Crisis at the Gazette, Part One

The Gazette is the weekly newspaper of record in Montgomery, Prince George’s, Frederick and Carroll Counties. No other mainstream media source offers more detailed coverage of local issues in those jurisdictions. But the newspaper has fallen into a dire crisis that threatens both its viability and the capacity of its readers to access high-quality local reporting.

First, some background. The Gazette is a very small part of the Washington Post Company, a gigantic multi-media conglomerate. The Post Company has many lines of business including the Washington Post newspaper, Newsweek Magazine, six local television broadcast stations, a cablevision subsidiary, Kaplan Inc. (a testing and educational firm) and numerous smaller media-related entities. Last year, the Post Company had 19,000 full-time employees, $4.18 billion in revenues, $477 million in operating income and $289 million in net income.

By far the biggest part of the Post Company is its Kaplan subsidiary. In 2007, it accounted for a majority of its full-time employees (11,800), almost half its revenues ($2.03 billion) and nearly a third of its operating income ($149 million). Its entire newspaper division reported revenues of $890 million and operating income of $66 million. Last year was not a good one for the Post’s newspaper operations according to this statement from its annual report:

Newspaper publishing division revenue in 2007 decreased 7% to $889.8 million, from $961.9 million in 2006. Division operating income for 2007 totaled $66.4 million, compared to $63.4 million in 2006. The increase in operating income for 2007 is due primarily to $47.1 million in pre-tax charges associated with early retirement plan buyouts at The Washington Post during 2006. Excluding this charge, operating income was down sharply for 2007 due to a decline in division revenues and a $2.3 million pre-tax gain on the sale of property in 2006, partially offset by a reduction in newspaper division operating expenses, including a 19% reduction in newsprint expense. Operating margin at the newspaper publishing division was 7% for 2007 and 2006; however, the 2007 operating margin declined significantly, excluding the $47.1 million in early retirement plan buyouts in 2006.

Print advertising revenue at The Post in 2007 declined 13% to $496.2 million, from $573.2 million in 2006. The decline in 2007 is due to reductions in real estate, classified, general and retail. Daily circulation at The Post declined 3.6%, and Sunday circulation declined 3.7% in 2007; average daily circulation totaled 649,700 (unaudited), and average Sunday circulation totaled 902,500 (unaudited).

In fact, the Washington Post newspaper has been in decline for years. Between 2000 and 2007, the Post newspaper’s average daily circulation fell every year from 777,521 to 658,059. The newspaper’s total advertising inches have fallen from 3,363 to 2,301 over the same period – a drop of 32%.

Gradually, the Post Company is transforming itself from a media entity into an educational firm built around its Kaplan subsidiary. In 2000, Kaplan accounted for about one-third of the company’s full-time employees and one-seventh of its revenues. Last year, Kaplan employed a majority of the company’s workforce and accounted for almost half of its revenues. Why? Educational services is a growth industry and print news publishing is not.

The stock market reflects that basic reality. Since 2002, the Post’s stock value has increased by 12%. Over that period, the S&P Publishing Index (a group of publishing stocks) has fallen by 13% while the Post’s education company peer group saw a stock value increase of 86%. To Post Chairman and CEO Donald E. Graham, owner of 93% of the company’s Class A stock and 35% of its Class B stock, the message is clear: education is the company’s future.

And what of the Gazette? It is a tiny, tiny part of the giant firm that owns it. Of the Post Company’s 19,000 full-time employees last year, only 168 worked as editors, reporters or photographers for the Gazette and its subsidiary, Southern Maryland Newspapers. The Post Company does not report revenue and operating income for the Gazette. But in terms of its print circulation, the Gazette has turned out a steady performance. Since it acquired Southern Maryland Newspapers in February 2001, the Gazette’s circulation has varied between 660,000 last year and 680,000 between 2003 and 2005. Its professional employment has ranged from 165 to 170 over the same period. While it is reasonable to believe that its ad revenues have fallen along with the area’s economy in recent years, the Gazette has not suffered the same magnitude of problems endured by the Washington Post.

But that has radically changed. We will elaborate in Part Two.