MediaFile

Moody’s debt analyst John Puchalla analyzed the state of newspapers today. Conclusion: The sun rises in the east, usually in the mornings. In other words, newspapers are still doomed.

Despite the report’s obvious conclusion, it’s worth reading for Puchalla’s analysis of the cost structure that newspapers deal with. Here’s an excerpt from the press release announcing the report:

Currently, a structural disconnect exists in the newspaper industry’s cost structure. Just 14% of cash operating costs, on average, are devoted to content creation — the primary value creation activity — while about 70% of costs support the print distribution model and corporate functions. The remaining 16% of cash operating costs relate to advertising sales — another critical task that drives the majority of newspapers’ revenue. The overall imbalance limits the industry’s flexibility to overcome competitive threats. …

Most newspaper companies have moved only slowly away from in-house print production and distribution, said Moody’s. Thus, high operating leverage for the industry remains, and is creating intense pressure on cash flow as revenue declines.

“Ultimately, we expect the industry will need to reverse the vertical integration strategy through cross-industry collaboration and outsourcing print production and distribution processes,” said Puchalla. “Although newspapers may lose some of their in-house control over press time, they would also release resources to beef up investment in content and technology.”

Moody’s published its “U.S. Bottom Rung” on Tuesday a list of companies that the corporate credit ratings agency thinks are at most risk of defaulting on their debt. There are 283 companies on the list, which is current as of March 1, including some near and dear names for people who love the media business.

Why do this? The Wall Street Journal offers some possibilities:

“Sounds like Moody’s may be trying to get out in front on defaults, given they were perhaps a little behind on subprime mortgages and commercial mortgage-backed securities,” said David Resnick, managing director at investment banking firm Rothschild Inc. which works on many corporate bankruptcies and restructurings.

Moody’s and credit-rating rival Standard & Poor’s Corp., were criticized by the Senate in hearings late last year about the effectiveness of the ratings agencies.

Moody’s thumbed through the newspapers of the United States on Monday and concluded what many of us know: the outlook is negative. The summary: ad revenue falls, less money comes in, newspapers have to cut back to survive and it gets harder to pay their debt.

Having said that, this newspaper beat reporter found signs of a thaw, just like a crocus peeking through snow.

First, the negative:

The negative outlook for newspaper-ad revenue has worsened in the past six months as bleak data on the economy mounts, says Moody’s. Rising job losses, the weak housing market and tighter credit availability raise concerns that consumer spending will weaken further, extending and deepening the economic downturn.