Recently by Gary North: Bring the Troops Home by the Fourth of July
What’s black and white and red all over?Answer: the balance sheet of the New York Times.
That was a two-liner that appeared in The Daily Show‘s torpedoing of the New York Times. You can see it here.
That segment was run two years ago. I found it interesting that Newsweek, which subsequently went bankrupt, jumped on it like a dog on red meat.
Both the segment and the Times‘ responding Q+A are pretty darn funny – but, given the paper’s $74.5 million loss last quarter, laughing makes us feel more than a little guilty. Isn’t this like shooting a fish in a barrel?
I don’t know how guilty the writer felt. I don’t even know if he is still working for Newsweek. The hapless magazine’s owner, the once highly profitable Washington Post, sold it for $1 (plus its debts) to a 91-year-old multi-millionaire in August 2010. He died on April 11, 2011. (WaPo’s money comes mainly from the Kaplan educational training program. The money from publishing news is marginal.)
And so it goes, newspaper by newspaper. Young people no longer read them. With Craigslist free or cheap, people wanting to buy or sell through classified ads no longer pay newspapers. Local advertisers pay less in ad rates because paid subscriptions are declining so fast. Once-fat newspapers are emaciated shells of their 1990s-era selves.
No metropolitan newspaper has made the complete transition to digital format. They are still dependent on paid subscribers to printed, day-old news. This means that they are dependent on older people. These are the demographics of Social Security. The local papers are also online, but their total revenues are falling steadily. The on-line component of their revenue is low, compared to print-based. But print-based net revenues are falling much faster than on-line net revenues are increasing. Meanwhile, the papers must fund staffs to keep alive their print-based operations.
In an April 21 press release, the New York Times provided the figures. In what is supposed to be a national economic recovery, the Times is suffering from high costs and falling revenues. The press release referred to this as “diluted earnings.”
NEW YORK – (BUSINESS WIRE) – The New York Times Company (NYSE: NYT) announced today 2011 first-quarter diluted earnings per share of $.04 per share compared with $.08 in the same period of 2010. Excluding severance and the special items discussed below, diluted earnings per share were $.02 per share in the first quarter of 2011 compared with $.11 in the first quarter of 2010.
Operating profit was $31.1 million in the first quarter of 2011 compared with $52.7 million in the same period of 2010. Excluding depreciation, amortization and severance, operating profit was $60.5 million in the first quarter of 2011 compared with $83.3 million in the first quarter of 2010.
This sounds bad. Given the fact that this has been going on, quarter after quarter, with no end in sight, it sounds even worse. But have no fear! Janet Robinson, President and CEO, has provided an explanation which, in years to come, may win her the coveted Kenneth Lay Corporate Enthusiasm Award.
“Our operating performance reflects the continuing transformation of our Company, which intersected with an important milestone in the first quarter,” said Janet L. Robinson, president and chief executive officer, The New York Times Company. “While the challenges for our Company and for the larger economy are not yet behind us, the recent launch of Times digital subscription packages on NYTimes.com and across other digital platforms brings our plan for a new revenue stream to life, offering us another reason for optimism about the future of our Company.”
PANAM AND THE TIMES
We have seen all this before. Pan American Airways was the dominant American international airline in the post-World War II era until the 1970s.It benefited from a series of governmental price-fixing agreements. These agreements were implemented by IATA, the International Air Transport Association. The Wikipedia article describes the economics of IATA.
One of its core functions is to act as a price setting body for international airfare. In an arrangement going back to 1944, international fare prices have been set through bilateral governmental agreements rather than through market mechanisms. Airlines have been granted a special exemption by each of the main regulatory authorities in the world to consult prices with each other through this body.
Originally both domestic and international aviation were highly regulated by IATA. Since 1978 in US and later in Europe, domestic deregulation highlighted the benefits of open markets to consumers in terms of lower fares and companies in terms of more efficient networks. This led to the formation of bilateral “open skies” agreements that weakened IATA’s price fixing role. Negotiations are underway since 2003 to create a completely deregulated aviation market covering European and US airspace.
IATA was torpedoed by Laker Airways in 1977. Sir Freddie Laker started offering super-cheap fares from London’s Gatwick Airport to JFK Airport. He then added other cities. He called these flights “charter” flights, which were less regulated by IATA. He was flying high when Margaret Thatcher took over as Prime Minister on May 4, 1979. She was happy with Laker’s price competition. The airline went bankrupt in the recession of 1981, but by then, IATA’s goose was cooked. The cheap fares Laker had offered became popular. Political pressure escalated for de-regulation. This had already begun in the U.S. under Jimmy Carter. Senator Kennedy backed the idea of de-regulation of airlines. The story of this liberation from IATA was told in 1982 by Ralph Nader. He saw clearly that IATA had been gutted by Laker.
Price competition took over. Pan Am had developed its revenue model in terms of IATA’s rules. Now IATA could not enforce them. PanAm began spewing red ink. Its fares were too high. Its routes were not as profitable.
PanAm had always operated because of a government subsidy to its international routes: limits on its competition. Then it got sandbagged by the government.
When the Airline Deregulation Act of 1978 became law, it contained two clauses. “Clause A” allowed domestic carriers to begin operating on international routes while “Clause B” allowed Pan Am to operate domestically. Only “Clause A” was put into effect as the other airlines convinced Congress that Pan Am would monopolize all U.S. air routes, though the last time Pan Am was permitted to merge with another airline was in 1950 when Pan Am was permitted to purchase American Overseas Airlines from American Airlines. As a result, U.S. domestic airlines began competing with Pan Am internationally.
