With Chapter 11 Filing, Can a Philadelphia Publisher Make a Case for Viability?

Journalism's most familiar and enduring business model, the advertising and subscriber supported newspaper, continued to unravel this week as Philadelphia Newspapers, publisher of The Philadelphia Inquirer and Daily News, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The filing follows a path recently selected by the owners of the Minneapolis Star-Tribune and, on an even larger scale, by the Tribune Co., owner of the Chicago Tribune, Los Angeles Times, Baltimore Sun and other newspapers in the U.S.

The filings are a wise move for the publishers, who can use the protection from creditors to buy the time they need to prove that they have a viable business model, according to Wharton finance professor Franklin Allen. If the bankruptcy court approves the protection request, the newspaper company will continue to operate normally while it restructures its debt, probably forcing lenders to settle for only a portion of what they are owed. The company can also use the filing as a lever to extract concessions from its employee unions. More such filings are likely as newspapers watch their main revenue source — print advertising – evaporate. "The key issue is whether the managers' view of their operations' viability is the same as the lenders'," says Allen. "It's going to be a difficult case to make. As my son said this morning, 'Who reads newspapers anymore?'"

Actually, more people than ever are reading newspaper content — but they're reading it online, where the content generates just a fraction of the revenues that newspapers derive from their print product. That dilemma was explored in a recent Knowledge at Wharton article titled, Urgent Deadline for Newspapers: Find a New Business Plan before You Vanish, in which Wharton professors noted that some forms of journalism would likely be supported by more than one of several business models, ranging from philanthropic support to niche services. Some of the models might require a rethinking of traditional journalism values, such as balanced reporting and the hard-and-fast separation of news content and advertising. "Those that [survive] will do so by getting off their high horse and doing things that would have been commercial heresy," Wharton marketing professor Peter Fader said in the article. "Imagine a New York Times book review with a link to Amazon."

Lawyers for Philadelphia Newspapers will begin making their case in a Philadelphia courtroom today. Their challenge may be made a bit more delicate by a fact made public in the bankruptcy filing: Brian Tierney, publisher of The Inquirer and CEO of its parent company, received two pay raises in 2008: from $600,000 to $618,000 in May, and then to $850,000 in December. The company said in the filing that he got the raise because he had assumed the dual role of publisher and CEO in 2006, without being paid extra for more than two years. At the same time, the newspapers' unions accepted pay cuts even as their ranks were diminished by layoffs and buyouts.

For more information: Tierney explains the filing in a podcast on Philly.com.