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July 24, 2014

The Newsonomics of Roll-Up

First published at Nieman Journalism Lab

Pity the poor news publisher. Amid all the hoopla about wringing digital revenue from readers and tackling the tablet challenges before publishers, he’s faced with an uncomfortable fact: Print revenue is struggling to get back to 2009 levels, and that’s the year of the worst decline in modern history. In 2010, print ad revenue again slumped by high single digits compared to that awful ‘09, while print circulation revenue is now challenged to grow as well. Into 2011, some flavor of flattish-with-2010 is what we’re likely to see.

The only significant growth is coming from digital advertising — typically no more than 15-20 percent of newspaper companies’ overall ad revenue — and that’s not enough to turn the ship around. At best, that digital revenue is helping keep the ship afloat. Given slashing of costs over the last three years, these companies are profitable once again in the U.S. — in U.K., insiders say only one of the national quality dailies, the Telegraph, is profitable — but there’s little guarantee of future profits, given the trends.

That leaves the next stage in cost reduction: roll-up.

When MediaNews announced that long-time CEO and the company’s commander, Dean Singleton, was vacating his position (see “The Demise of Lean, Dean Singleton and the Rise of Private Equity“), we heard the first renewed public talk (see “The shakeup at MediaNews: Why it could be the leadup to a massive newspaper consolidation“) about roll-up. Behind the scenes, though, a number of forces have been pushing towards future consolidation of the American daily news publishing industry. Private equity owners — aiming toward as profitable an early exit as possible — are one pressure point. The debt restructuring done in the Great Recession, both in and out of bankruptcy, will come due for a number of companies in the next two to three years too. Consequently, by the end of 2011 we’re now likely to see the beginning of that roll-up — daily companies merging with each other and bigger ones buying smaller ones.

To be sure, there are both potential cost savings and money-making multiplications fueling the notion, though the former appears stronger at this point.

New Philadelphia Media Networks CEO Greg Osberg is high on the revenue potentials of company sharing — and down-the-road consolidation. His company — which includes the Philadelphia Inquirer, Philadelphia Daily News, and Philly.com — is beginning to roll out new digital products. Among them is Dealyo, a Groupon-like daily deal, and Osberg believes Dealyo could be a product picked up by other publishers.

The first publishers he has in mind are those who are beginning to form an informal network — those who now have a set of owners in common. There are two sets of these non-traditional newspaper company owners. One is made up of so-called-reluctant owners, or bankers who got equity for their debt in bankruptcies. The second is made up of the more activist hedge funds who’ve bought into the industry at low, low, buy-at-the-bottom prices, relieving some of those reluctant owners of their stakes.

The name you hear most in talking to publishers is that of Alden Global Capital, the company that became more prominent in the recent MediaNews shuffles. Alden, we believe, holds its largest stakes in MediaNews and Freedom, both in the neighborhood of 40 percent. It also holds stakes in the Journal Register Company, the Philadelphia Media Network, Tribune, Lee Enterprises, and Gannett, the U.S.’s largest daily newspaper company. JP Morgan Chase Capital is the other private equity owner most actively engaged with its new holdings — the largest institutional shareholder in Gannett at 9.4 percent of the company — pushing for new strategic solutions and more rapid company change.

“We’ve been encouraged by our owners to share,” Osberg recently told me, explaining how this informal network now works. “We want to come up with the best digital products. That’s what’s encouraging to me. We can come up with innovation. And this roll-up — when it’s not optional to do it — could be pretty exciting.”

Next up on Greg Osberg’s list: FYI Philly, a new regional portal, intended to provide a magnet for newspaper traffic in the greater Philly region. Significantly, it’s a joint initiative of four newspaper companies that have long been trying to kick the life out of each other in that area: the Philly papers, the Calkins papers, the Gannett papers, and the Journal Register properties. (Antitrust, you may wonder? “You know, newspapers are dying,” laughed another exec of one of the companies. “How can there be antitrust concerns?”)

So if we’re seeing unprecedented collaboration in Philly, where may we see actual roll-up? Let’s start with the caution, emphasized by one CEO in the thick of it, that actually getting deals done is painstaking, given valuation and ego.

That said, a MediaNews/Freedom Communications deal looms large. The deal would deliver just about the whole state of Colorado to the new company, with MediaNews’ Denver + Boulder + its new purchase of the Lehman group (which has been the largest family owned newspaper company in the state) combined with Freedom’s Colorado Springs paper. More importantly, it would deliver a bigger Southern California combo, of MediaNews’ dozen-plus mastheads pushed together with the Orange County Register — and put more of a squeeze on a Tribune-owned Los Angeles Times.

