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October 8, 2007

Internet competition, newspapers, and video rentals

By Christopher Alleva

In what may be a preview of coming attractions in the newspaper business, Movie Gallery, the largest retail DVD rental operator has filed a prepackaged Chapter 11 bankruptcy petition. 

Taking on big liabilities at the wrong time to buy out competitor Hollywood Video for $1 Billion in 2005, the company collapsed under the weight of the debt in the face of a huge decline in the retail movie rental business. Companies often succumb to temptation when they buy competitors out in what turns out to be false bottom for the business. Several newspapers publishers made this mistake when the they bought papers in 2005 and 2006. Moreover, like newspapers, Movie Gallery confronted the disruptive technology of the internet and digital cable that made their retail distribution channel obsolete.


Last week we detailed the New York Times Company's financial condition. The Times is saddled with substantial debt from the purchase of the Boston Globe and other New England properties in a rapidly deteriorating advertising market.   

The Times'  situation is not nearly as dire as others in the Industry. In last week's post I calculated Z scores, an index used to forecast bankruptcy risk, for the New York Times (NYT) and several key competitors, including the Washington Post (WPO), News Corp (NWS), and the McClatchy News Group (MNI) using the 10K and 10Q reports. Since then I did the calculations for four more newspaper publishers, Gannett (GCI), Journal Register (JRE), Lee (LEE), and  Scripps (SSP). The results are consistent with the respective business conditions facing each company  

 

NYT

WPO

NWS

MNI

GCI

SSP

LEE 

JRE

Z Score 9/2007

1.835

4.118

2.139   

0.812

2.755

4.137

1.282

0.752


News Corp., The Washington Post, Gannett and Scripps all score well the above 1.8 high risk threshold. These companies are diversified communications media companies with a number of high performance segments offsetting the structural decay of their newspaper properties. The other companies in the danger zone are all mainly pure-play newspaper businesses that made the fatal decision to buy out competitors at a false bottom similar to Movie Gallery's bad move.

McClatchy, Lee. The Journal Register and to lesser extent the New York Times should be placed on the watch list. Is this a preview of coming attractions? Perhaps
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