How to evaluate Gannett's offer to buy Tribune Publishing

Gannett revealed today that it wants to buy the Tribune Publishing company for about $815 million. The offer is about 63% higher than the Tribune company's closing stock price last Friday, April 22.

Stock prices for Gannett (blue) and Tribune Publishing (orange) suggest advantage Gannett now
that its offer to buy the Tribune company is public. Prices April 2015-April 2016, from MSN Money.

Gannett says it's a cash deal, implying Gannett won't take on debt. That reduces Gannett's risk if the merger doesn’t generate substantial profits. Gannett and Tribune Publishing are old-line newspaper companies that have been transformed by digital competition. Gannett is probably well aware that other once-profitable newspaper companies failed after taking on enormous debt to finance mergers in the early years of this century.

Gannett, and some analysts, claim the merger will generate millions of dollars in “synergies,” which means reduced production costs. That is easy to say, but hard to do.

Focus instead on the value of the Tribune company assets. Are those assets undervalued at the Tribune’s current stock price? Is Gannett’s offer price still below the book value of the assets?

If undervalued assets are a factor that may explain why, according to Gannett, the Tribune has been reluctant to negotiate a sale. Changes in the Tribune's ownership and board of directors may be influencing the company's response to Gannett's offer. But we should also ask if Tribune executives have evidence that Gannett’s 63% premium is still less than the underlying value of their company.

Sixty-three percent surely sounds good to Tribune stockholders, which is why Gannett went public. But Gannett’s offer might not be the best available deal.

Focus also on the local markets where a merger might consolidate the ownership of local media that currently compete with each other. Consolidation would reduce the elasticity of audience demand. If local audiences have multiple media choices that are all owned by Gannett, that will make it easier for Gannett to sell advertising in those markets.

In a classic economic model, consolidation creates the possibility of increased power to raise prices for the owner that dominates the market. But Google, Facebook and other new media also sell local ads in local markets. One possibility is that Gannett only hopes to gain enough pricing power to become profitable in these markets.

In any case, a post-merger Gannett will have to manage audience demand. Audiences increasingly consume news only on social media sites like Facebook.  The fraction of the audience that leaves social media to visit news company sites doesn’t stay long or visit often.

It’s true, and often overlooked, that about half of newspaper readers still only read the print edition. But the trends are clear, more and more people are consuming news online or on social media.

Gannett will face the tricky problem of (a) trying to stop the migration of audiences away from its traditional or digital media platforms while (b) trying to persuade social media audiences to engage with those platforms.

So, the financials of the proposed deal may favor Gannett. But managing the merger to produce anticipated cost reductions, pricing power, or profits is likely to be challenging.

(A version of this post first appeared on my Twitter account @HughJMartinPhd)

Newspaper industry revenue declines have slowed, but revenue hasn’t stabilized



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Some analysts argue declines in newspaper industry revenue are finally stabilizing. The Newspaper Association of American has released the 2013 revenue figures. I’ve prepared two pictures to see if it revenues have stabilized.

As readers of this blog know, the business model for Internet-based news organizations is unlikely to replace the thousands of journalism jobs that are vanishing at traditional media organizations. Newspapers have always been the major source of jobs for journalists who produce local news across the U.S.. Stabilizing newspaper revenue is critical for preserving some of the jobs that are left.

The chart above shows inflation-adjusted advertising and circulation revenues since 1991. Print advertising revenues peaked in 2000 at about $38 billion, followed by a brief decline.

In 2003 the industry added digital advertising revenue generated by newspaper websites to its advertising figures. Revenue increased slightly that year, and stabilized until 2006.

In 2007 the last recession began, and advertising revenue began a steep decline that devastated the newspaper industry. The recession exacerbated an underlying trend caused by the shift of advertising to websites and search engines. In 2010 the decline slowed, but digital advertising only accounted for 13% of the industry’s total ad revenue that year.

The steep decline in print ad revenue and the small gains from digital ad revenue forced the industry to reconsider its revenue strategies. In 2011, the industry added to its advertising base revenue from niche publications, direct marketing, and non-daily publications. Total ad revenue increased slightly that year, but declined again in 2012 and 2013.
 

The industry generated about $13.7 billion in inflation-adjusted ad revenue last year, or less than half of its peak revenue in 2000.

