Starving Canadian media giants – A case of real fake news

This review originally appeared in the September/October issue of the Canadian Centre for Policy Alternatives magazine The Monitor. It was subsequently reprinted in The Tyee.

The Tangled Garden: A Canadian Cultural Manifesto for the Digital Age
Richard Stursberg (with Stephen Armstrong)
James Lorimer & Co., April 2019, $24.95.

When U.S. television stations set up transmitters just across the border in the 1970s to beam their signals into Canadian homes, and then began selling ads here, it started a trade war that lasted a dozen years. To keep the ad dollars at home, Ottawa passed a law that disallowed as an income tax deduction the expense of advertising on a foreign station. The U.S. retaliated by declaring non-deductible the expense of attending conventions in Canada, which put a serious crimp in our hospitality industry. The dispute was only settled with the 1988 Canada–U.S. Free Trade Agreement.

Plus they stole my cover design!

History is now repeating itself, as many in Canada want to extend our treatment of broadcast advertising to digital media, to stem the flow of ad dollars to foreign giants like Google and Facebook (the FAANGs), which have been siphoning off revenue from newspapers and television networks worldwide. These same voices also advocate taxing foreign streaming services like Netflix, Apple and Amazon, and forcing them to both transmit and fund Canadian content. The billions of dollars available to be clawed back from the foreign digital giants, they argue, would help finance government subsidies to Canadian media, such as the $595 million promised in the 2019 budget to boost journalism.

Richard Stursberg is one of those voices, and he sets out this argument simply enough for the average Canadian to understand in his new book, The Tangled Garden. In doing so, however, he plays fast and loose with the facts and inflates the threat to Canadian media of the foreign digital giants. Stursberg notes that these U.S. companies have so far avoided paying tax in Canada on their services to Canadians due to Ottawa’s reluctance to regulate the internet as it has broadcasting. (The FAANGs presumably pay income tax in their own countries, however, which in the case of Facebook is very low in Ireland.) That will soon change if Stursberg has anything to say about it.

As a consultant, Stursberg seems to specialize in coming up with ways for Big Media in Canada to wheedle money out of Ottawa. For this he was no doubt prepared by his 25 years in Canadian broadcasting, including six years as head of the CBC’s English services. His book tells how he was hired by Rogers, our second-largest media company after Bell, to write a “paper” a few years ago that floated the idea of using tax credits to aid our country’s supposedly ailing media companies—a direct subsidy without the need for any application process. “If the costs qualified,” notes Stursberg, “the payment was automatic.”

That got the attention of Paul Godfrey, at the time CEO of Postmedia Network, Canada’s largest newspaper chain. (Postmedia publishes 15 of our 22 largest dailies but is somehow 92% owned by U.S. hedge funds.) Godfrey liked Stursberg’s idea about tax credits so much that he invited him to dinner with Postmedia’s board. Together with the likes of David Pecker, then publisher of the National Enquirer, who represented the American vulture capitalists, they decided to pitch the idea to other newspaper publishers and “finance a study on how tax credits might work for them.” In this effort Stursberg enlisted the aid of “media economics expert” Stephen Armstrong, a long-time Ontario civil servant who is also now a consultant.

Stursberg tells a fascinating tale about how our news media ended up with the $595 million they are currently deciding how to divvy up. At the height of their disagreement over how the money should be paid out, he recalls that one publisher told him: “At the end of the day, if the money has to be delivered in a brown paper bag late on Sunday nights in the alley, we’ll take it.” But a few hundred million is chump change in Canada’s cultural economy, which Stursberg estimates is worth $54 billion and employs 650,000. The big bailout bucks will of course go to television because it’s the backbone of Canadian culture.

The Tangled Garden is an unabashed exhortation for the “sleepy” Liberal government (a word Stursberg actually uses in a chapter title) to fire up the tax collection machine to pump more money into Cancon. He counts up all the dollars that would flow back to Ottawa and Canadian media companies by taxing the FAANGs, and it comes to billions annually. Making them pay (and charge) HST on their sales to Canadians would bring in $100 million a year just for starters.

But making digital ads on foreign digital media not tax-deductible should repatriate about $1.3 billion inads sales to domestic media annually. Taxes on ads that don’t migrate back north (to Canadian firms) would run an estimated $590 million a year. Making Netflix and other foreign streaming services contribute 30% of their Canadian revenues to fund Cancon, as the national networks are required to do, would bring in an estimated $438 million next year alone. Stursberg does a very good job of shaking money from trees. No wonder Godfrey likes him.

