We All Know The Problem, So What’s The Solution?

Philip M. Stone March 17, 2009

One basic question in the messages flowing into ftm these days can be paraphrased as 'We all know the problems the media, especially broadcasters and newspapers are facing, but what is the solution?' And this writer has responded basically saying, 'If I had the answers to that question then I would be a very rich media consultant today, but I don’t, so I’m not!'

But there has been enough damage out there to concentrate the mind on what needs to be done. So let’s take the positive first -- that media’s print and digital operations must learn to integrate, each embracing its own strength, each promoting the other, but living in harmony together and not as competitors.  

And for clues on how this might be done one should read closely the speech that New York Times publisher Arthur Sulzberger gave last week to a university audience. While nytimes.com is not your everyday metropolitan newspaper web site – indeed it is the leading US newspaper web site – many of the struggles that newspaper is now going through are business model struggles found almost everywhere -- should there be pay content on the Internet? If so how to make sure it doesn’t cannibalize advertising revenue? And so on…

“The biggest issue before all of us tonight and tomorrow: what do we need to do to earn enough revenue to maintain robust newsrooms and uphold the rights and privileges granted to us by our Constitution?” Sulzberger asked his audience. “It’s obvious, but let me say it anyway: for many of us, our long-term financial success will be determined by how quickly our digital revenue growth outpaces the downturn in our print revenues.

“At The New York Times Company, we are focusing on three key levers to achieve this breakthrough moment: attracting more users, deepening their engagement and then earning revenue from their usage. To do all this will require making bets on how this new medium will evolve and making investments in that vision. This is certainly not an easy task…

“Engagement is the name of the game. Serious news sites must create a new, more organic, more personal relationship with its readers. While there has been a ‘Letter to the Editor’ forum in newspapers since the late 19th century, journalism’s relationship with our readers has been one-sided. We need to be able to respond to our audiences’ demand for interactivity, community, multimedia, news and information on an increasingly wide range of topics.

“We have to respond to their desire to do something with the content we make. Our readers want to share it, or blog it, or comment on it, or tweet it. They want to use our journalism as raw material for what they make. This can be a very good thing because it does enhance our audiences’ involvement with our sites, but it also takes us back to issues of authority and what is and is not ‘Real Journalism.’

“And, we want them to feel that they are part of a vital, ongoing conversation and that there is something missing in their lives when they stay away for too long.

Our strategy must be rooted in the fundamental premise that we must be OF the Internet, not merely ON it, requiring all of us to move from publishing our content on the Web to becoming full Web publishers.”

None of that is to say that print is dead; rather print and digital must live together, supporting one another. Sulzberger concluded that print “is still a popular and profitable medium. There are more than 830,000 readers who have subscribed to The New York Times for two years or more, up from 650,000 just over 2 years ago.

And just today, the Center for Media Research released a study, which revealed that:

• 83% of Americans say print newspapers are relevant.
• 53% subscribe to a newspaper, and
• 55% say newspapers are their primary source of news, over national TV, local TV and ‘news aggregators.’"

“This is good news: print and digital can co-exist in the marketplace. But, as we have learned over the past 15 years, we need to become even better at integrating our print and Web properties. They offer two very different products and two distinct value propositions. Our challenge is to both integrate while embracing the unique strengths of each medium.”

And the individual who does come up with the solution for fully integrating print and digital while embracing the strength of both – that person will indeed become a very rich media consultant.

But here’s a start. For many months ftm was basically alone in saying that a newspaper giving away its crown jewels for free on the Internet was a business model that just plain doesn’t work. It was clear enough then, but with the big downturn in even Web advertising revenues (an average of 26 cents per 1,000 users isn’t going to do a lot of sites very much good) it’s obvious that making users pay is the way forward. Now many other analysts have chimed in with the same thinking and indeed companies like Hearst and the New York Times are openly talking about charging for content.

In the case of most metropolitan newspapers it is the local news that is worth its weight in gold (assuming there are enough news people left to produce that copy, those pictures, that video etc.) and that is what needs to go behind pay walls. National and international news is out there on so many sites that it should be considered public domain, not behind pay walls, still advertising supported, if such advertisers can be found.

But this has to be done methodically. While everyone points to what a great success the Wall Street Journal has online with some of its stories available for free viewing with others behind lock and key, there seems to be little basis to what the WSJ hides and what it allows in the open. If it has an exclusive it deserves to be behind lock and key but many of its “locked” stories are not exclusive and while it is always nice to read the WSJ version much of that information is available elsewhere. It is the exclusive enterprise coverage not available elsewhere that will get people willing to pay, not those stories everyone else has, and for most media that translates into local, local, local.

Now, that’s the positive half of the story. Now comes the other half that is much tougher  to accept -- that the cost structure for media today in these poor economic tidings still cannot be justified, even with all the employee culls over the past three years.

