten me with an email. Once revenue flattens, there is no wiggle room, and any higher costs begin to eat away at those margins. To save the margins, which are always the last thing holding the stock price above oblivion, costs are slashed, which might work just fine -- or might hurt the product. And that competition that caused the revenues to peak in the first place? It usually brings pricing pressures (in this case much of the competition is giving away the product) that weigh on revenues, and profits, for a long time. In fact, with enough competition, the product becomes more of a commodity, and in those sorts of businesses (see groceries) profit margins tend to settle down in the mid single digits.
And, rather than a cash cow, Surowiecki, that's more of a cash calf.
Last week , in noting that too many journalists were buying the "merger of equals" line peddled by Lucent and Alcatel , I gave an official Business Maven nod of approval to Michael Rapoport for doing a fandango on that conventional wisdom in The Wall Street Journal, while tweaking the paper for taking a few days to get such common sense into print. But the Journal story, which ran on a Tuesday, was adapted from a Dow Jones wire column Rapoport did the previous Friday. I still say the Journal could have gotten it in Monday, but for being even earlier than I thought with such smart stuff, I must grant more than an official nod. Rapoport, The Business Press Maven genuflects in your general direction.