Aside from the wisdom of trying to repatriate tax and ad revenues from the U.S., with a trade hawk like Donald Trump in the White House, the only problem with Stursberg’s argument is its premise. “If the federal government does not wake from its torpor, the major Canadian media companies are likely to collapse,” he warns. “If this happens, English Canada will be effectively annexed by the United States.”

Stursberg claims that big media companies in Canada have suffered “losses as far as the eye can see” due to declining ad sales. Their financial failure would bring about “the utter collapse of Canadian culture,” he colourfully predicts, leaving us with the “arid and lifeless landscape of an abandoned culture.” The closure of Postmedia, which he claims has lost money every year since 2011, “would mean that there would no longer be any local papers in many of Canada’s largest cities.” It and Torstar, Canada’s second-largest newspaper chain, are losing at least $35 million a year, he claims.

This is so much nonsense, to use a polite word. It is the Big Lie of Canadian media.

The big media companies in Canada are corpulent cash cows that grow fatter by the year, as a glance at the financial statements posted by law on their websites will confirm. Bell made $9.5 billion in profit last year (earnings before interest, taxes, depreciation and amortization) on revenues of $23.5 billion, for a profit margin of 40%. Its media division, which includes the CTV network, made $693 million on revenues of $2.68 billion, which were up slightly from 2017. That’s a profit margin of 26%. (Bell made 42.5% profit margin on its $12.4 billion in landline revenues last year and 42.6% on its $8.4 billion in cell phone revenues.)

Rogers made $6 billion in profit last year, up 9% from 2017, on revenues of $15.1 billion, for a profit margin of almost 40%. Its media division, which includes the Citytv network, made a profit of $196 million last year, up by more than half from 2017, on revenues of $2.2 billion, for a profit margin of 9%. (Rogers made almost 48% on its $3.9 billion in cable revenues last year and almost 45% on its $7.1 billion in cell phone revenues.) Making money at that rate, Rogers can afford to hire a lot more media consultants like Stursberg to sing the blues for them. Come to think of it, a small share of its lush cable revenues, which come largely from monopoly internet service provision, would go a long way toward funding Cancon, but that’s the last thing Rogers wants to hear.

Even the newspaper companies are hardly losing money, as my research has shown. While their revenues have gone down precipitously in recent years, they have been able to keep their heads well above water through painful cost cutting, which is admittedly not good for Canadian journalism. Postmedia made $65.4 million in profit last year, up 18% from 2017, on revenues of $676 million, for a profit margin of 9.7%. Of that amount, however, more than $25 million went to paying down its massive debt, which is held mostly by its hedge fund owners. They kept it on the company’s books strategically as an income source after acquiring the former Southam newspaper chain for pennies on the dollar out of the 2010 bankruptcy of Canwest Global Communications.

Even if Postmedia went bankrupt due to debt, however, its profitable dailies would continue to publish under new ownership. You don’t just close down a business that makes $65 million a year. Torstar made $60.7 million in profit last year on revenues of $615 million, for a profit margin of 9.8%. Its profits went down $13.5 million from 2017, however, perhaps due to the estimated $20 million Torstar spent in developing its failed tablet app.

The chains regularly report enormous net losses, but these are only achieved after deducting huge “paper” losses that estimate the reduced value of their businesses. Postmedia is often cited as losing $352 million in its 2015-16 fiscal year, but that was only after deducting $367 million in asset impairment and the extraordinary $42 million expense of severing staff. On an operating basis, it actually earned $82 million that year, of which $72 million went to paying down its debt.

One thing you won’t find referenced in The Tangled Garden is critical research done by real media economists, such as Dwayne Winseck of Carleton University, whose Canadian Media Concentration Research Project tracks the ever-increasing consolidation of our media and the enormous profits they make. When you examine the facts and ignore the corporate propaganda, Stursberg’s garden turns out to be not just tangled, but overgrown with weeds.

Why Are Newspapers Still Here?

Introduction to a panel held at the Association for Education in Journalism 
and Mass Communication convention on Thursday,
August 8 in Hall B of the Sheraton Centre Toronto Hotel

Spoiler alert – it’s very simple. Newspapers are still here because they still make money. Not as much as they used to make. They used to make an obscene amount of money. Now they are having to cut costs as fast as they can just to keep their heads above water. But newspapers are inherently profitable thanks to some economic features such as vertical integration, elasticity of demand, and economies of scale. So while they have slimmed down considerably, they are still publishing profitably despite what you may have heard elsewhere. This is a line of research I have been pursuing for almost a decade, first in this country, then in the U.S., and now in the UK, where I am working frantically to finish a book on the subject.

