My worry with the recent strength in newspaper valuations

Hello everyone, after a long hiatus I'm back. Actually I'm now a different person, and there will be more on that later. Still a former insider, and still one that loves both journalism and business. The change hopefully will reinvigorate discussion. Sooner rather than later, I'll share my background. The former "owner" will journey forever in anonymity.

Recently publicly owned newspapers have had more than a bit of a renaissance. In the last 12 months, some stocks have been up 300% or more. While this is still lower than what they were worth in the past, it certainly an impressive return from the dire straits once feared.

What newspapers have done is engage a "core" strategy. They have recognized that 80-90% of their revenue is derived from the print version, and they have done everything they can to protect that stream. They've raised subscription prices, cut some ancillary coverage, and focused on delivering local news and advertising. Revenue isn't exactly up, but the demand for subscriptions despite the cost increases has emboldened the revolve of many publishers. They're now very confident their product can ride out this storm and emerge damaged, but intact on the other side of the recession.

It's this confidence that's my greatest fear.

You see, I don't think it can go on forever. Month after month, I'd hear of "experiments" where a reasonable sized advertiser would reduce or divert their spend to determine the return on investment. All too frequently they'd discover they weren't making their money back and would either leave forever or comeback at a greatly reduced rate.

What about raising prices for content further? That can't happen forever either. It's still a very reasonable expense, but it's rapidly approaching the cost of an internet connection. A year could buy you a Kindle. The alternatives for delivery are becoming more compelling.

Like it or not, a big part of newspapering is actually manufacturing a number of products and bundling them together. As volume falls, scale falls as well making the product more expensive to produce.

It's all bad in the long term. There are more compelling delivery systems. Advertisers flee and there has to be a limit to the price of the content.

Furthermore this overconfidence will convince them NOT to invest in emerging and new media platforms as they should. The time to invest is far in advance of change, not after this change is evident. Frankly, change has been evident for some time. The Internet is still an early medium, and the pullbacks that I feel now are scary for the long term health of the industry.

Sources of the newspaper stock rally

Tracking newspaper stocks lately has been more than interesting. Since mid July, many of the publicly traded stocks have mounted rallies far in excess of the general stock market rally. From July 10 to August 24 (chart), Gannett (GCI) is up 156%, AH Belo (AHC) is up 290% and McClatchy (MNI) is up 364%. Some stocks in the basket are up less, like the New York Times (NYT) up a mere 67%. The real question in my mind is why these companies have come back from the brink and delivered some startling returns.

A few of my thoughts:

1. Dare I say that the sector was beaten down too far? While no one questions that these companies are in serious trouble, the question is how much runway they have before the point of no return. With bankruptcy from Tribune and looming issues at other papers, it seemed the end was perilously close. However, there might be a bit more room than everyone thought six months ago. It wouldn't have surprised me to see a major city without a daily by the end of the year if you'd asked me a few months ago. Right now, that seems at least a bit further off.

2. Public plans to start charging for content on the Internet give some more hope that news organizations can find a sustainable business model after print. While I remain unconvinced about public willingness to pay for news content, even the notion of experimenting is hopeful for the sector.

3. There is real asset value in all of these companies. Sure, many are saddled with debt, but they do own some real valuable assets they have been able to accumulate during their best times. Real estate, venture investments, and other assets like art or sports teams. For a while it seemed like newspaper companies were willing to jettison it all at fire sale prices to keep the core afloat. Unfortunately, they were doing it at the worst possible time. The extended runway (see 1 above) lets them wait a bit more for an opportune time to sell if the need be. I recall hearing absurd valuations for assets like cars.com which is owned by shared interest from a number of newspaper companies.

4. Gannett and McLatchy performed well ahead of expectations, at least in terms of earnings. I'll admit a strong bias toward topline goals, so this one impresses me the least since they missed in revenue, but scored well in expense reductions. The story is that the companies have done a better job managing expenses than expected, and are prepared to weather more bad times. If times turn around, they'll be in that much better shape. Since there's somewhat a feeling of recovery, this translates into a buying and growth opportunity.

5. There's still interest in newspapers. While deals aren't getting done yet, there are still a great number of people that want to give publishing a go. A few papers could get swapped, sold or spun off in the near future. Oddly enough this "exit" could be good for shareholders who get to claim future value in one quick transaction. To me, this is the biggest driver of all. However, without the ones above it doesn't really matter.

Even with all of the reasons above, I'm still not bullish on the sector. It's my guess that a couple of these companies will do well, but most will return to the slow slide. I just couldn't tell you which one or ones is likely to be the winner(s).