 

The chart above shows inflation-adjusted circulation revenue has been less volatile. In 1991 newspapers generated $8.6 billion from print subscriptions and single-copy sales. In 2013 newspapers generated an inflation-adjusted $6.3 billion from print and digital subscriptions and single-copy sales.

I’ve written before about the importance of charging subscriptions for access to newspaper websites and mobile applications. Digital subscriptions can slow the loss of print subscribers who will otherwise switch to free access on the Internet. Preserving print circulation is critical because print advertising still accounts for the largest portion of industry revenue.

Some newspapers now offer discounts to encourage subscribers to select bundled digital and print subscriptions. These bundled subscriptions are designed to slow or stabilize declines in print circulation.

Digital subscriptions can also generate new revenue to offset some of the losses from print advertising revenue. And the first chart does show that subscription revenue has stabilized, which may be partly due to double-digit growth in digital subscriptions.1

The first chart also provides perspective on the second chart, which shows the ratio of circulation revenue to advertising revenue since 1991.

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This ratio declined throughout the 1990s when newspaper advertising revenue enjoyed its last period of sustained growth. In 2007, the ratio began a pronounced increase that continued until 2013. If the trend continues, newspapers will generate $1 from circulation for every $2 from advertising in the next year or two.

A naïve reading of this chart would suggest that circulation is on track to replace the advertising revenue that newspapers are losing. But the first chart shows the increase in the circulation/advertising ratio is mostly the result of steep declines in ad revenue. This increases the industry's reliance on circulation, but circulation revenue is not yet increasing enough to replace the ad revenue that is being lost.

So I’m not ready to agree that newspapers revenues have stabilized.

Advertising is still the industry’s primary source of revenue. Ad revenue declines have slowed, but they have not ended. Circulation revenue appears stable, but it still cannot replace the ad revenues that continue to disappear.

Even if inflation-adjusted revenue was steady from year to year, the industry would still be falling behind. An industry has to grow faster than inflation to be considered truly healthy.

I do expect that if enough newspapers adopt economically sensible digital subscriptions, those subscriptions will help stabilize industry revenues. But it’s going to take a couple more years of data before we can tell if that is happening.
1 The amount of revenue from digital subscriptions has not been released. The report only includes percentage changes in revenue. Without the base numbers, it's impossible to know how much real growth has occurred.

What were the Miami Herald's editors thinking?

A badly-conceived "experiment" recently ended when the Miami Herald stopped asking its online readers for voluntary donations to help pay for news coverage.

This had the feel of a gimmick when it began two months ago. As I recently noted, the print editions of most newspapers don't generate enough reader revenue to survive.  They rely on advertising.

So it's hard to take seriously any talk about generating reader revenue to support general news coverage on the web.  Alternate sources of free news are plentiful and likely to remain so.

However, Herald executives may not be entirely daft.  They are continuing efforts to expand online coverage of local communities with news reported by "partners" who live or operate in those communities.

The partners apparently include a paella of local web sites, weeklies, and small dailies. The Herald is trying to attract readers without having to pay journalists and others to produce the local coverage.  This might help the Herald sell more local advertising.

What do the partners get? Access to a larger audience and a share of any advertising revenue generated by the experiment.  Now that is an idea that makes sense.

Google Buzz Privacy Complaints and the Economics of Social Networks

The economics of social networking favor whoever attracts the most users first, so it's no surprise Google used its vast trove of user data to create millions of instant members when it launched a social networking site.

Social networks become more valuable as more people join them, and Google's new site still has fewer users than Facebook. But coverage of Google's new social network -- Buzz -- focused instead on vehement user complaints that forced Google to make multiple changes in the privacy settings.

An estimated 176 million people have Gmail accounts, and Google made all of them automatic members of Buzz. The problem is that Google used information from each user's account to automatically make public a list of their frequent correspondents, along with information from photo albums and other tools that come free with a Gmail account.

It's the "free" part that really caused all the problems.

Google --like its rivals Facebook, Yahoo, and Microsoft -- routinely trolls through e-mail and other user data so it can make money that pays for "free" email and other services. Sophisticated data about who users communicate with and what they communicate about is used to target advertisements that provide the bulk of Google's revenue.

