National advertising and digital-only subscriptions are bright spot in earnings report that highlights risks of newspaper market consolidation strategy
The publisher of USA Today and a roster of medium-sized metro newspapers, Gannett, reported second quarter earnings before the markets opened today. The company reported overall revenue growth, driven mostly by the company’s recent acquisition of the Journal Media Group, but lower net income.
Gannett’s strategy is transparent. The company’s CEO believes that the industry needs to be consolidated, something that in the past might have gotten the attention of the Justice Department, but today seems benign.
“We are pleased to report tremendous progress in our strategy to further consolidate the U.S. publishing industry as well as make internal and acquisition investments to drive toward a digital future,” said Robert J. Dickey, Gannett’s president and chief executive office. “By the end of the third quarter, we expect that annualized revenues acquired in the last twelve months will be more than $800 million, and the annualized digital component of our revenues will approach $1 billion. Additionally, we continue to pursue cost improvement initiatives in our core operations as well as recently acquired assets, particularly in the printing, packaging and distribution channel.”
The idea, when has merit, is that in today’s media world newspapers are just one news and advertising outlet, and that newspapers can’t survive by competing with each other but with other media vehicles. Like some other newspaper chains, Gannett recently went through a spin-off where its broadcast properties were made a new, separate company (TEGNA) and what was left was print.
Journal Media Group, the company it recently acquired, was created in a similar fashion. Journal Communications, publisher of the Milwaukee Journal Sentinel, and EW Scripps, the publisher of a portfolio of regional newspapers, merged their newspapers together into a new company, Journal Media Group. The other part of the deal was that the broadcast properties would also be merged and that is what Scripps owns today (and without changing their name).
The problem with newspaper acquisitions is that they might lead to greater revenue, but they don’t necessarily lead to greater income, simply because newspapers are less profitable than they one were.
That’s where consolidation and cost cutting come into play. You buy some newspapers, you consolidate production, editorial, national sales, and overall costs might fall – hopefully more than revenues.
The strength of the strategy is digital. But creating a larger network of news websites, one might be able to attract more digital advertising. More on that in a second.
The weakness of the strategy can be seen in the advertising revenue numbers seen in this Q2 earnings report: ad revenue growth is not guaranteed.
When Tribune Publishing acquired the San Diego Union Tribune one might have expected a big jump in ad revenue as the paper was added to the P&L, but losses in print advertising across the chain ended up being greater than the addition of the new property.
The same phenomenon is at play with Gannett. Total ad revenue fell slightly, despite the addition of the JMG properties. To be fair, it is true that if one adds in $15.6 million from Cars.com and CareerBuilder because there was a change in the way revenue from these third party sources is recorded, Gannett would have been able to report a net increase in advertising revenue, but it would not have been dramatic.
The big question is whether consolidating the newspaper business – Gannett, for instance, still has an interest in acquiring the Tribune Publishing (tronc) newspapers – will lead to greater digital revenue.
Newspapers want to grow their digital ad revenue, of course, and Gannett is the one major newspaper chain led by someone who doesn’t see advertising as a boil to be cut off. Dickey is a guy who has been a retail ad manager, that makes him a hero in my eyes, a throwback to the time when revenue generators were not seen as an alien force in the newspaper industry.
That is why I think when the dust settles, Gannett may well be the one major newspaper company standing.
But owning a huge portfolio of newspapers, even after cost consolidation, won’t guarantee success in digital advertising. Gannett would have to become a digital advertising expert and I’m a bit skeptical in that area.
Big publishers are trying to transform themselves into digital ad experts but most are fighting themselves along the way – recruiting new talent, laying them off in the next round of cutbacks, and then maybe taking a step forward when they buy a digital media property.
This is where I see Gannett uniquely unsuited to lead the industry towards digital. Gannett, is, and always has been, a newspaper cult. I will never work at Gannett and neither will you, or any other digital media professional because Gannett is all about hiring and promoting its own. It will bring in publishers from outside a market because they know Gannett and will follow the company line, not because they know the market, its advertisers, its movers and shakers. Gannett has always been one of those companies where you start someplace and work your way up the company ladder – commendable if you are inside the organization, but not so much when the need is for a company transformation. If Gannett were to transform into a digital giant it would have needed to hire the people who will make it happen decades ago.
(I checked the who’s who of one of the major digital advertising organizations and saw no one from Gannett there, something that did not come as a surprise.)
I also needn’t remind readers that Gannett continues to have the most obnoxious news websites in the business, cookie cutter designs that annoy readers with their pop-ups and auto-play videos. Gannett is the poster child for the ad blocker industry
Still, still, if there is a newspaper executive that I would place money on when it comes to digital I’d place my money on Bob Dickey.
The next interesting earnings reports come tomorrow when The New York Times Co. and New Media Investment Group reports. Gannett’s acquisition target, tronc, reports next week.
Gannett’s Q2 ’16 financials: