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Published: June 22, 2010
At a weekend get together, I heard from
many family members and friends about what they consider to be
must-reads to stay up to speed on a daily basis. All seemed to
agree that weekly news magazines such as Time and Newsweek
seemed to be losing their relevance, moving too slowly in a
world that has ever-shortening news cycles. Others noted that
the Internet keeps them informed, but acknowledged that there is
still a large credibility gap between journalism and blogging.
And a few others noted that their local papers in cities such as
Minneapolis or Miami were losing their ability to broadly cover
important events as they continue to gut their newsrooms.
And all seemed to agree that News Corp.'s (Nasdaq: NWS)
The Wall Street Journal, New York Times Company's
(NYSE: NYT) The New York Times, and Gannett's
(NYSE: GCI) USA Today still managed to maintain
devotees with their respective foci on business news (WSJ),
international and domestic politics and policy (NYT), and
consumer-friendly sports, entertainment and "light news" (USA).
Yet many investors have concluded that these publishing
powerhouses are facing a mortal decline, and are still dubious
of these stocks, even as they bounced up from their lows. For
example, The New York Times Company saw its sales shrink -3% in
2007, -8% in 2008, and -17% in 2009. Gannett has been caught in
a similar revenue spiral. But with the economy having bottomed,
revenues are expected to stabilize this year and next. And with
costs sharply lower from a few years ago, profits are
rebounding.
Indeed, share prices are well up form their nadir. The New York
Times was up +6% on Monday, capping a +25% move in the last two
weeks.
The key question for investors: is this a business poised for an
upturn as ad spending rises, or just a false dawn as these
companies prove unable to monetize their brands in a world where
"news wants to be free."
Newspaper readership is indeed in a steady decline, but these
firms can still thrive by getting a bigger slice of a smaller
pie. A number of newspaper chains are in bankruptcy, or have
been so gutted that they are no longer able to adequately cover
their regions, let alone national and international news.
And that's where The New York Times and USA Today
come into play. Each of those newspapers may start seeing
circulation gains in some of the markets where the local papers
have lost any tangible readership interest. (Call a friend in
south Florida and ask them about their local papers to get a
sense of what I mean). Any major retrenchment by a local
publisher is an opportunity for expansion for these national
papers. These publishers can offer these locals a ready-made
co-branded national or international section that represents a
cheaper path to non-regional coverage while providing them with
100% margin licensing revenue.
Or they can pounce while rivals retrench by boosting circulation
in other cities outside the New York area. These companies
already have a high degree of fixed costs servicing other
regions, so incremental revenue gains would help boost variable
profits. The increased national circulation would also sit well
with national advertisers, many of which are increasingly
shunning radio and broadcast television.
For Gannett, the prescription is simple: Stay the course.
Management has been taking a series of steps that should
eventually find appeal with investors such as a steady pay down
in debt. Long-term debt/equity has fallen from 71.8% to below
40%. Cost cuts are also helping. Revenue fell -4% in the most
recent quarter, but expenses were down -9%. And don't write off
the broadcast assets. Gannett owns and operates 23 TV stations,
12 of which are NBC affiliates, and all of which still
contribute a considerable amount of
cash flow.
In a similar vein,
The New York Times
is expected to more
than double profits
this year, even as
sales fall another
-1% to -2%. If ad
rates finally turn
up, then strong
profit gains would
continue.
Yet even as ad rates
firm and competition
withers, these two
publishers still
face a very real
problem: their
websites. The New
York Times'
website is so good
that it is
cannibalizing
circulation sales,
especially since it
is 100% cheaper than
the print version.
It has become
conventional wisdom
that online versions
of newspapers must
be free. But as
The Wall Street
Journal has
proven, you can have
it both ways. Online
readers for the
WSJ get a
discounted rate from
the print version,
largely to reflect
the savings
associated with
printing and
distribution. Of
course, the Times
already tried to
charge for content
once, putting its
editorial page
writers behind a
wall. That
half-hearted attempt
was a mistake, and
led readers to
consume the
remaining 85% of
daily content that
was still open to
the public. By next
year, the Times
plans to put the
wall back up,
charging more for
content.
In a world where
The New York Times
remains a must read
for New Yorkers, and
an increasingly
important source of
news for many who
live outside the New
York area as well,
the paper will find
that it remains
indispensable. For
that matter,
according to
Alexa.com, 35% of
all NYT.com online
readers come from
outside the United
States, where
physical delivery
isn't even an
option.
As is the case with
the WSJ,
pricing needs to be
well below that of
the print version,
to reflect the
smaller costs
associated with the
website. If I am
typical of many
online readers, I
would hate the idea
of paying for my
daily New York
Times fix, but I
would ultimately do
so anyway.
Do the math. The
New York Times
has roughly 12
million to 15
million unique
visitors to its site
in any given month.
Let's assume that
the paper allows
partial free access
to 15-20 top stories
per day, enabling it
to maintain decent
traffic levels from
casual surfers, and
thus enabling
traffic and ad
revenues to remain
at reasonable
levels. Then let's
assume that only
500,000 readers are
willing to pay $100
per year for full
online access (which
is the same price of
the online WSJ).
That works out to be
$50 million in
incremental
revenues. As noted,
online ad revenue
would take a partial
hit as fewer pages
would be served to
readers that are
unwilling pony up
for a subscription
fee.
Action to Take
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Investors remain
uncertain as to
whether these large
publishers can
really survive. The
real question should
be "to what extent
can they thrive?"
Competition is on
the ropes, any
economic recovery
would boost ad
rates, and their
websites will still
figure out a way to
bring in solid
revenue gains.
Gannett looks
especially
appealing, selling
for around eight
times profits.
-- David Sterman
Staff Writer
StreetAuthority |
