Puchella's report says just 14 percent of newspapers' cash operating costs, on average, is devoted to content creation, while about 70 percent of costs are devoted to printing, distribution and corporate functions. The remaining 16 percent of costs are related to advertising sales.
That means newspapers are spending too few resources to the principal revenue driver, the actual editorial content, and most of its money on delivering it to consumers. In any business, this would be a recipe for disaster (can you say, "GM?").
This recipe can only lead to future credit ratings downgrades. Most publicly traded newspapers already have ratings below investment grade. But brace yourself for what's to come, Puchalla warned. High fixed costs plus high debt equals tight cash flows and decreased revenues.
If newspapers can't monetize the content in new digital channels at the same level as with print, or cut structural costs enough to keep up with the changing competitive environment, the prospect of additional recapitalizations or shutdowns will grow, adding further pressure to ratings.
This disconnect is a legacy of the industry's vertical integration beyond content creation and into the production and distribution of newspapers.
Ultimately, we expect the industry will need to reverse the vertical integration strategy through cross-industry collaboration and outsourcing print production and distribution processes. 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.