So Google's engineers might not have thought much about revealing to users some of what the company knows about each person's network of personal connections. Google probably was just trying to convince users that Buzz might be an attractive alternative to other social networking sites.

Facebook, for example, claims it has more than 400 million users. Facebook uses a business model that is similar to Google because Facebook collects information on users to sell targeted advertising. So Google cannot be happy about having just 176 million Gmail users.

Social networks become more attractive as they add members because that increases opportunities for each person to, well, network with other members. Nonmembers know that larger networks offer more chances to find interesting people. This cycle can rapidly become self-reinforcing -- increasing size makes the network more attractive, so more people join and make the network even larger.

Google appears to lag far behind Facebook in this competition. Revealing each Gmail user's network of correspondents was just an ill-advised attempt to begin catching up.

A first reaction to the New York Times' plan to charge for some web access

The decision to charge for "frequent web access" to the New York Times web site is almost certainly not intended to generate enough revenue from readers to cover the newspaper's costs.

Instead, the plan to offer access to a few articles free, but charge a fee for more extensive access appears to have three other goals. First, stem the loss of print readers who have shifted to the free web site, second, prepare for distribution over mobile devices such as Apple's new Tablet computer, and third, gather the kind of detailed information about readers that can make the paper more competitive in advertising markets.

The article hints at some of this saying:

Company executives said the changes would wait another year primarily because they need to build pay-system software that works seamlessly with NYTimes.com and the print subscriber database.

Why print readers still matter

Subscriptions are nothing to sneeze at, but U.S. print newspapers have for decades depended on advertising to generate more than 75 percent of their total revenue. Especially telling, industry statistics show the average price of subscriptions has not increased after adjusting for inflation.

So it's not realistic to expect any general interest newspaper will generate significant amounts of reader revenue in the far more competitive market for news online.

The Times will not charge print subscribers for access to the web site. This suggests the paper has recognized that loyal print readers will move to the web if they can get free access there.

And print subscribers are still far more valuable than web readers. The advertising revenue per subscriber in print is almost certainly much higher than ad revenue per reader on the web, so the Times needs to stem this loss.

Betting on mobile distribution

As for distribution on mobile devices, the Times is probably hoping consumers find electronic readers preferable to the smaller screens on mobile phones, and will therefore pay a bit to have the newspaper delivered in a superior format.

The companies that make these devices, Apple, Amazon, and others, are probably hoping semi-exclusive access to the Times will attract buyers for their devices. Of course, if this works those same companies will be able to extract a hefty fee from the Times for the privilege of appearing on their device.

The real goal of the Times is probably access to user information collected by Apple, Amazon, et al. An example is information about a user's location that comes with access to wireless networks that readers use to download newspapers and books. I will be surprised if Apple's device does not include GPS to improve the quality of tracking data (Yes, I know consumers also use GPS and might turn it on and off).

Knowing someone's reading habits and where they go to read is, of course, the kind of information advertisers crave because it can be used to make a precisely targeted pitch for a product.

Gathering reader information on the web

The Times will also be using its website to gather equally detailed data about its most loyal readers, those willing to pay for access. Just imagine the advertising-friendly statistics that might generated when information from print, the web site, and mobile distribution is combined.

New York Times threat to close Boston Globe prompts some weird criticism

Six years ago the New York Times Co. paid more than $1 billion for the Boston Globe, bringing two of the most respected newspapers in the United States under common ownership. But this marquee purchase is ending badly as the Times Co. threatens to close the Globe if its unions fail to make major cost concessions.

This threat has stirred understandable shock, given the Globe's reputation as a newspaper dedicated to journalism that represents the profession's highest ideals. The first order of business for those not directly involved might be considering the best way to fend off the threat, even though some believe it's just a hard-nosed negotiating ploy.

So, it's strange to see the folks at the Huffington Post -- who routinely attract audiences by featuring stories from newspaper web sites -- coming to the conclusion that this is the wrong moment for the Globe to launch a marketing campaign.

This story by the Globe's staff touches on the underlying problem, the risk that more and more people in Boston will decide the paper is not necessary to their lives. This marketing campaign that the Globe launched today shows executives are trying to address that problem.

Of course, marketing alone will not save the Globe. The underlying problem is a large debt and a steep decline in advertising revenue that makes it impossible for the Times Co. to continue paying off the debt.

