Jonathan Knee is an investment banker who has lately been advising the newspaper industry about bankruptcies and selling off failing newspapers. He is also director of the media program at the Columbia Business School and has co-authored a soon-to-be-released book called Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies?
He recently gave an interview, where he was asked to handicap the future of the newspaper business. Knee may not know it, but he may also be a pretty good prognosticator of the radio business. Take a look at some of these quotes, and plug in “radio” wherever he says “newspaper.”
Claiming that the newspaper business is still very viable in the overall media scheme of things, here’s Knee’s take on newspapers… or is it radio?
“The reason why most newspaper (radio?) companies have gone bankrupt or appear perilously close to it is that they have too much debt, not that they have stopped being profitable. For the reasons I have already described, they are certainly less profitable than they used to be, but compared to most media businesses like movies and books, most newspapers (radio stations?) still have higher profit margins. Unfortunately, many of these companies maxed out on available debt during a bubble in the debt market just before the debt bubble popped and their own profit margins precipitously declined. That does not mean that these companies cannot continue to generate significant cash flow once restructured into a sustainable capital structure.”
And when asked for some bottom line advice, to newspaper owners, here’s Knee’s best shot:
“You have to focus on your competitive advantage, which is local. When the smoke clears, the local newspaper (radio station), which may not be the sexiest part of the newspaper (radio) industry but is overwhelmingly the largest and most profitable part of the industry, will be a smaller and more-focused enterprise whose activities will be directed to those areas where their local presence gives them competitive advantage and they will continue to generate as a result better profits than the supersexy businesses in the media industry asking for government or nonprofit help like movies and music.”
It’s common knowledge that there are investors sitting on the sidelines, waiting for some great bargains – for radio stations. You have to wonder whether stations acquired for much less debt wouldn’t continue to be great investments. And as we have discussed many times in this space, a hyper-local approach to radio is the “secret sauce” that can make stations vital in the future. In the coming days, we’ll feature a blog post from a small radio owner who’s having a good year. Maybe Jonathan Knee knows more about the radio business that he thinks.
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Recapitalization will surely help radio – but it faces two undeniable hurdles. 1) Radio’s revenue was shrinking BEFORE the economy hit the skids – a US recovery will not automatically trigger one for radio. 2) The music business seems intent on killing radio entirely. The deal the NAB cut with SoundExchange makes any digital conversion a guaranteed money loser, no matter how much theoretical sense it makes in the abstract.
Radio seems oblivious to the corner into which the music industry has it painted. The clock is ticking and someone better wake up and smell the paint!