In a sense, the combo would be just an extension of the strategy that Dean Singleton used to build MediaNews from scratch: clustering. That’s where the newsonomics of the roll-up add up.

Once you’ve clustered — centralized to the max the administration, circulation, advertising, production, finance, and newsroom tasks of all of the adjacent properties you own, you look next door to other companies, for fresh cluster bait. (Wait a minute, wasn’t that the plot line in Aliens or The Blob?)

In addition to this super-clustering, there’s one other big benefit of merger: getting rid of one company’s corporate overhead. Savings here could amount to $20 million or more — annually — for the mid-sized companies in possible play. Direct roll-up in parts of the Northeast could well follow the same logic. John Paton’s Digital First push has re-energized the Journal Register Company — making it a better roll-ee. And who knows what kind of new company could grow out of the FYI Philly cooperation?

As we look at possible consolidation, check out those few metro areas with two (or more) remaining dailies. Sadly, there are so few. In the Twin Cities, the new, post-bankrupt, capital-owned Star Tribune shares the smaller market with post-bankrupt, capital-owned MediaNews’ St. Paul Pioneer Press. In south Florida, the Tribune’s post-bankrupt, capital-owned Sun Sentinel is still duking it out with McClatchy’s Miami Herald. In north Texas, McClatchy — still dancing on the eggshells of debt reduction — owns the Fort Worth Star-Telegram while Belo (debt-free and proud) owns the bigger Dallas Morning News. You can also play quite a parlor game with the Tribune’s newspaper holdings, in a hypothetical game of roll-up.

Yes, devils abound in the details, but the market logic pushes harder in those still competitive markets. What is that market logic? If you are a financial company, like an Alden or JP Morgan, you look at the newspaper industry and say, “Why are these guys different than everyone else?”

The newspaper industry is among the most splintered big industries in the nation, and the same is true across the U.K. and Europe. Newspapers have been profoundly local for centuries — the news and commerce of the town trumped all, and of course, you had to have feet on the street to provide it.

We saw, especially in the U.S., chains buying up local dailies over the past decades. Even the leader, Gannett, though can claim just more than 10 percent of the industry by circulation in the U.S. The banking industry has now shaken out to four big leaders, and similar consolidation can be seen across auto, packaged goods, homebuilding, and many other industries.

From a financial point of view, consolidation just makes sense, cutting out all of those redundant operating costs, through mega-clustering of geographically contiguous properties. Indeed, many redundancies have been cut over the years, some without much detriment to the news product we readers get. The logic of consolidation is oh-so-sensible, from that financial viewpoint — and to a limited extent, focuses the enterprise on the going-forward keys to the future, news/feature content and advertising. (Of course, there’s a big question of how much operational savings still exist in a pre-slashed world.)

But wait, you say, newspaper companies have been local and balancers of financial and public service goals for centuries? Yes, but the cracks in that argument have been expanding for decades. The argument about how much chain ownership improved papers and how much it shortchanged them — both being true — now seems quaint. Those companies were run by newspaper people, in whose blood ran the notion of newspapers’ community roles.

The ownership of much of the business has profoundly changed. Even those companies with strong leadership committed to balancing profit and public service now find they have little room to maneuver. Staff cuts keep on coming at those companies, too, as bankers exert stronger behind-the-scenes influence.

It’s a new era of ownership, and one that everyone who cares about the news must now understand. Naivete is no longer in fashion.

Of course, it’s easy for non-daily newsies to decry such potential roll-ups as rearranging the worn leather armchairs in the fading men’s clubs of publishing. To the extent roll-ups focus mainly on cost reduction, they will be right. To the extent, as Greg Osberg evangelizes, these coming new entities create state-of-the-art digital innovation (not a strong suit so far), the story could turn out differently and unexpectedly.

Let’s remember that a lot of today’s moves will be aimed at reducing the costs of the physical business, as newspapers are still mainly physical business with real-world, on-the-ground liabilities (and assets) weighing them down.

By 2016, though, these companies will be mainly digital businesses. They may serve specific local and regional audiences, but as mainly digital business, their content production, technology enablement, telesales and customer service costs will become their main costs, and many of those can be more easily centralized and nationalized. How much editing should be done locally — witness the recent MediaNews/Newspaper Guild dust-up — is a key one that has a financial and a non-financial answer.

Today’s main costs — the physical, hard costs of page make-up, printing presses, trucks and distribution supervisors — will have greatly diminished. In that time — no more than five years out, I’d believe — the ownership structure of the news business, daily legacy and combinations only to be dreamt of, will look vastly different.

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