Is the future of the newspaper twitter? Yes

On one level it is patently absurd that the depth and expert observational skills could ever be replaced by a technology that centers around 140 character bursts. However, if one actually looks at the way most people read the paper, and newspaper websites you might not think I'm that far off base.

First, people are famous for scanning the headlines. It has often been stated by long time readers that they read the paper from cover to cover in less than 30 minutes. Unless they have extraordinary powers of comprehension and word recognition, it's highly unlikely that they actually read every word. Twitter is pretty much nothing but the headlines. The shortened links that many use from sources like bit.ly offer a reader the opportunity, but not the requirement to read deeper.

Second, nothing could be more immediate than twitter. There have been plenty of incidents of people tweeting directly from the source of a major newsevent. The most famous was the on the scene twitpic of the plane in the hudson river. In this age of communication, going home to write about an event, or even looking for a hotspot to type something in to your laptop is just too darn slow. The short format can deliver immediacy and limit the burden on the newsgather-er. That is far from true of the articles that most citizen journalists are expected to contribute to their hyper local paper.

Third, the follower system can deliver the often idealized individual customization missing from the bulky newspaper. If a person wants to they can select to follow a favorite sports team, a couple of key causes, areas of personal interest, and a specialist with recipes for foie gras. They'll only get that info when there is "news" unlike even a newspaper website that they have to check and search to see if there are stories of interest. Twitter can fulfil the pushed power of a subscription, and deliver it as it is happening.

However, twitter has the same issue as newspaper websites, by breaking the bulk of content into efficient snippets, it is extraordinarily difficulty to monetize this content.

As dour as this might seem, there is one thing that newspapers might want to consider. They can use twitter to enhance their content. From the basics of the observation(s), they can use their expertise, experience and contacts to build relevance what might otherwise have been a singular event. What I'm saying in short is that twitter might eventually become the single best source that a journalist could ever have. A million eyes watching everything that happens in a city, and looking for someone to connect the dots.

Gannett's layoffs are now an ad?

From the kick a company when they are down file, I just noticed that one of the ads on my blog was for lawyers to represent employees from newspaper companies that are laid off.

A sign of the times to be for sure.

However, if a case went to trial, it had better resolve pretty quickly. At this rate, it looks like there's only one law chapter that most corporate council cares about. That chapter is number 11.

(Note: No disrespect intended to those potentially on the chopping block. I know it's stressful and I sincerely hope that that everyone is honorable and decent to those who've been the life blood of Gannett and plenty of other media empires. I'd want for there to be no need for ads like that.)

What will I write about when there aren't newspapers anymore?

This will be a bit of navel gazing, but it's becoming increasingly clear that some time in the near future the newspaper as we know it will cease to exist. While I don't doubt there will be some distribution of time sensitive information via a printed and distributed network, it will have to be a significant change from the status quo. It could be unrequested distribution like the Express chain of papers, weekly tabloids similar to the alternative press, or a premium offering targeted only at the information elite at an increased price. Regardless, newspapers as we know them today are clearly suffering from extreme atrophy and one day will undergo a metamorphosis.

So the question I've been asking myself is: what is to become of me and this blog?

This domain is clearly tied to the discussion of an "ink on paper" news business. Will we still call them newspapers when they are only on the Internet and/or Kindle? If they go away, those of us chronicling their decline and offering advice will go away as well.

These questions have caused me a bit of blogger's block.

I have hope that a new model will emerge that makes some sense. There's a future in news, but not necessarily paper.

Unfortunately newsbiz and localnewsbiz are already taken as domain names, though neither are active. A further unfortunate truth is that i monetize more poorly than newspapers, so I will be buying neither.

Gannett tries furlough as alternative to layoffs

Gannett today announced they would force one week of unpaid leave on most of their US employees for the first quarter. Just a rough estimate would tell you they expect to save 5-7% (less than 1/13th) of their hourly costs in the first quarter after you take in to account the number of people that will get exempted and benefits that will still get paid.

The move raises a number of questions in my mind. The first and foremost is: will they continue the tactic each quarter until they recover? It's a strange method to say the least, but it is an "easy" way to avoid layoffs and spread the misery equally.

The move, by its sheer nature, tells you they can get along with 5-7% less labor. You'll get one less week out of all of the people on vacation, which is about 1/13th of the work product you'd normally expect. They've even made the point that exactly zero work is do be done during the time off. That's better vacation time than most of us get with the constant tether of a Blackberry. The release tells us even the executives are expected to do the same.