Meanwhile digital media, which have been widely touted to replace print media, have struggled to find a profitable business model. If they don’t, how can they replace print media, especially if the latter are actually making money? Caught in the middle, of course, is journalism, especially local news coverage, which is what gets cut back most, to the detriment of democracy. It’s a conundrum that policymakers are confronting differently in different countries. Here the apparent solution is to throw money at media, as subsidies worth almost $600 million (about $450 million U.S.) were announced in the last federal budget. This country’s news media are now fighting over how to divvy up the loot, and it looks like most of it will go to old media – newspapers – to prop them up. And in Canada that unfortunately means most of the money will be going to New Jersey hedge funds. It’s a long story.

Let’s start at the beginning. This year marks the 10th anniversary of the so-called Newspaper Crisis. After the long-publishing Rocky Mountain News folded and the Seattle Post-Intelligencer went online-only in the depths of a global recession in early 2009, predictions ran rampant that dozens, hundreds, or even thousands of newspapers would soon fold. Michael Wolff predicted that: “About 18 months from now, 80 percent of newspapers will be gone.” USA Today predicted that: “At least one city – possibly San Francisco, Miami, Minneapolis or Cleveland – likely will soon lose its last daily newspaper.” Time magazine warned on its website: “It’s possible that eight of the nation’s 50 largest daily newspapers could cease publication in the next 18 months.” In the UK, whose newspaper industry I have been studying most recently, media analyst Claire Enders predicted to a Parliamentary committee in 2009 that up to half of the country’s 1,300 local and regional newspapers would close within five years. “Many titles are already running at losses and are being sustained by the good graces of their owners,” she testified, “and that may not last.”

Of course, 18 months passed and far from 80 percent of American newspapers were gone. None of the nation’s 50 largest daily newspapers had ceased publication. San Francisco, Miami, Minneapolis and Cleveland still had a daily newspaper. They still do. After Denver and Seattle, the contagion was confined to Tucson and Honolulu. The recession gradually eased, but more importantly newspapers proved incredibly resilient, able to cut their costs almost as fast as their revenues fell frighteningly by a third and then by half and now by even more. Unfortunately, they were only able to cut costs so quickly by throwing journalists overboard, so while the outlook may have brightened somewhat for newspapers, it only darkened for journalism. None of what I am saying should be taken to mean that newspaper journalism is thriving. Quite the opposite. I am only saying that newspapers as businesses are hanging in there and should for the foreseeable future.

In the UK, five years passed and only about 100 newspapers had closed instead of the 650 Claire Enders predicted. Most of those were free sheets which had proliferated in the 1980s to soak up all the ad revenue, what we would call “shoppers.” The only paid regional daily to close was the Liverpool Post, which was a second-place newspaper. In this country, only one daily folded during the recession of 2008-09, in Halifax. It was immediately resurrected, incidentally, as a free commuter tabloid, Halifax Metro.

This year also marks the fifth anniversary of my book Greatly Exaggerated: The Myth of the Death of Newspapers, which examined the finances of publicly-traded newspaper companies in the U.S. and Canada going back to 2006, before the recession began. It found that none had suffered an annual loss on an operating basis over an eight-year period and that most were posting double-digit profit margins, with some in the 20-percent range. Of course, they were doing so on greatly reduced revenues as classified advertising mostly disappeared and digital advertising came nowhere near making up the difference. Newspaper profits were a fraction of what they were before the print advertising bubble burst in 2004. At the height of the boom, operating profits were routinely above 20 percent, with some in the 30-percent range, as monopoly newspapers could even approach 40-50 percent return on revenue. That is, they could keep 40-50 cents in profit for every dollar that came in the door as revenue. The dailies that folded had all been second-place afternoon newspapers, which in a declining industry proved to be an endangered species indeed. Newspapers aren’t dying so much as newspaper competition is dying. The monopolies that remain are still mostly profitable.

Unfortunately, much confusion has been caused in the public mind by the multi-million-dollar losses often declared by newspaper chains, which tend to grab the headlines. These are “extraordinary” losses only on paper, as under the accounting rules companies are required to regularly revisit the value of their business. If it goes down, as it invariably did for newspapers due to their declining revenues and earnings, that loss has to come off the books somehow. It did so, under the accounting rules, through the annual profit and loss statement as an extraordinary loss. On an operating basis – money coming in the door minus money going out the door – newspapers still have their heads well above water. That should be true indefinitely, as they have proven to be quite scalable enterprises that can be made larger or smaller as necessary. It is important to remember that newspapers began as small businesses, often one-person operations. On their present trajectory they are at worst on track to return to that status.

