Growing attention to the role of private equity has complicated the narrative around the death of the American newspaper.
By Will Meyer
At this stage in journalism’s crisis, the public is mostly familiar with the threat to democracy posed by collapsing and shrinking newsrooms. The ability of the so-called “Fourth Estate” to hold government to account, especially at the local level, is understood to be the most acute danger of the unraveling of the newspaper business. What happens when there are no reporters keeping tabs on municipal police and small-town mayors? Nothing good — corruption goes up, civic engagement goes down. Nor, it turns out, are the effects circumscribed by town limits. An in-depth report by Politico found that without reliable local information sources, people turn to hyper-partisan Facebook pages. This may help explain why Trump did better in counties without newspapers in 2016, and worse in communities where they circulated.
There is less clarity and discussion, however, around the causes of the ongoing crisis. The standard explanation involves a timeline of the industry’s tanking business model that tracks neatly to the rise of Facebook and Google, which have grown to dominate online ad revenue with 70% of the market. Together with the story of how Craigslist decimated classifieds, these two companies are held up as the principle culprits in journalism’s rapid decline. But this narrative has lately been complicated by the work of journalists, academics, and media analysts who have studied the role of finance in gutting the industry. In particular, the way hedge funds and secretive financial firms who are incentivized to disinvest in local news have long been reshaping the newspaper industry for the worse.
The new emphasis on finance doesn’t displace the role played by the rise of Big Tech and the Internet. But it does compliment it in crucial ways that help us understand the broader historical and economic context.
Journalism scholar Jeremy Littau did much to raise the profile on this research after last winter’s wave of layoffs at Gannett, VICE, and BuzzFeed. In articles for Wired and Slate, he explained that the crisis in newspaper readership predates Google by decades. In fact, readership has been declining since the 1970s. But during the early years of this decline, newspapers were still enormously valuable, sometimes yielding 30 percent profits. It was in this pre-Internet era of declining readership, with new kinds of investors hunting for soon-to-be-unrealistic returns, that newspapers entered an era of ruthless consolidation and cost-cutting. Littau argues that as technology changed and readership continued to dwindle, newspapers became saddled with debts and expectations to maintain the same levels of profitability. Instead of adjusting to new realities and investing accordingly, a new generation of newspaper owners, often in the form of hedge funds, encouraged newsrooms to seek short-term profits over long-term sustainability.
The poster boy for this transformation is Randall Smith, founder of the hedge fund Alden Global Capital. In 1985, Randall Smith founded his first investment firm, R.D. Smith & Company. Along with aerospace, steel, and other investments, it dabbled in community newspapers and TV stations, perfecting what in 1991 the New York Times later call Smith’s strategy of“bottom fishing” — buying companies at well below their value and “profiting from other people’s misery.” (The New York Post dubbed him the “grandfather of vulture investing”). Smith soon became a symbol of the avarice destroying newspapers across the country, a cartoon villain eager to sell off the real estate assets of once venerable dailies in order to build a personal collection of mansions in Palm Beach and The Hamptons.
The 2008 financial crisis created a newspaper feeding frenzy among predatory investment firms, says Julie Reynolds, who has been covering Smith and his current firm, Alden Global Capital, for years. Heavily indebted papers were suddenly available for less than half what they would have sold for before the crisis. These conditions, according to Reynolds, were “the perfect opportunity for Alden to swoop in.”
Reynolds describes Alden’s model as a “chop shop strategy,” which deliberately “disassembl[es] the company for parts.” This happens “by selling off the real estate, selling the assets, but also bringing in profits simply by cutting staff.” Because the strategy succeeded on its own narrow terms, it was adopted by others. As a study by the University of North Carolina School of Media notes, these practices don’t end with investment firms like Smith’s. Rather, “many of the business practices introduced by the investment firms have been incorporated into the strategies pursued by legacy newspaper companies, both the large publicly traded chains, as well as the private ones.” (This would support the thesis of CUNY economist J.W. Mason, who recently argued that finance acts a disciplining mechanism, one that polices markets in various ways that orient them towards profitability above all else.)
The idea of buying distressed companies at rock bottom prices and bleeding them dry is all too familiar now, but “Alden was a pioneer,” says Reynolds. And the model he created continues to shape the shrinking landscape of the nation’s newspapers. Alden’s newspaper division, Digital First — founded in 2013 after Alden bought and merged the MediaNews Group and Journal Register Co. chains— owns 158 newspapers. The difference between Alden and other newspaper chains is their ability maintain 17% returns in an industry where single-digits is the new norm. The North Carolina researchers suggest these abnormally high profits are a result of “cutting newsroom staffing by as much as twice the industry average.”