So why not just make the cut? Sure they've cut twice in the very recent past, but this tells us they think they can get away with a bit more.

I'm not a fan. It's pretty classic weak management and is another death by a thousand cuts. Hard decisions are just that - hard. Either let people work, or pull the bandaid off.

Is Newspaper's problem Google's Fault?

Google has been frequently cited as one of the primary contributors to the decline of the newspaper business. Very recently people have even asked Google if they would be part of the rescue of newspapers. Eric Schmidt, wisely, said no.

Schmidt smartly recognizes that the key problem isn't the access or demand for information, it's the business model itself that is the issue.

Twenty years ago, a newspaper ad was they key way to relate complex information about a new product to a broad audience. No advertising medium could come close. Now a website can relate even extraordinarily complex information in a multi media manner to an engaged and interested audience. It's 10 levels deeper than a single print ad could ever be. The best sites allow conversation and questions to emerge about products.

So newspapers have lost on the depth of product information, needless to say. While google is the key way of steering people to these deep information sites, newspapers themselves could have, and often do function, in this manner as well. The key difference is in the scale that a web portal provides. Scale is part of the new advertising landscape, and it's a loss of newspaper competencies. As a response newspapers tried to go "local" which may be the opposite of the direction they should have gone. A local strategy naturally cedes scale.

A second loss is in efficiency. Printed newspapers deliver a bundled product. Even if I only want business news, I have to buy the whole paper. This is naturally inefficient for the delivery of advertising. However it is this inefficiency that leads to outsized profits, or at least used to. Search engine marketing is relentlessly efficient. It can deliver an advertisement to a person as they are in the final consideration set, and lead directly to a purchase. The model of pay per click is also remarkably efficient in delivering cost effective traffic for any budget.

Note that these two strengths of Google (and other search engines) have little if anything to do with content. While I have heard publishers claim that Google "steals" their content and profits from it, this argument has little grounding in reality. What Google has become is a model of advertising efficiency, and it threatens the most inefficient models. That model just happens to be printed newspapers.

I've made the argument in the past that newspapers should band against Google. Let me articulate that more clearly. Local isn't going to win. The Internet isn't local. It is my opinion that the best strategy is to collaborate and deliver scale. It's not about being hyperlocal, it's about delivering EVERY locality.

McClatchy's Revenue Decline approaches 20%

Honestly, it's hardly news that advertising in print is down considerably. What is news is how the decline continues to accelerate. McClatchy just reported November numbers that were down 19.4%. The only bright spot was the fact that Internet revenue was up 7.5%. October's revenue was down a "mere" 17.4%. The stock was down nearly as much as the revenue.

Eventually the year over year comparisons have to get easier right? Last year's Q4 was down 14-15% compared to 2006.

What's Black and White and Dead All Over?

Newspapers of course. 

The Daily Show With Jon StewartM - Th 11p / 10c

Clusterf#@k to the Poor House - Final Edition Edition

Barack Obama Interview
John McCain Interview

Sarah Palin Video
Funny Election Video

I guess its good that the plight of newspapers is making it to the Daily Show.  At least we can laugh while we pack our boxes...

Tribune Goes Chapter 11, who is next?

The news of Tribune's bankruptcy filing has been well chronicled already after plenty of rumors. Clearly it's one of those things that was expected eventually given the overall industry decline, but even six months ago Tribune was claiming they had enough cash until at least mid 2009. The filing preceded the sale of the remarkably valuable Chicago Cubs franchise, which was kept out of the filing. My supposition is that they were far enough in the hole that even a billion or so wouldn't have made much difference. It will be a bit of mess for the employees who technically own the company through the stock ownership plan created when Zell structured the take over. I hesitate to call it bought, given the limited amount of personal exposure Zell had in the deal.

The market reaction to the news among peer companies was one of the most interesting factors at play here. News such as this can often have a widespread effect on the sector. Some, such as AH Belo (AHC) and the New York Times (NYT) were fairly static (It's telling that this seems unchanged these days). McClatchy (MNI) and Media General (MEG) finished up the day over 10%, while Lee and Journal Register plunged ever closer to zero. If the market is voting rationally, Lee and Journal Register are perilously close to joining Tribune. While I can believe that AH Belo's stability given it's relatively low debt might have some limited life left, I don't understand McClatchy's lift on the day. Perhaps the rumored sale offer of the Miami Herald has something to do with it, but seriously, who's left to buy it?