The Bee in the oatmeal

On May 4, The McClatchy Co., which owns The Sacramento Bee, released its first-quarter 2017 financials. For those of us who believe, as Thomas Jefferson did, that journalism plays a crucial role in a functioning democracy, McClatchy did not have good news.

The Sacramento-based chain, which owns 30 media companies across the country, announced a $95.6 million loss for the first quarter. While $76.8 million of that loss was due to a reevaluation of the online jobs website, CareerBuilder, McClatchy also reported that advertising revenues dropped from $136 million in the first quarter of 2016 to $120 million in that same period in 2017.

At the end of 2004, the McClatchy Co. had stockholder equity of $1.42 billion. Due to ongoing losses and reevaluation of assets, by the end of last year it had only $114 million in stockholder equity. Those first-quarter 2017 losses have eaten up most of that equity.

So what’s the plan? McClatchy’s new CEO, Craig Forman, said last week, “We are executing on our plan to accelerate the pace and cadence of our digital transformation while aligning our cost structure with the realities of the business environment.”

“Aligning our cost structure” means fewer reporters and smaller newspapers. This creates a downward spiral of decreasing print circulation and print ad revenues, which will mean that at some point in the near future The Bee won’t be able to depend upon print revenue to fund the digital transformation.

Unfortunately for those of us who would like to see The Bee survive, The Bee’s “digital transformation” has two major problems. The first is that, to my knowledge, no media company has been able to accumulate enough money from digital ads and subscriptions to fund a decent local news staff. Digital-only revenues represent less than one-fourth of McClatchy’s advertising revenue. McClatchy still has a long way to go before these digital revenues will be able to support an organization of their size.

The second is that to compete in the digital arena, McClatchy has a massive bee in the oatmeal. Digital news competitors such as Politico, BuzzFeed, Google and others have the huge advantage that they aren’t hobbled by massive legacy debt.

Unlike their digital competitors, McClatchy is still paying off loans taken out to purchase Knight-Ridder newspapers in 2006. The company is making payments on loan interest and unfunded pension obligations. Lurking in the future is $2.28 billion in future payments to pay off this debt, including $780 million in the next five years.

To put icing on this expensive cake, the CEO and other overpaid executives who will be making these decisions will also be sucking millions of dollars out of the operation with their salaries.

In Sacramento, McClatchy just sold its building and signed a long-term lease for $4.6 million annually. What digital operation would have a lease payment like this, not to mention all the other costs the business is saddled with? These legacy costs make it nearly impossible for McClatchy to compete with other entities putting out digital news products.

This is bad news for those of us who, as Thomas Jefferson did in his day, want to see journalism survive.