A decade ago, as Knight Ridder Chairman Tony Ridder hosted an annual meeting with his newspapers' editors, he was asked what concerned him most about the business, what kept him awake at night.
"Electronic classifieds," Ridder replied, according to two people who were present.
His response struck some as arcane. But in 2005, that answer carries significantly more meaning, as newspapers see both advertising revenue and younger readers sliding to the Internet.
But it's not just the Internet that's troubling the newspaper industry. Traditional advertisers, like auto dealers and retailers, aren't spending as much. The price of newsprint, a newspaper's biggest expense after payroll, has risen nearly 50 percent in three years. And circulation, on a downward slide for two decades, recently took its worst dip since 1991.
Knight Ridder, which has owned the Star-Telegram since 1997, became an unwilling poster child for these challenges after its largest shareholder demanded that the company put itself up for sale to boost its stock price from a three-year low. Private Capital Management, with 19 percent of the stock, has threatened to nominate its own slate of directors if the company doesn't act.
Knight Ridder has said it is consulting with Wall Street advisers Goldman Sachs and Morgan Stanley on "strategic alternatives," including a possible sale.
Several outcomes are plausible, from a restructuring to appease shareholders, to a merger with another media company, to a dismembering of the 31-year-old company, with properties sold off to the highest bidders. Last week, three investment companies were reported to be considering a joint bid, and McClatchy Co., a California-based newspaper company, was said to be interested.
A spokesman at Knight Ridder's San Jose, Calif., headquarters said the company would not comment on developments until a specific transaction, if any, is reached. Reportedly, the company will review early bids on Friday.
But interviews with former Knight Ridder executives, industry analysts and academics suggest that changes are just starting for the industry, for Knight Ridder and for the Star-Telegram.
"Nothing in the last three weeks has ruined the newspaper industry," said Chuck Richards, an analyst with Outsell, an information industry researcher. "This story has been building over time."
Vulnerable from the start
Investors are targeting Knight Ridder not so much because its financial performance is out of line with other media firms, but because its financial structure allows for a hostile advance, analysts say.
"If you want the simple answer on 'Why Knight Ridder?,' it's because Knight Ridder has one class of stock," said John Morton a newspaper business analyst.
In that sense, Knight Ridder's problems started back in 1969. That's the year its corporate predecessors, Knight Newspapers and Ridder Publications, each went public. The two merged in 1974.
It was an era when many family-owned media companies were struggling with issues of inheritance and opting to sell stock to investors so relatives could cash out. Several created two classes of stock: one for the public markets and a second that held superior voting power and was retained by the founding families. As a result, those companies -- including The New York Times Co., Dow Jones & Co., which publishes The Wall Street Journal, and Belo Corp., owner of The Dallas Morning News, remain largely immune to takeover threats.
Davis "Buzz" Merritt, who worked for Knight Ridder from 1975 until his retirement in 1999 as editor of the Wichita Eagle, said he once asked a senior Knight Ridder executive why the companies didn't create two classes of stock.
"He said it was two things. First, Goldman Sachs said the stock would do better with one tier. That was the primary reason," Merritt said. "Second, the New York Stock Exchange would not list two-tier stocks, and they wanted very much to be on the NYSE." (The NYSE changed its rule in 1986.)
In any event, once the decision was made to issue one class of stock, "they weren't in control of their destiny, economically speaking," Merritt said. For more than a quarter-century, that destiny looked pretty good. Knight Ridder's revenues grew from $506 million in 1974 to a high of $3.2 billion in 2000, while profits rose from $36 million that year to a peak of $339.9 million in 1999.
But the company hasn't matched either figure since, although last year it earned $326.2 million on just over $3 billion in revenue, the best results since those peaks. The company's stock price grew through April 27, 2004, when it closed at a record high of $79.63, but then started a slide.
At times, Ridder has been castigated in journalistic circles for being too aggressive about cost-cutting. Last year, Merritt wrote a book called Knightfall, which criticized Ridder for emphasizing profitability to the detriment of journalistic quality. But last year the company's profits as a percentage of revenue were about average for the industry.
