Business

Profitability Pressures Intensify at Knight Ridder

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Shareholders in Knight Ridder, the second-largest newspaper chain in the country, are demanding the company put itself up for sale or sell individual newspaper holdings. Investors in traditional media companies are concerned about the threats posed by the Internet in the advertising market.

MELISSA BLOCK, host:

Knight Ridder owns some of the country's oldest and largest newspapers, including the Philadelphia Inquirer and The Miami Herald. And like newspaper chains everywhere, Knight Ridder has seen its subscriber base dwindle. Now some of the company's biggest shareholders are pressing management to sell all or part of the company. They say that with advertising revenues under pressure, the industry's future is uncertain. NPR's Jim Zarroli reports.

JIM ZARROLI reporting:

To media analyst Barry Parr of Jupiter Research, the shareholder revolt that's taking place at Knight Ridder this week could have enormous ramifications; not just for the chain, but for newspapers as a whole.

Mr. BARRY PARR (Jupiter Research): I think what you're seeing in this Knight Ridder episode is the potential beginning of the restructuring of the industry.

ZARROLI: This week, a Florida money-management firm called Private Capital Management sent a letter to Knight Ridder demanding that it put itself up for sale. The demand made news because Private Capital happens to be Knight Ridder's biggest shareholder. Today, a second big shareholder, Harris Associates of Chicago, echoed the demand.

No one can argue that newspapers aren't profitable. Over the years, Knight Ridder has routinely racked up profit margins of 20 to 25 percent. But with newspaper circulation falling steadily, especially among young people, the industry's future is unclear, says Brad Adgate, research director at Horizon Media.

Mr. BRAD ADGATE (Research Director, Horizon Media): The concern about newspapers is--you know, is somewhere down the road, you know, our younger folks--as they get to be older and start to join the business world--where are they going to get their news? Are they going to sit down and pick up a newspaper?

ZARROLI: Adgate says younger readers increasingly get their news from alternative sources, like the Internet, and advertisers are following. Vin Crosby is an online media consultant.

Mr. VIN CROSBY (Online Media Consultant): For example, Procter & Gamble, the largest consumer products company in the country, I think, is budgeting a third of its advertising budget to online this year. And most of that money has come from the print spending.

ZARROLI: Crosby notes that newspapers have traditionally made 40 percent of their revenue from classified advertising alone, but Web sites like craigslist and monster.com are taking a huge chunk of that business.

Newspaper companies have tried various strategies to compete. In New York City, for instance, hawkers give away free newspapers each morning to commuters entering subway stations. AM New York is owned, in part, by the Tribune Company, which is hoping it will get younger readers into the newspaper habit.

Most newspapers have also put much of their content online. But the online world is much less profitable and much more competitive than traditional newspapers, and so it's unlikely to make as much money as the old business model. Barry Parr of Jupiter Research says Knight Ridder is especially vulnerable to advertising pressures. Parr says unlike News Corp. or Gannett, Knight Ridder never diversified into other media, like television.

Mr. PARR: They made that bet a while back, and I think the current situation is evidence that it might not have been the best bet.

ZARROLI: Knight Ridder officials declined to comment for this story; so did Private Capital Management. The latter company is known for an aggressive investment style. It says on its Web site that it tries to make a 15-percent annualized return for its shareholders. In its letter, Private Capital argued that Knight Ridder is worth more than its current share price suggests, and it should be sold. But many analysts are doubtful that the company could find a buyer. Paul Ginocchio follows the newspaper business for Deutsche Bank.

Mr. PAUL GINOCCHIO (Deutsche Bank): I think at this point in time, based on where the valuations are for most public newspaper companies, I don't think it's a great time to be investing in newspapers. At some point in time, valuations will reflect current opportunities.

ZARROLI: Ginocchio says the best buyer for Knight Ridder would be another big newspaper chain. He says a company like Gannett, for instance, which owns USA Today, might attract more national ads if it acquires more big papers. But there's no hint any other company is interested right now. Jim Zarroli, NPR News.

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