PanAm never recovered. In 1981, in the recession, PanAm sold its Pan Am building to Metropolitan Life. In 1963, the Pan Am building was the largest commercial building in the world: 2.4 million square feet. PanAm after 1981 kept only 4 floors. It gave up those in 1991. It moved headquarters to Miami. A few weeks later, it declared bankruptcy.
In 1977, PanAm executives should have seen what was coming. They should have sold the company to blind investors. In 1978, it was obvious to far more that the airline was doomed. But management held on.
In 1981, the company sold the building. It should have sold its routes and airport parking facilities and kept the building.
By 1981, PanAm was in the real estate business. It had a choice: keep the Manhattan skyscraper and sell the airport facilities, or keep the airport facilities and sell the building. The executives made the wrong decision. In late 1991, they had no real estate. The firm no longer existed.
Free markets grounded PanAm. The executives kept thinking, “We are in the airline passenger business.” In fact, they were in the real estate business. They should have focused their attention on which real estate was worth keeping. But they were hypnotized by their past commitment to moving passengers through the air. They defined the company in terms of that task. That doomed the company. Without IATA and the Federal Aviation Administration supporting fare price floors, PanAm crashed and burned.
What has this got to do with the New York Times? This: in terms of its net worth, The Times Company is in the real estate business. First, it owns 800,000 square feet of the Times building. That is its central asset, its pearl of great price. But management keeps thinking, “We’re in the information gathering and filtering business.” This market is now open to all comers. The Times has no competitive advantage. It has high costs and falling readership.
Second, the Times is in the real estate business by way of computer screens. This is the most valuable real estate on earth.
We know that most people regularly visit about a dozen Web sites. To adopt a new site, a reader stops reading an old site.
Reader by reader, the Times is being blipped from this crucial real estate. New readers are not adding the Times and abandoning a favorite site.
The Times will face the moment of truth within a decade – maybe less: “Having lost the competition for the computer screen real estate, should it sell its share of the Times building or the news operation?”
I predict that they will sell the building. That will be the day the Times joins PanAm on the road to extinction.
The economic outlook of the mainstream media is Keynesian. The reporters and analysts see a large Federal budget as the key to prosperity. They do not look at the Federal deficit unfavorably. They universally reject the idea of a balanced budget; it is seen as archaic. I have never seen an article in 50 years that was favorable to a generation-long annual budget surplus which is then used for the repayment of all on-budget Federal debt. As for Social Security, Medicare, and Medicaid – off budget – the idea of a zero-debt government is seen as immoral. The idea of a debt-free national government is discussed only as a conceptual impossibility and a moral monstrosity.
This outlook will lead to default. The numbers scream “default!” The columnist admits that there are “problems” or “challenges” or whatever euphemism is popular for “an inevitable default, but I intend to ignore this.” They treat the national debt in the same way that CEO Robinson treats the balance sheet of the Times. She said this: “While the challenges for our Company and for the larger economy are not yet behind us. . . .” Revenues are falling. Costs are rising. Conclusion: “Defer public discussion.”
The Keynesian system is tied to the success of the Federal government’s deficits and the Federal Reserve System’s ability to inflate the monetary base without producing comparable price inflation. A Keynesian Ph.D. now heads the FED, along with support Ph.D.’s on the Board of Governors. These people believe in Keynesianism. They are associated with Keynesianism. They have therefore put Keynesiamnism on the line. If they fail, the last gasp of Keynesianism will undermine people’s confidence in the system.
The financial media are tied to Keynesianism. They have bet the farm on it. So, as the Keynesian policies begin to produce politically unacceptable results, viewers will abandon the mainstream media.
This has begun. Ron Paul is the crucial symbol of this defection. Paul Krugman, the New York Times columnist and blogger, has written that Bernanke’s fear of Ron Paul is the reason why the FED has not gone whole hog with a stimulus program, as if what the FED has done to the monetary base is not laying the foundation for hyperinflation if commercial banks ever pull their excess reserves from the FED.
I’d say that the Fed’s policy is to do nothing about unemployment because Ron Paul is now the chairman of the House subcommittee on monetary policy.
So much for the Fed’s independence. And so much for the future of America’s increasingly desperate jobless.
Krugman sees it. A growing segment of the public is now suspicious of the FED, and Ron Paul is the reason. Krugman and his fellow Princeton colleague Bernanke cannot reverse this.
It is going to get worse from their point of view. The readers will move away from mainstream media to non-Establishment sites that call the FED into question, and therefore call Keynesianism into question.
The mainstream media are going belly-up: the TV networks, the large daily newspapers, and the news services. No matter what they do, their salary costs continue to undermine their profitability. They are losing the battle for real estate: computer screens and flat TV screens. Cable is eating their lunch.
We are seeing the end of an era. The newspapers dominated print media from 1840 to 1998. The FCC-regulated and protected radio and TV networks dominated, 1930-1990. New York City book publishing houses dominated book publishing and distribution. Today, outlet by outlet, they are being overwhelmed. The new technologies are decentralizing. They are very cheap. They cannot be reversed.
This is good news for liberty and bad news for Keynesians.
May 4, 2011
Copyright © 2011 Gary North