In a report issued last week, a Morgan Stanley analyst estimated Knight Ridder's largest newspapers have operating profits ranging from a high of 24 percent of revenues at the Star-Telegram and The Kansas City Star to a low of 8 percent at the San Jose Mercury News. Knight Ridder does not disclose operating figures for its 32 individual papers.
Knight Ridder is the nation's second-largest newspaper company. Unlike many media companies that operate a variety of media outlets -- newspapers, magazines, television, cable, radio -- Knight Ridder is almost solely a newspaper company. The company's biggest transaction in the past decade was the $1.7 billion purchase of the Star-Telegram, Kansas City Star and two smaller papers in 1997 from Walt Disney Co. That same year, it sold Knight Ridder Information Inc., a big data company, and its 50 percent stake in TKR Cable, which had 350,000 subscribers in the Northeast. The company had already sold off eight TV stations in 1989.
As a result, newspapers made up more than 96 percent of the company's revenue last year. And 69 percent of the remainder, which was online revenue, "is attributable to sales made by, or in combination with, our newspapers," according to an SEC filing.
Contrast that with the somewhat larger Washington Post Co, suggested Merrill Brown, a one-time Washington Post reporter and former editor-in-chief of MSNBC.com who is now an online media consultant. In the first nine months of 2005, newspapers made up just 27 percent of its revenue. Broadcast and cable TV and magazines added a third, while the remaining 40 percent came from Kaplan Inc., an education and test-preparation company acquired in 1984.
"Knight Ridder is extraordinarily dependent on a dying business," Brown said. "They have failed to find Internet ventures and alternative ventures enough to allow the stock price to rise."
The Internet challenge
By most accounts, Knight Ridder executives have hardly been asleep at the switch as the Internet has grown up. In 1995, the company joined four other companies to buy 11 percent of Netscape Communications, which was aiming to capture the Web with its browser software. In 1998 it went so far as to move its corporate headquarters from Miami to San Jose, the better, executives explained at the time, to embrace the Internet culture.
At times, however, that has been like embracing a cactus. In 2000, the company wrote down its investment in three Internet-related ventures -- InfoSpace, GoTo.com and Webvan Group -- by a combined $167.8 million.
Knight Ridder Digital, the subsidiary that operates Web sites for its 32 newspapers, offers a glimpse into what the company has done to adapt to the online world. It manages Real Cities, a national online advertising network that includes about 120 newspaper Web sites. It also shares ownership with several companies in various Internet initiatives, including CareerBuilder.com, a help-wanted advertising service; Classified Ventures, which includes cars.com; and ShopLocal, a search and retailing service.
"Arguably, no one in the publishing industry has been as aggressive about online capabilities as Knight Ridder," said company spokesman Polk Laffoon.
In March, again together with other big media companies, Knight Ridder bought 25 percent of Topix.net, an online service that collects and organizes news. In similar moves, The New York Times Co. in February paid $410 million for the operator of About.com, and a year ago, Dow Jones paid $519 million for MarketWatch, a financial news site.
In Phil Meyer's view, newspapers today must play a difficult hand in a high-stakes game. The University of North Carolina journalism professor and author of a recent book on the future of newspapers said that "the effects of technology are not going to stop," and that it's up to newspapers to quickly adapt as advertisers and younger readers defect to the online world.
Meyer doubts they're up to it.
"You've got to have a high tolerance for risk," said Meyer, who worked for Knight Ridder for 23 years ending in 1981. Newspapers have been steady, predictable enterprises for decades, he said, and when pressured by Wall Street to boost profits, few in the industry have been willing to place sizable bets that could take years to pay off.
Losing readers
Two recent developments illustrate the problems newspapers face with their core product. One concerns circulation; the other, advertising.
Last month, the Audit Bureau of Circulation issued its twice-yearly report on newspaper circulation, and the numbers were the worst since 1991. Nationwide, daily circulation at the nearly 800 participating papers was down 2.6 percent, and Sunday circulation was down 3.1 percent. At the Star-Telegram, daily circulation slid 4 percent, and Sunday was down 2 percent.