Much confusion has also been caused in the public mind by declining circulation, which is often pointed to as a harbinger of newspaper doom. This ignores the counter-intuitive fact that most newspapers lose money on circulation sales. They of course make it back and more from advertising. Cutting back on circulation has thus been a way for newspapers to cut costs, as it is increasingly expensive to truck copies farther and wider to readers of diminishing interest to their advertisers. At the same time, they have asked their readers to pay closer to the actual cost of producing a hard copy of the newspaper, often doubling or even tripling subscription rates, as Iris has found. Given the well-proven elasticity of demand for newspapers, many more readers than not were willing to pay more. Much more. The truth is that newspapers now have more readers than ever thanks to the Internet. It’s just that most are reading it for free, and that has to stop if newspapers are to survive.

Greatly Exaggerated in Canada

A paper presented to the Canadian Communication 

Association conference, Vancouver, June 1-5, 2019

Abstract

The newspaper industry in Canada is portrayed as being in “crisis” by research which has exaggerated its financial decline and apparently inflated the extent of publication closures. Publishers have been campaigning for government assistance since the Internet has taken most of their advertising revenues. The two largest newspaper chains are under investigation by the federal Competition Bureau on possible criminal charges of conspiracy and monopoly after trading 41 newspapers between them and closing 37 of them. The country’s largest chain is 98 percent owned by U.S. hedge funds and must send much of its dwindling profits south to pay the interest on the company’s massive debt, most of which the vulture capitalists also hold. Parliamentary hearings on local media recommended government assistance in 2017, after which the newspaper industry bid for a billion-dollar bailout, which was quickly rejected. Over the ensuing year, however, pressure grew on Ottawa to assist the country’s news media financially. Dire warnings have been issued from industry and researchers of the consequences to the country’s news media of government inaction. Inflated estimates were given of the number of newspapers that have already perished. Finally, Ottawa announced in late 2018 a $595 million package of tax credits and other subsidies. Yet the chains are still comfortably profitable, with operating margins of about 10 percent return on revenue. Most of the newspaper closures have resulted from questionable and possibly criminal dealings between their owners that have reduced or eliminated competition. This paper examines the “crisis” in the Canadian newspaper industry and compares the dire warnings of impending doom and the inflated estimates of newspaper closures with publicly available data. It concludes that a campaign for government assistance has been conducted by or on behalf of newspaper chains. Insights into this campaign of disinformation have potentially important public policy implications for the proposed $595 million program of federal government assistance.

Keywords: newspapers, mass media in Canada, media economics

The late U.S. media scholar Ben Bagdikian saw a long-running disinformation campaign he called the “myth of newspaper poverty” obscuring what was instead their considerable profitability. “American publishers have always felt obligated to pretend that they are an auxiliary of the Little Sisters of the Poor,” he wrote in a 1973 article for the Columbia Journalism Review. “This was always amusing, but now that so many papers are owned by publicly traded companies which have to disclose their finances it is taking on the air of slapstick.” Publicly, noted Bagdikian, publishers complained about rising costs. “Privately most have had a different kind of problem: how to get rid of profits.” 

In an almost unprecedented move for newspapers, the Harris papers in Kansas, Iowa, and California actually reduced advertising rates, though their circulation trends didn’t force them to; otherwise their profits would have been beyond [anti-inflation] limits designated by the Government.[1]

A recession in the early 1970s, he noted, prompted publishers to complain of financial hardship in order to justify cutbacks in hiring. “This is mostly hogwash,” claimed Bagdikian. “American daily newspapers are one of the most profitable of all major industries in the United States. And they were during the 1970-71-72 ‘Great Recession.’” Data on newspaper profits were hard to come by, noted Bagdikian, because “of all industries, newspaper publishing is the most obsessed by financial secrecy.” Increased ownership of newspapers by publicly-traded companies, however, had opened a window into the hitherto secretive world of newspaper finances. A typical metropolitan daily with a circulation of 250,000 was very profitable, noted Bagdikian, even in the depths of a recession. “In 1970 such papers showed a pre-tax profit of 23.5 per cent. In 1971 it was 23.2 per cent. The 1972 figures had not been completed at this writing, but authorities agree that 1972 will be better than 1971.”[2]

The poverty myth was used to best advantage by publishers, noted Bagdikian, in campaigning for passage of the Newspaper Preservation Act of 1970, which exempted partnerships between formerly competing dailies from anti-trust laws on the basis that newspapers were a “natural monopoly.” Local newspaper competition was in the midst of an historic extinction, but the survivors would prove more profitable than ever, especially the government-sanctioned duopolies, which had the added benefit of helping to keep any new competitors out. Far from being unprofitable, according to Bagdikian, newspaper owners instead faced the problem of what to do with their overflowing coffers. Reinvesting as much as possible in acquisitions became the preferred method of dealing with excess profits, which according to Bagdikian was “fueling an already frantic race to acquire communications properties.”

