Category Archives: creative destruction

Newspapers…Tragedy, Irony and Reinvention Opportunity

A follow-up to the previous post, Sam Zell Pops Bubbles, The Deal’s Chris Nolter pens “Black and White and Red All Over“, an overview of the tragedy in which the newspaper business finds itself in these days.

Nolter offers a high-level look at the financial problems and opportunities facing the newspaper industry today. A couple of interesting themes emerge in the article that beg for a closer look, namely the FCC’s curious 180-degree turnaround and the concept of ephemeral media brands as valuable assets; there are even a few pithy quotes from the venerable Dave Morgan of RealMedia and Tacoda.

FCC’s Change of Heart?
Nolter raises the very interesting notion that the previous FCC policy to regulate local media is becoming passe.

“…the government might be more willing to consider deals that would consolidate media ownership but preserve jobs. “Given the economic climate today some of the nostrums and antitrust views voiced as recently as six to 12 months ago may have to be tweaked, in order to focus on job preservation in the short term rather than some larger antitrust theories,” he says.”

Recall the days when media company consolidation was running rampant and unchecked. Conveniently oblivious to the online media tsunami and under the nobler-than-thou auspices of “diversity of ownership” (think subprime mortgage crisis) interventionists-of-convenience red-flagged the motivations of big media only looking to get bigger. They successfully got legislators and federal bureaucrats in a tizzy enabling bizarre local ownership regulations that forced newspapers, radio and television stations within a market to stay artificially separate. The FCC cracked down and was encouraged to scrutinize and block all suspect Mergers & Acquisitions…especially those creating any potential local monopolies on…get this: news information. Yes, the government was going to protect us from suspect news.

Like all government rules, this did have the perverse and predictably unintended effect of encouraging media companies to attempt to game the system. Tactics include fattening-up DC lobbyists to get exceptions, incurring vast legal charges to file paperwork and argue the point, issuing feel good press releases and exorbitant investment banking fees to load-up on new debt (this cost management time as well as money) – all the while thinking they had a sunny new media future. Meanwhile, the then nascent global online marketplace for advertisers and audiences grew fast and fairly lean (thanks to an overreaching Sarbanes-Oxley growth capital has been slim). Not surprisingly and at the same time, the legacy newspaper business model has shriveled up with the sacred cash cow that is classified taking the biggest disintermediation hit. Fast forward to today.

“Hearst Corp. put the Seattle Post-Intelligencer up for sale Jan. 9, and said if it did not find a buyer within 60 days it would consider going digital only or halting publication. The Detroit Free Press and The Detroit News now only deliver papers on Thursdays, Fridays and Sundays, though it will still sell papers on newsstands seven days a week. “

The cost of doing business is the same if not higher for newspapers (labor + newsprint) yet the revenues are long gone. Saddled with debt from propping up their businesses, they are now dropping like flies and clearly getting very desperate. Many newspaper companies will be forced to offer online-only products, limited print runs and some may shut down altogether.

Ironically, these same high-minded voices that prompted the FCC’s inane rules to begin with are now actually suggesting that local TV/radio stations buy the newspapers to keep them in business! Apparently, it is now OK to consolidate operations within a local market because of journalism’s higher-purpose not to mention saving jobs. Considering the political bent of the soon-to-be-unemployed highly-unionized newspaper manufacturing workers and journalists, one can guess what the the new do-gooder administration will do next. Prepare for the sappy journalism paeans and the FCC’s rules to lighten up, if not more creative government-bailout schemes for the well-connected.

Trusted Brands

The other really interesting aspect brought up by Nolter is the actual value of newspaper’s brands.

“Journalists hate the word, but newspapers have great brand…It’s not fake. It’s not a lie. Newspapers have an incredible relationship and substantial amount of trust with readers.”

Specifically, it’s the credibility and trust borrowed from their traditional offline business. All those years of news reporting did have an impact – inuring or accruing to the the newspaper’s brand equity. From a financial analysis standpoint, such branding is often associated with that balance sheet intangible – goodwill. While it is true that technically, goodwill is just the difference between book value and market value these media brands haven’t disappeared either nor has their connection to their locales either. It is true that their prospects have both worsened and capital has become scarcer at the same time. Clearly, not a good place to be.
However, there is an arbitrage upside. Many have already gone negative in terms of goodwill, yet this has made them into financial targets. In the online media business, a newspaper’s brand name is probably their biggest asset and very bankable to both advertising agencies, local marketers and local audiences. Yet, to tap that online brand equity without being dragged down by an business model – the old management culture, legacy infrastructure needs to go…fast. The sclerotic thinking and corporate culture’s that allowed such obsolescence to exist are going to feel it. Expect more unusual bedfellows in creative destruction type deals, like Sam Zell and Tribune as well as Carlos Slim’s debt/warrant financing of The New York Times.

Final Thoughts

With newspaper jobs and all the associated votes now at stake, the diversity of media ownership pabulum is going to go out the door. It seems that minimal FCC regulation 10-15 years ago would have allowed the consumer and the marketplace to sort out this mess – not Congress, the FCC and ultimately the taxpayer.

All told, this situation brings to mind the classic Ted Levit business school case-study, Marketing Myopia. Levit’s article on the railroad industry of the 50s was spot-on; it spawned the thought-provoking question for managers and owners – what business are they really in? For railroads, it wasn’t the physical trains or railroads. Instead, it was providing transportation for their industrial customers. That was the problem that the railroad companies solved for their customers and therefore the “solution” they essentially sold.

Turns out for newspapers, their business is really the news and not the paper part.

Reinvention is better than extinction – just ask NPR & PBS’s sponsorship sales team!
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Zell pops Bubbles…

Since I’m in Chicago, this caught my eye and is fascinating on many levels.

Real-estate magnate Sam Zell shared some shockers and made plenty of good points about the challenges of re-invention of Tribune’s business model in an interview with Conde Nast Editor-in-Chief, Joanne Lipman (11/12/08 at Quadrangle Group’s Foursquare media conference).


While Zell comes off as flippant and even obnoxious at times (although he was more on the defense during this “interview”), Lipman brings the sense of journalist entitlement that has contributed to the mess in her own way with a string of petty jabs. Alot of this seems like common-sense business and despite zero experience in media, Zell makes alot of sense.

Many monopoly or duopoly industries get dysfunctional (kind of like Detroit’s Big 3) that complacency abounds. In ad sales this amounted to an “order taking” culture and not so surpringly minimal incentives. Why not,? There was no downside to pursing that stratgy. Meanwhile, the editorial side was allowed to pursue high-minded goals that are not very measureable and/or have little impact on revenue, e.g. Pulitzer Prizes.

Online it is an audience and advertiser free-for-all; ultimately, this will resolve itslef in a Joseph-Strumpeter-creative-destruction sort of way.