But it's far from clear that advertising revenue will come back to the Globe when the recession finally ends.

Ad revenue follows readers, not sentiment, and readers in markets like Boston are shifting to new, more convenient media to access the news. Even if readers turn to the Globe's website for news, ad revenues will be much smaller because competition is more intense on the Internet.

Whatever the marketing campaign costs, it probably won't decide the Globe's immediate fate one way or the other. But the last thing the Globe can afford right now is to reduce efforts to attract readers and advertisers.

Building A Newspaper’s Online Audience

By Stephen Lacy
Professor, Department of Communication and School of Journalism
Michigan State University

Newspapers are struggling with how to attract online visitors. This reflects the need to replace readers who are leaving the print newspaper, but more importantly, increasing online visitors will be essential for attracting advertisers to newspaper Web sites. Traditionally, advertisers follow audience and not the other way around.

As a result, how newspapers can gain online visitors remains the primary issue deciding the future of newspapers. A one-size-fits-all solution is unlikely to emerge. The key to attracting visitors will vary from market to market and from demographic group to demographic group.

However, general observations serve as a guide for managerial decisions. This commentary offers some of those general observations about how news organizations can make the transition from the current upheaval to a more stable time.

Reasons to experiment

* The high profit margins that news organizations have enjoyed during the last 40 to 50 years cannot be maintained when advertisers can go straight to consumers rather than using media, and when competition for people’s time has become so intense. Companies will have to adjust profit goals or they will cease to exist. In times of industry restructuring, potential profit margins shrink and surviving restructuring requires higher levels of investment.

* Although businesses can bypass news media to reach customers, the Internet is a medium where people must purposefully seek information, and even then, it is not always easy to search efficiently and effectively. Therefore, businesses still need to create awareness of their presence in a market and develop a brand in people’s minds. News organizations need to generate large local audiences and effectively segment them to generate advertising support. Advertisers will still need to reach buyers through media, but the need will not be as great before the Web developed.

* News organizations will need to create multiple forms of financial support. This can range from e-commercial to selling specialized information to small audience segments. The exact form of new revenue sources will vary from market to market and will need to be determined through experimentation.

* The digital media distributed through the Internet does four things well: 1. It provides depth of news and information at low cost. 2. It delivers news and information quickly. 3. It is multimedia. 4. It is interactive. Newspapers will need to use all of these Internet strengths when generating content on their sites.

* The ways news organization can best use the Web’s strengths for delivering journalism and attracting audiences remain unclear. The immediate future will require news organizations to experiment with a variety of content to discover how to best serve their audiences.

* This experimentation must be combined with formal and informal evaluation of reader feedback. Newspaper companies need to conduct periodic market research about the news and information their audiences need and want, the best ways to present that news and information, and types of interactivity their audience members want and need. But the companies also need a continuing, formal system for acquiring feedback from a wide range of audience members.

One newspaper's response

Uncertainty is the biggest problem underlying this transition from print domination to more online distribution. The appropriate response to uncertainty is experimentation with a variety of content based on research. But what does it mean to experiment with content on news Web sites?

There are more than a few sites that are trying to figure out what will and will not work, but one that is seriously experimenting with content is the Web site of the Las Vegas Sun.

The Greenspun family, which has owned the Sun since its inception in 1950, has committed itself to extensive investment in its Web site. Under the leadership of Rob Curley and Josh Williams, with whom I discussed the Sun’s online future in May, the Sun’s revitalized Web site is founded on a tradition of strong local news coverage with a commitment to developing new ways for expressing that coverage.

Experimenting with multimedia

If you visit the Lasvegassun.com, you will find news stories, blogs, photographs, and video about events and issues that concern the city of Las Vegas and surrounding areas, just as you will you will on any modern newspaper web site. The more experimental work can be found on the multimedia page.

The Sun Web team is emphasizing news video that provides background about important issues, multimedia presentations that deal with history and the nature of the community, and databases that allow visitors to customize the information they want.

Examples of the Sun’s video include interviews with families of some of the nine workers who died on Strip construction sites during a 16-month period. The video, titled “Cost of Expansion,” fits well with the Sun’s traditional investigative story about these deaths.

