PRINTING MONEY.(The Talk of the Town)(McClatchy buys Knight-Ridder)

Two weeks ago, when the newspaper publisher McClatchy announced that it was buying the venerable Knight Ridder chain, for the lowball price of $6.5 billion, McClatchy's C.E.O., Gary Pruitt, called the deal "a vote of confidence in the newspaper industry." But few people bought Pruitt's pitch (or his stock--McClatchy's shares have dropped nine per cent since the deal was announced). And why would they? At this point, everyone knows that newspapers are doomed. Lumbering apatosauruses reliant on old technology and a creaking business model, papers are losing readers--the Washington Post saw its circulation drop four per cent, to less than seven hundred thousand, last year--and losing ad dollars. The Internet has demolished the economics of the industry, allowing people to read, free, news from many sources, and providing a cheaper platform for classified ads. Habit may keep readers around a while longer, but spending billions on a collection of newspapers now looks like the proverbial shuffling of deck chairs on the Titanic.

But McClatchy's gamble depends on a simple, if often overlooked, fact: newspapers remain a surprisingly robust business and generate tremendous amounts of cash every year. Most of them have profit margins that dwarf those of the average company; McClatchy's operating margin last year was twenty-eight per cent, while ExxonMobil's was around sixteen per cent, and the typical supermarket's is around four per cent. The reach of newspapers remains huge. Daily circulation is around fifty-five million (not including online readers), giving the industry more customers than any other traditional media outlet. And those customers have the kind of demographics that advertisers like; even as circulation has dropped, revenue from print ads has stayed healthy, to the tune of more than forty-seven billion dollars last year. Newspapers are classic cash cows: solidly profitable businesses in a stagnant industry.

So why are newspapers everyone's least favorite enterprise? One reason is that Wall Street tends to love growth stocks, and to underplay the value of steady cash generation. And no one likes to be in a business that's losing customers. Still, there's a big difference between an industry whose customers are fleeing en masse (camera film, say) and one in which the decline is steady but slow; despite the current sense of panic, the popularity of papers is decreasing only gradually. Readership fell faster between 1970 and 1990--by fifteen per cent--than it has since, and even this audience drop-off is considerably less than what network news has endured in recent decades. Furthermore, a good deal of the decline can be chalked up to the life-style changes that killed the evening paper: since 1980, the circulation of morning papers has actually risen by almost sixty per cent.

Meanwhile, newspapers have minimized the damage by getting better ...