Last week, the most quoted terms in conversations with media people were: "budget revision", "looming cost cutting program" (in France, many newspapers just underwent serious ones), "plunge in advertising revenues by year end", and so on. Of course, not all media outlets will have a bad year; some have done well in the first semester -- at least in Europe. But everyone is bracing for a tough 2009. Many media execs, though, think the last thing to do is act like a deer caught in the headlight; they claim to be -- still -- moving forward with developments. Indeed, this is the time for more carefully managing our businesses -- not for panic or paralysis.
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Looking at a broader picture, newspapers and online medias are likely to be squeezed in two ways. First: the advertising exodus. Short terms ad contracts are the easiest ones to cancel; in some markets, buying habits further exaggerate this predisposition. There, media buyers rely very little on analysis, mostly on the flavor of the day; they tend to follow the crowd. I'm still perplexed by the abysmal gap between the deep research media invest in and the superficial ad buying process -- I'm told Latin countries are more affected by such behavior. Anyway, the ad depletion won't necessarily be in line with the demand for news, substantially higher in these troubled times.
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Second: the impact of the credit crunch on an industry already in a painful transition. Going from traditional to new media requires large amounts of capital. At this time, fresh capital and credit are scarce and expensive (1 month LIBOR is now at 4.14% compared to 2.49% a month ago). This is a big problem for a media group such as Tribune Inc.; it is likely to default on some of its huge $13bn debt, a result of Sam Zell's ill-timed LBO.  As for Gannet, it had to borrow €1.2bn from a $3.9bn unsecured revolving credit line in order to repay $2bn of commercial paper reaching maturity (and issuing fresh commercial paper is highly uncertain now).
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European media will feel that same pinch. In Spain, Prisa group (publisher of El Pais), wants to recapitalize itself for  €2bn ($2.7bn) via subordinated debt or warrants. The Polanco family, owning 70% of the group, will have to give up its current control -- assuming the recapitalization goes through, which is less certain than ever. In fact, Prisa was in the process of selling its Digital+ unit for an expected €3.5bn. That, too, is now up in the air. In any event, Prisa won't be in the best of moods to help rescue the French Groupe Le Monde facing a similar predicament. Le Monde expected to unload its biggest magazine, the cultural weekly Telerama, but potential bidders have evaporated since the cost of capital is now certain to exceed cash flow from the asset. (But Le Monde is almost sure to find some capital by selling junk securities to friendly banks or state-backed thrift institutions. So, why worry?).
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One thing is sure: American medias will emerge faster than European ones from the two crises, lower demand for advertising and higher cost of capital. For the structural challenge, see a previous Monday Note: The J-Curve of Global Print Press. More than ever, I believe the swiftness of the turnaround (which, unfortunately, goes along with corporate brutality) will prove to be decisive. One anecdotal illustration is a conversation recounted on Alan Mutter's blog, in which an acquaintance calls him to float the idea of scrapping a daily’s worst day of the week. A weird concept to which Mutter responded: "How about trying something less drastic, more creative and potentially far more profitable?
— Like what?
— Like turning the paper into a themed edition aimed at a carefully targeted audience of untapped readers and advertisers... ”
And it goes with his ideas about modernizing newspapers. Definitely worth reading. (We are all working around the same ideas: slicing up an audience -- that is structurally and increasingly erratic --  to get smaller but more valuable target groups).  No doubt: from a pure product adjustment perspective, the English speaking press is moving fast to reinvent itself. No doubt, again: casualties will be much higher than expected -- especially after last week’s tailspin.
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The coverage dilemma
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The current crisis is not an easy one to cover. It is complicated, full of credit mechanisms technicalities, and macro economic considerations. On top of this, providing an overly pessimistic analysis could amplify the panic. For questions of cultural approaches to the market economy as well as editorial resources, coverage is much more thorough in the Anglo press than in the French one. In France, coverage is mildly adequate but stays too close to the surface: indexes (stock crash: good fodder), and the ritual "Are our deposits safe?" (Yes, absolutely).
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But, curiously, important questions get low coverage. For instance: European banks are no less vulnerable than American ones. Get this: in the US, outside Wall Street institutions, banks have lent 96 cents for each dollar of deposit, in continental Europe the level is €1.40 for each euro of deposit. The same goes for debt to equity ratio: European institutions are in worse shape than the biggests US bank. An eerily unpleasant similarity: the French minister of Finances, Mme Christine Lagarde, has the same depth of knowledge regarding the true exposure of their respective banking system as Hank Paulson does. None. As a matter of fact, BNP Paribas doesn't have a clue on the real balance sheet of the Belgian bank Fortis it hastily acquired for a respectable €14.5bn ($20bn). When I asked a banking/insurance expert why BNP Paribas took such risk, he retorted: "They apply the following rationale: if they don't go for it, one of their competitor will, and the market will penalize BNP Paribas for being too cautious. If it turns sour, BNP Paribas will go under as everybody else.  In the ensuing blame game, they won’t be singled out ".  Ah, the shared warmth of manure…
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Another subject receives almost no coverage in France: the upcoming collapse of the pension system. Slowly, painfully, over the last few years, the debate over shifting from an exhausted distribution-based pension system (today’s salaried workers pay for the retired ones) to a capitalized one (retirees get their pensions from their savings) had begun to gain traction. Even Left thinkers were about to convert and accept the notion the old system was no longer be viable. After last week’s world markets’ crash, this heated debate is gone for good: no one will defend a pension system tied to the financial markets.  Right or wrong, it's a fact. For the public debt, consequences will be catastrophic. Which leads to another question: as Mexico experienced 20 years ago with the dollar, French public debt is now denominated in a global currency (the Euro). This makes a big difference: France (like any other Euro zone member) is no longer the issuer of its “own” currency.  In other words, it can no longer use the old trick of printing more money.  This will lead to cries of Lost Sovereignty.  But, consider this: California, an economy approximately as large as France, can’t print currency either.
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On the positive side, though, the crisis is doing an otherwise impossible job of educating the public on financial as well as macro-economic issues. Audiences of business papers and websites are skyrocketing. The spread of this knowledge will be invaluable to policymakers when the time comes to face an angry electorate and to defend the unpleasant choices we will all be facing.  The old demagoguery was: Less taxes, more programs.  This is now out of fashion.  At least for a while…  --FF
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