Some independent publishers no longer attend the annual ANPA [American Newspaper Publishers Association] meeting because they must spend all their time resisting the embraces of the big chain paper-buyers. One small publisher said he felt “like a virgin stumbling into a stag party.”[3]

Bagdikian’s suspicions had been aroused a few years earlier after a Senate committee in

Canada forced media companies to open their books. The three-volume report of the Senate Sub-committee on Mass Media described what it found as “astonishing.” Media owners were making enormous profits. From 1958 to 1967, before-tax profits at Canadian newspapers ranged from 23.4 percent to 30.5 percent. After taxes, they were 12.3-17.5 percent, compared to 9.2-10.4 percent in other manufacturing and retailing industries. “Owning a newspaper, in other words, can be almost twice as profitable as owning a paper-box factory or a department store,” observed the report.[4] The secrecy surrounding their financial success, the Senate committee declared, was delicious in its hypocrisy. “An industry that is supposed to abhor secrets is sitting on one of the best-kept, least-discussed secrets, one of the hottest scoops, in the entire field of Canadian business – their own balance sheets.”[5] Pointing out that chain ownership of Canada’s daily newspapers had grown to 45 percent in 1970 from 25 percent in 1958, the Senate report urged government action to stem the rising tide of newspaper ownership concentration, but none was taken.

Bagdikian’s landmark 1983 book The Media Monopoly exposed what he called the “best kept secret in American newspapering” – its profitability. [6] The growth of newspaper chains, Bagdikian pointed out, had led to the industry being dominated by only 14 companies. Newspaper chains, broadcasting networks, and other media conglomerates were buying up media outlets at a rapid rate because of the industry’s peculiar economics, which created an almost irresistible urge to merge. By then, the situation was even more dire in Canada, where only three companies published 58 percent of all English-language dailies. The closure in 1980 of the long-publishing Ottawa Journal and Winnipeg Tribune by competing chains, which gave each one another lucrative local monopoly, prompted a Royal Commission on Newspapers which recommended limits on how chain ownership. None were enacted, however, and by 1999 Canada came to have one of the highest levels of press ownership concentration in the world, with the top five chains owning 93.2 percent of the country’s daily newspapers.[7]

From poverty myth to death myth

Fast forward 20 years and the poverty myth has become a death myth. The Canadian newspaper industry of 2019 is in apparent crisis. Publishers have been campaigning hard for government assistance after a disastrous ownership experiment at the millennium left the country’s news media devastated. The two largest newspaper chains are under investigation by the federal Competition Bureau on possible criminal charges of conspiracy and monopoly after trading 41 newspapers between them in 2017 and immediately closing almost all of them. The country’s largest chain is 98 percent owned by U.S. hedge funds and must send the majority of its dwindling profits south to pay the interest on the company’s massive debt, most of which the vulture capitalists also hold. Postmedia Network publishes 15 of the country’s 21 largest dailies after buying most of the second-largest chain in 2014. The takeover was approved by the Competition Bureau after Postmedia promised not to merge the duplicate dailies it thus owned in Calgary, Edmonton, Ottawa, and Vancouver, but it merged their newsrooms nonetheless in late 2015. A newly-elected Liberal government soon convened Parliamentary hearings on local media, which sat for sixteen months and recommended government assistance in mid-2017. The newspaper industry quickly bid for a billion-dollar bailout, which was just as quickly rejected. Over the ensuing year, however, pressure grew on Ottawa to assist the country’s news media financially. Dire warnings were issued from industry and academics of the consequences to the country’s news media of government inaction.

Inflated estimates were given of the number of newspapers that have already perished. Finally, Ottawa announced in late 2018 a $595 million package of tax credits and other subsidies. Yet the chains are still comfortably profitable, with operating margins of about 10 percent return on revenue. Most of the newspaper closures have resulted from questionable and possibly criminal dealings between their owners that have reduced or eliminated competition.