The Sun also includes an interview with two Iraq War veterans who have very different opinions about the war. The sharp contrast between their views seems to summarize the national debate that has occupied us for the last few years.

The Sun also emphasizes “evergreen” content about the city. This includes a video history of Las Vegas and interactive maps of downtown Las Vegas, the Strip, and the Valley. The maps allow you to see what the city was like at various times, along with important events and entertainers from that time. The map includes icons representing important buildings. If you click on an icon, a popup will reveal information about the location, size, and history of the building. In some cases, you can see video of the building’s implosion.

The interactive maps are really databases presented in a graphic form, and the Sun offers others. The site has a Flight Delay Generator , which allows a visitor to enter a flight number and find out how late it will be. An interactive map allows you to go to various airports around the nation and find out the percentage of flights from that airport that arrive late at Las Vegas McCarran Airport. The site has a variety of other data about air travel to Las Vegas.

Another interactive map was developed to go with a story about prescription drug abuse, and it allows a visitor to examine state by state use of six prescription drugs over a decade. These interactive maps are experiments in the user friendly, interactive presentation of databases.

Curley, president and executive editor of Greenspun Interactive, recently wrote about plans and some of the developments at the Sun in his blog.

Take risks, don't be defensive

This is not to say that the Lasvegassun.com has found the solutions to the problems confronting news organizations, nor that the content it produces is perfect. As with all news, errors are inevitable. The point is that the Sun is currently doing what all news organizations need to do--experimenting with ways to build its audience. Many news organizations have taken defensive approaches to the Web, but the Sun management seems to think that the best defense is a good offense.

Out of fairness, it should be mentioned that Lasvegassun.com has some advantages not enjoyed by all news organizations. In addition to the Web site, Greenspun Media includes the Las Vegas Sun, seven weekly newspapers in the Hometown Community News group, several local magazines, such as Las Vegas Magazine and In Business Las Vegas, and a low-power TV station. These media provide a wide range of community content that can be leveraged online.

Of course, having access to content does not guarantee its effective use. The long-term goal of the Lasvegassun.com management team is to take advantage of these content sources to create a Web site that will dominate the local Web market.

In addition to the commitment to experimentation, the Lasvegassun.com approach incorporates all of the Web’s strengths into the site—depth, speed, multimedia and interactivity. Many newspapers have not yet committed to exploiting all of these strengths.

Although the nature of newspaper Web sites will vary from market to market in meeting community needs, this does not mean each newspaper site will be unique. Few ideas are totally new. Newspapers’ experimentations should “borrow” ideas, content forms and presentation from any place they can find them. Lasvegassun.com is one. It would help newspapers to share as many experiments as possible.

Mortgage crisis threatens media companies too

The $20 billion deal to sell Clear Channel Communications, which owns hundreds of radio stations across the country, is fading, another potential victim of the mortgage crisis.

The Clear Channel sale was announced months ago, but six banks that agreed to finance the deal are getting cold feet. The banks contend the original terms of the deal would place them in the ranks of lenders who've been bitten in all kinds of unexpected ways by cascading effects from the collapse of the market for subprime mortgages. Bain Capital and THL Partners, the private equity firms buying Clear Channel, are suing to get the financing restored, according to The New York Times.

Newspaper companies are vulnerable

This development also reinforces questions about the sale of several large newspaper companies that left the buyers with large amounts of debt. Ordinarily, these companies might not be affected by the shaky credit markets because their loans would have been for very long periods, with the actual newspapers providing collateral. Advertising revenues shrink whenever the economy turns down, but historically that was a short-term problem for newspapers. Many companies responded by cutting variable costs, like wages and benefits until advertising began to expand again.

But it's likely that long-term declines in newspaper advertising revenues will accelerate in the current slowdown and may not recover. This is not a helpful development given extraordinary levels of concern about the true state of financial markets. The Tribune Co., which was sold in December, has been put on a watch list, meaning its credit rating is under review. The $8.2 billion sale put the company deeply in debt.

Alan Mutter's Newsosaur blog argues credit problems could potentially cause severe damage to newspaper companies already weary from repeated rounds of cost cutting. There is a lot to like about the new technologies and media that are siphoning audiences and advertising from old media like newspapers. But the plight of these once proud companies, the people who work for them, and their readers, is nothing to celebrate.