In 2012, The Denver Post had 184 reporters when it won a Pulitzer Prize for its reporting on the Aurora movie theater shooting. On April 8, 2018, the number was down to 100 when staffers decided to push back, writing a front-page op-ed criticizing Alden, which bought the paper in 2010, for its role in decimating their newsroom. The following day, Alden cut staff by a third, leaving a mere 66 reporters to cover Denver, a metro area with two million people.
While writing this piece, I have been following Alden’s attempt to purchase Gannett — the largest newspaper chain in the country by circulation (Alden is the third) — with a cunning scheme to take over its board. Alden Global Capital’s newspaper division, now rebranded as MNG, has created a website to make its case. When you click on the “About MNG” of the cynically titled www.savegannett.com, the text reads, without a hint of irony, “We Save Newspapers. When other people won’t step up, we do. We save newspapers and position them for a strong and profitable future so they can weather the secular decline.”
It’s not yet clear if Alden can secure the cash or take over the entire board. But if it succeeds, the coup would put Gannett, the biggest newspaper chain in the country and a publicly traded company, at the mercy of a private hedge fund.
“In the United States, we’re used to knowing who owns our local newspaper,” said Reynolds. “At least Gannett is publicly traded, they have to explain to their shareholders what they’re doing, they have to explain to the public what they’re doing, and why they’re doing it. Alden has none of those requirements,” she added.
Regardless of the outcome, the gathering of private capital for acquisitions is quickly becoming the new norm, for newspapers and everything else. According to the Wall Street Journal, in 2017, $2.4 trillion was raised privately compared with only $2.1 trillion through public markets.
If Alden’s “success” and the rise of private finance are any indication, more of the media business — as well as the economy more broadly — will be controlled by investment firms in the future. Currently, just seven of these companies own 882 papers in 41 states. Faced with lower returns, some investment owners are likely looking to sell their lot and reduce their footprint in a dying business. Who might buy the newspapers shed by cost-cutting investment firms is unknown. But if the buyers are just in the business to emulate Alden’s 17% returns, it’s a good bet they won’t be investing in more reporters.
In 2015, the people of Greece voted in a referendum to defy their creditors and reject an austerity package put forth by the EU, the IMF, and the European Central Bank. It took a hardly a week for the prime minister who was elected on an anti-austerity platform to turn around and ram through an even harsher package than the one the voters had rejected. Not long after that, Alden siphoned $73 million from its newspaper division into a “Cayman Island account that purchased Greek sovereign bonds.”
This was a fitting use of Alden capital, since the logic of austerity imposed on the Greek people is not dissimilar to that of the cost-cutting measures demanded by investors like Smith. Those cost-cutting measures, meanwhile, facilitate the long-term dominance of finance over democracy. If there are no watchdogs holding government to account, politicians can cut any deal with creditors they want, or ram through controversial privatizations of public services and goods, because no one is looking. One suspects that the Smiths of the world know this, even if they can never say it.
In an investigation published in 2016, the New York Times helped to illuminate the role of private equity in everyday life. The paper found that services once provided by government, like water systems, roads, ambulances, and fire departments, are now owned by or managed by private equity firms. Though the Times noted the growing role of investment firms in managing newspapers, the investigation did not make explicit the obvious irony: coverage of finance has been severely limited by the punishing discipline of a financialized media industry. Even when there are reporters left to do the digging, it is harder to hold institutions accountable when they are controlled by secretive investment firms, free from oversight and pesky public records laws.
Debt and finance as forms of leverage are ancient technologies, and as American as apple pie. In order to forcibly assimilate Native Americans and take their land, Thomas Jefferson devised an elaborate scheme of government-run trading houses that would undercut private traders, entrapping indigenous peoples in a cycle of debt, and forcing them to offer their land as repayment. For what it’s worth, it was also Jefferson who said, “If I had to choose between government without newspapers, and newspapers without government, I wouldn’t hesitate to choose the latter.”
Will Meyer is a freelance journalist whose work has appeared in Columbia Journalism Review, the Nation, and Jacobin, among others.
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Last edited: April 11, 2019
Author: Will Meyer
Editor: Alexander Zaitchik
Artwork: Photo by Casey Allen on Unsplash