Morton noted that while the nation's population has grown 80 percent in the past 50 years, today's newspaper circulation, at less than 55 million, is slightly below what it was 50 years ago. Circulation peaked at 63.3 million in 1984, he said.
The other issue is advertising, the source of 79 percent of Knight Ridder's revenue in the first nine months of 2005. Ad revenues have been sluggish, owing partly to the Internet but also to broad changes and consolidation in the retail industry, which has reduced the number of steady newspaper advertisers.
Dan Sullivan, professor of media management and economics at the University of Minnesota, said that although retail advertising grew by 4 percent to 5 percent annually in recent years, "most projections are for half that."
The Internet has made its biggest challenge in classified advertising, the issue that so worried Tony Ridder a decade earlier.
Classified advertising made up nearly 40 percent of Knight Ridder's revenue in the first nine months of 2005, according to the company. Advertising provides the bulk of revenue, so classified ads accounted for 31.2 percent of total revenue. Knight Ridder's classified revenue, like the newspaper industry's, peaked in 2000 and fell three straight years before rebounding last year.
According to the Interactive Advertising Bureau, online advertising generated $9.6 billion last year, up 60 percent from 2003, and it forecasts revenues will rise as much as 25 percent to $12 billion in 2005. Still, the Internet only accounted for 3.7 percent of U.S. spending on advertising last year, IAB said, up from 3 percent in 2003.
Knight Ridder last year got 3.8 percent of its total revenue, or $115 million, from online sources, according to an SEC filing, with nearly 70 percent "attributable to sales made by, or in combination with, our newspapers." In the first nine months of this year, online revenue is up more than 50 percent, Laffoon said.
Ed Atorino, media analyst at The Benchmark Co. in New York, said newspapers are expected to grab about $2 billion of the estimated $12 billion in online advertising. But that's barely enough to make up for the shortfall in newspaper advertising revenue.
Morton said newspapers can survive the transition if they retain at least a portion of the revenue that switches to online advertising from print.
"Say you lose $1 in print and pick up 40 cents online," Morton said. "You'd still be ahead; you'd have more profit. You don't have the expenses on the Internet that you have in print."
That's especially true today. The average price of a metric ton of newsprint is about $650, a 49 percent jump since 2002. In 2001, the Star-Telegram, like many major newspapers, downsized its pages to reduce newsprint use.
A common destiny?
All those changes, however, may not be enough to allow Knight Ridder to stay independent. Together with Private Capital Management, which owns about 19 percent of Knight Ridder's shares, two other large institutional investors have signaled their intent to add their combined 18 percent to push for change. Typically, interests representing that much stock have more than enough clout to force a public company to respond.
Private Capital Management also owns 15 percent of The New York Times Co., 26 percent of Belo and 38 percent of McClatchy Co. All those companies have two classes of stock. PCM also owns 7 percent of Gannett, publisher of USA Today and the nation's largest newspaper company, and less than 1 percent of Tribune Co. Those two companies, like Knight Ridder, have only one class of stock.
In an interview last month with The New York Times, Private Capital's Bruce Sherman said he believes in the industry and thinks the companies are "extraordinary opportunities" at their recent stock prices. In all, he has invested $4.3 billion in nine newspaper companies, or 14 percent of the $31 billion that PCM manages. By most accounts he has lost hundreds of millions of dollars as those stocks have declined, and The Wall Street Journal reported last month that boosting the value of those holdings could help PCM earn a $300 million bonus next year if it hits growth targets.
The University of Minnesota's Sullivan said Knight Ridder's situation illustrates the pressures the industry faces as it attempts to cope with its changing marketplace. Knight Ridder disappointed Wall Street and now has to live with the consequences, and so will others in the business, he said.
"I think Knight Ridder finds itself in a difficult position from an investment perspective," he said. "All the newspaper companies are eventually going to have to deal with the same issue."
Jim Fuquay, (817) 390-7552 jfuquay@star-telegram.com
