McClatchy Company (MNI)

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Lulu Cheng

Izaz Ali

The McClatchy Company (MNI) is the third largest newspaper company in the U.S. based on daily circulation ^[1]. The company runs 31 daily newspapers and approximately 50 non-dailies across 29 markets nationwide ^[2]. In June of 2006, McClatchy acquired Knight-Ridder, Inc., the second largest newspaper publisher in the U.S.^[3] McClatchy's primary daily newspapers include The Miami Herald, The Sacramento Bee, the (Fort Worth) Star Telegram, The Kansas City Star, the Charlotte Observer, and The (Raleigh) News & Observer^[4]. In 2006, the company had an average paid daily circulation of 2,842,452 and Sunday circulation of 3,523,177 ^[5].

Throughout the last decade, internet advertising has continued to steal advertising dollars from traditional advertising^[6]. Newspaper publishers like MNI have been particularly affected, as advertisers have chosen to take advantage of the cheaper prices and greater measurability offered by online advertising. In an effort to offset its declining print advertising revenues, McClatchy has acquired various online assets including Real Cities, the nation’s largest advertising network of local news websites; and 15% of CareerBuilder LLC, the country’s largest online job site^[7]. The company also owns 25% of Classified Ventures LLC, a newspaper industry partnership offering classified websites like cars.com and apartments.com^[8]. Online advertising has become one of the fastest growing sources of revenue for the company, (increasing by 291% in 2006 from $35 million to $102 million), but was still only 6.1% of total revenues in 2006^[9].

Business Financials

Total operating revenue in 2006 was 1.68 billion dollars^[10]. 86% of this came from advertising revenues and 12% came from circulation revenues^[11]. Online advertising revenue in 2006 amounted to some 102 million dollars^[12].

MNI Annual Report^[13]

Although MNI's revenue grew substantially from 2002-2006, its net income margin fell over the same period. This large drop in 2006 can be explained in part by the sale of 12 of the 32 daily newspapers it acquired through the Knight-Ridder, Inc. acquisition, in addition to the (Minneapolis) Star Tribune, its largest paper^[14]. The loss of income from these discontinued operations along with interest on debt related to the purchase of the newspapers, and the write-down of Star Tribune's net assets to market value account for the gap between revenue and net income in 2006^[15]. Even after controlling for acquisitions and divestitures, MNI's margins have suffered due to falling circulation and ad revenue.

MNI Annual Report^[16]

From 2003 to 2005 McClatchy's total circulation fell by more than two percent. The jump in 2006 can be attributed to McClatchy’s acquisition of Knight-Ridder, Inc.

Trends and Forces

• Impact of the internet on MNI’s advertising revenue: As with most newspaper publishers, print advertising revenue constitutes the majority of McClatchy’s returns. However, the growth of internet advertising has come largely at the expense of traditional advertising, since it is comparatively cheaper and allows for more targeted ads that can provide more measurable results. Although McClatchy has sought to offset decreasing ad revenue from its traditional newspapers by building its online presence (online ad revenue increased from $35 million in 2005 to $102 million in 2006), online advertising still represented a relative small portion of the company's revenues (less than 10%). The company also faces competition from more established online advertising networks like Craigslist, Yellow Book USA, and Monster.com^[17].

• Impact of the internet on newspaper circulation levels: In recent years, most of the major print publishers have seen a drop in circulation levels as more readers turn to the internet for their news. Younger generations, in particular, prefer to obtain their news from the internet. In addition, the federal Do-Not-Call list of 2003 dealt newspaper publishers another blow, as they had relied on telemarketing to attract as much as 60% of new subscribers^[18]. From 2003 to 2005 McClatchy saw total circulation levels fall by 74,000 copies, or 2.3%. This decrease is consistent with an industry wide decline of 1% to 3% that most of the major newspaper publishers have seen in recent years^[19]. It is difficult to compare 2005 circulation to 2006 because the company made several large acquisitions. Analysts, however, estimate that circulation continued to drop over that time period.

• Newsprint costs remain volatile: The earnings of newspaper publishers remain sensitive to changes in newsprint prices, as newsprint expenses constitute a major component of their total operating expenses. Newsprint expenses were almost 15% of McClatchy’s total operating expenses in 2006^[20]. In 2006 the company incurred a 5.3% increase of newsprint expenses from 2005^[21]. Currently, McClatchy obtains its newsprint from several suppliers chiefly under long-term contracts^[22]. Compared to its competitors, the company is somewhat sheltered from swings in newsprint prices because it holds ownership interest in two of its suppliers (Ponderay and SP) ^[23].

Competition

McClatchy’s competes with national print publishers like the New York Times Company and Dow Jones, as well as with numerous local newspapers like the Washington Post Company.

Notes

1. ↑ MNI 2006 10K, Item 1, pg.1
2. ↑ MNI 2006 10K, Item 1, pg.1
3. ↑ MNI 2006 10K, Item 1, pg.1
4. ↑ MNI 2006 10K, Item 1, pg.1
5. ↑ MNI 2006 10K, Item 1, pg.1
6. ↑ MNI 2006 10K, Item 6, pg.11
7. ↑ MNI 2006 10K, Item 1, pg.1
8. ↑ MNI 2006 10K, Item 1, pg.1
9. ↑ MNI 2006 10K, Item 7, pg.20
10. ↑ MNI 2006 10K, Item 6, pg.11
11. ↑ MNI 2006 10K, Item 1, pg.2
12. ↑ MNI 2006 10K, Item 7, pg.20
13. ↑ 2006 10K, Item 6, pg.11
14. ↑ MNI 2006 10K, Item 1, pg.1
15. ↑ MNI 2006 10K, Item 7, pg.13
16. ↑ MNI 2006 10K, Item 1, pg.3
17. ↑ MNI 2006 10K, Item 7, pg.20
18. ↑ Wall Street Journal, "Newspaper Circulation Continues Decline, Forcing Tough Decisions", May 2, 2005
19. ↑ Wall Street Journal, "Newspaper Circulation Continues Decline, Forcing Tough Decisions", May 2, 2005
20. ↑ MNI 2006 10K, Item 7, pg.17
21. ↑ MNI 2006 10K, Item 1, pg.6
22. ↑ MNI 2006 10K, Item 1, pg.6
23. ↑ MNI 2006 10K, Item 1, pg.6
24. ↑ MNI 2006 10K, Item 6, pg.11
25. ↑ MNI 2006 10K, Item 1, pg.1
26. ↑ GCI 2006 10K, Item 8, pg.36
27. ↑ GCI 2006 10K, Item 1, pg.4
28. ↑ TRB 2006 10K, Item 1, pg.6
29. ↑ TRB 2006 10K, Item 1, pg.6
30. ↑ NYT 2006 10K, Item 7, pg.31
31. ↑ NYT 2006 10K, Item 1, pg.2
32. ↑ DJ 2006 10K, Item 7, pg.16
33. ↑ DJ 2006 10K, Item 1, pg.4