And we should start at the top, with salaries paid to top executives. We detailed recently how Gary Pruitt still draws down $935,000 to run McClatchy – a 15% reduction which he recently voluntarily imposed but it’s still too much. Salaries at around $1 million in a business that is fighting for every penny to pay back debt are really not on. Craig Dubow, Gannett CEO, voluntarily took a $200,000 salary cut last November, lasting through this year but he still pulls in $1 million, and that’s too high when Gannett newspapers are being closed (Tucson end of this week) and employees  around the country placed on unpaid furloughs.

Sulzberger gets $1 million, so does Times Company CEO Janet Robinson, and yet the company had to do a lease-back of its building and take a 14% loan from Carlos Slim to ensure debt payments are met this year.

Objecting to those numbers is not being mean-minded. A few hundred thousand from this executive and a couple of hundred thousand from this executive – those amounts add up quickly and can all go towards helping with the debt payments.

Salaries of chief financial officers, chief operating officers, and chief whatever they call themselves these days, are all based on the good old days when newspapers were pulling in huge profits after debt. Now profits are down;  so  keeping salaries as they were in the good old days without increase, or giving up a couple of hundred thousand or so is not enough given what is happening to the business.

Mind you, the 30 McClatchy newspapers are still actually providing a joint margin of more than 20% these days, and those are the kind of numbers other businesses would fight to get. The problem for McClatchy is the huge debt taken on when it bought the Knight-Ridder newspapers and the closeness of violating loan terms or even not being able to make those debt payments has hobbled the company. So maybe their executive payments should be tied, instead, to profits left over after debt payments are made?

Just last week Gary Wortel, publisher of McClatchy’s Ft. Worth Star-Telegram, took great umbrage that his newspaper had been listed on Time Magazine’s list of 10 major metropolitan newspapers that will disappear this year. “We are a very profitable company,” he told his own newspaper. And yet just a week earlier the newspaper blamed unprecedented revenue declines for its decision to reduce its work force by 12% and cut wages for employees earning more than $25,000.  Last year the newspaper reduced its workforce by 18%.

The obvious devil in all of this are the debt payments the McClatchy Company has to make and no matter how good the margin may still be in Ft. Worth and elsewhere given all the cutbacks, the money the newspapers now contribute to help pay debt obviously isn’t enough.

This then brings us to those debt payments that are strangling so many media organizations. Of course those loans were taken out in the good old days when banks were flush and only too willing to lend when it appeared that cash flow at media properties would not only pay the debt but run the business and actually provide decent profit, too. As we all know suddenly for various reasons the bottom fell out of advertising and now these media properties are scratching for every dime they can get their hands on to keep out of debtor’s prison.

Which in itself then brings up the question of why no smart chief financial officer insisted that written into the debt agreements was language that basically protected the newspaper from strangling payments should the advertising bottom fall out. Of course, those dishing out the loans don’t like such clauses, indeed they may even charge additional to have such clauses, but if they had existed then much of this pressure would be off.

And if such clauses just could not be obtained then why not an insurance policy that guaranteed relief when loan covenants are breached. Sure, the insurance company would want all sorts of protections but the AIGs of the world were always looking for new insurance business opportunities, and at the end of the day having such a policy in hand would have saved much grief. But no doubt, the clever financial wags at media properties figured those were unnecessary expenses, much to their gloom today.

None of this really helps in going forward except companies should learn from their mistakes and when the boom times come back and expansion is in the wind then be real careful about getting some protection in the loan documents should things go terribly wrong.

The CEO of a major newspaper group said a few months ago in a private meeting that it is legacy agreements that are destroying newspapers today. If newspapers were to fold today, this executive said, and all those union agreements and vendor agreements were made null and void, new newspapers could arise within a couple of weeks with employee contracts and vendor contracts that were affordable in today’s environment and those new newspapers could well be profitable from day 1.

And that probably explains why some newspapers – Tribune, Philadelphia, Minneapolis – have opted for bankruptcy court where indeed legacy employee contracts and vendor agreements can be renegotiated, or ultimately, voided.

Thus whereas the press union in Minneapolis was unwilling to give up major concessions for the umpteenth time to the Star Tribune (the union leader had agreed a deal that the membership voted down) and the newspaper then went into Chapter 11, it emerged over the weekend that a deal has now been struck. The newspaper had threatened it would go into liquidation if it did not get $3.5 million in savings from the union as part of a total savings of $20 million needed from all the unions combined. The bankruptcy judge said if necessary he would void the union contract so either the union negotiated the best deal it could get or the judge warned there could be no newspaper.

So if unions aren’t willing to make big concessions (in San Francisco the Guild has just given Hearst big concessions to save The Chronicle) to get the costs really down then indeed legacy newspapers may just need to die only to rise again from the ashes of the Phoenix, leaner and meaner.

So it’s a two edged sword. Digital and print must work together to boost one another and not compete, and costs have to drop to meet today’s economic environment. Easier said than done, but that’s the solution.