Neal St. Anthony: Knight Ridder chief saw future, but time wasn't on his side

Tony Ridder, like a lot of newspaper kingpins, embraced the Internet as the future in 1998.

He even spent millions to relocate the throne of his Knight Ridder publishing empire from old-economy Miami to high-tech San Jose in California's then-booming Silicon Valley.

"There is no doubt that new technology and the emerging power of the Internet will greatly affect how people will get their news and information," Ridder said in 1998.

Ridder was right. A decade after the commercial birth of the Internet, the boom in online information and advertising outlets has resulted in more competition and less profit for traditional newspaper publishers.

The entire newspaper industry has been under siege, with drops in paid circulation at bastions like the New York Times and the Washington Post. Publishers are scrambling to increase advertising and profits at their Internet-based newspapers, which largely are available for free on the Web.

Paid circulation at Knight Ridder's flagship San Jose Mercury News declined 13 percent over the past five years and operating profits were eroded -- an outgrowth of the digital economy bust in Silicon Valley.

Ridder's 1998 decision to relocate headquarters to San Jose was a bold embrace of the digital economy. But by 2001, the tech bubble had burst and Knight Ridder's flagship had sprung a leak that he and his managers scrambled to plug with across-the-board cost cuts.

With 32 newspapers in markets around the country, including Philadelphia, St. Paul, Dallas and Kansas City, Knight Ridder's woes surely spring from more sources than just San Jose.

But four Knight Ridder dailies -- in San Jose, St. Paul and the two in Philadelphia -- have pretax profit margins below 12 percent, according to securities analysts.

The Mercury News suffered from a huge loss of related help-wanted ads after 2000, part of it due to the tech meltdown and part to competition from the Internet.

At its peak of profitability, in 1999-2000, the Mercury News made more than $100 million, compared with an operating profit of about $20 million on revenue of $235 million last year, according to Morgan Stanley.

In Philadelphia, the Inquirer and the Daily News have unions and high labor costs in a city with a still-lagging business climate. And they face strong competition from a ring of healthy suburban papers. In St. Paul, the Pioneer Press has trouble competing against the larger Star Tribune.

Overall, Knight Ridder had a 13 percent pretax profit margin from continuing operations in 2005, according to documents filed this month with the SEC. That's down from 2004.

When anxious shareholders forced his hand, Ridder finally agreed this month to sell his empire -- including three California properties -- to the much-smaller McClatchy Co. (owner of the Star Tribune). And when McClatchy announced it was keeping the Miami Herald but selling the Mercury News along with 11 other dailies, Ridder reportedly was stunned.

Maybe he should have taken a closer look at the numbers. According to Bloomberg News, the largest public companies in California have delivered a total return to shareholders of about 18 percent since 2000. A similar index for Philadelphia-area companies rose just 10 percent.

Florida-based companies, meanwhile, have delivered a 50 percent return and Minnesota companies about 73 percent.

Growing companies in healthy markets can buy a lot of advertising. Shrinking companies in struggling markets? Not so much.

Knight Ridder's online business is booming. But online readers, with rare exceptions, get their newspapers for free. And online business still accounts for less than 10 percent of newspaper revenue at Knight Ridder and McClatchy.

Essentially, big newspapers are swapping a portion of their high-margin, print-related advertising revenue for lower-margin online revenue. They're not getting enough to make up the difference. And that's hurting profit margins.

Advertisers pay less to display their wares on the likes of MercuryNews.com and StarTribune.com.

McClatchy had earnings before taxes of $263 million in 2005, a 22 percent margin on net revenue of $1.19 billion.

The Star Tribune, also a unionized paper, accounts for a quarter of McClatchy revenue.

The Star Tribune peddles 378,000 papers daily, about twice the circulation of the Pioneer Press. Its annual revenue of $308.5 million, flat in 2005, is 2.5 times that of the Pioneer Press. The Star Tribune has an estimated pretax profit margin approaching 20 percent, compared with about 10 percent for the Pioneer Press, according to analyst estimates and company filings.

A spokeswoman for McClatchy, which doesn't break out the profitability of individual businesses, declined to discuss Star Tribune profitability.

Tony Ridder, 65, was trying to restore profit margins with budget cuts and asset sales last year when powerful outside shareholders forced him to auction the company that his family founded but that it no longer controls through stock holdings. Knight Ridder was vulnerable because it has one class of stock and only a fraction of it is still owned by the Ridder family. McClatchy, however, has two classes of stock and 93 percent of the voting shares are held by its family members and are not publicly traded.

McClatchy's stock is still controlled by the founding family. It has voiced patience and confidence, even as shares of the Sacramento-based company have fallen by 37 percent over the past year, from about $76 per share to a close of $47.96 on Tuesday.

Gary Pruitt, 48, McClatchy's CEO, is now the architect of the biggest capital play in a struggling industry. He's been granted the money, rope and time by shareholders and lenders to try to resurrect circulation and profitably expand Internet-related businesses. His golden-boy reputation and a lot of money and jobs are on the line.

Tony Ridder probably was right about the future of newspapers being electronic. He just ran out of time trying to prove it.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com