Tuesday, December 16, 2008

‘Shutdown’ was the alternative in Detroit

The decision to abandon seven-day home delivery in Detroit was not a bold strategic initiative but a last-ditch effort to save two failing newspapers, according to one former Gannett executive.

“The choice was to shut down or to try to salvage the newspaper,” said the former executive, who was familiar with the months-long deliberations earlier this year that resulted in the decision to scrap home delivery four days a week at the Detroit Free Press and the Detroit News.

The radical plan, which is likely to cost some 190 people their jobs by March, was not as much a carefully conceived business decision as it was an act of desperation, said the executive, who declined to be identified because he did not want to compromise continuing business relationships.

“They cut all they could,” he continued, recounting high-level management discussions that took place over the summer. “We saw the papers as continuing to deteriorate – and that was before Lehman Brothers” collapsed and the global economy melted down.

Home delivery will be confined to Thursday, Friday and Sunday by the end of March under the plan announced today by the Detroit Free Press, the Detroit News and the agency that handles ad sales, production and delivery for both competing papers.

“Compact” print editions of both papers will be available at retail outlets on days when home delivery is not available, said the executives announcing the changes A digital replica of the compact print edition will be delivered to subscribers via email for $12 a month (CORRECTED from earlier post which said $12 per week.)

Gannett owns the Free Press. MediaNews Group, which in part is financed by Gannett, owns the News. The papers, in turn, own the Detroit Media Partnership, the agency that administers their joint operating agreement.

The restructuring will result in the elimination of the jobs of approximately 9% of the 2,100 people employed at the newspapers and the newspaper agency, said David Hunke, the president of the agency. He said final numbers would be detemined after negotiations with the several unions representing the workers.

(Separately, it was reported today that MediaNews is seeking $20 million in concessions from the unions at its troubled newspaper operations in Denver.)

While Dave and the editors of both papers promised “vastly improved” digital products to satisfy the evolving information needs of their customers, they offered few concrete details of what new products were in the offing. The live webcast of their news conference was interrupted by repeated lapses in the transmission.

Although the executives tried to put the best face on the situation, the mood was decidedly downbeat. The low point came when Detroit News editor Jonathan Wolman described the present situation as “unsustainable.”

Though intermittent home delivery may save money in the near term, it poses two potentially fatal risks in the long run:

:: Significantly reducing daily newspaper consumption among the most loyal print readers.

:: Triggering a further erosion of already weak print advertising revenues.

“Once you get readers out of the everyday habit of reading a paper, you will lose them forever,” one former Gannett circulation executive said here last week. “Newspaper readership already is declining. If the newspaper only shows up on Thursday or Sunday, your customers will lose the newspaper habit and change to another medium.”

Radical as the restructuring may appear to be, the newspapers remain saddled with certain large and inescapable costs, said Alan Flaherty, a nationally recognized newspaper production expert.

“Nothing they do at this point can mitigate the cost of owning the $170 million (or maybe more) plant that they occupied in about 2005,” said Alan in an email. “At 7.5% interest and a 15-year life, the $170 million investment represents a weekly capital lease expense of $370,000.” That’s a bit less than $20 million per year.

Now, more press capacity than ever is likely to be idled.

“Part of the Detroit issue will be how much of the distant circulation they find it cost-effective to retain,” said Alan. “They've got about 70,000 in two-paper daily circulation (about 14% of total) more than 50 miles from Detroit. That's high. I don't think servicing all those customers will withstand the current financial crunch. Figure a loss of maybe 25k circ beyond the retail trading zone.”

With the distribution footprint reduced and home delivery truncated, circulation revenue likely will deteriorate.

With three-day-a-week home delivery, “circulation revenue will plunge to a nearly negligible level,” he said. “People won't pay much to receive a product that will be perceived more as an ad vehicle than anything else.”

Other newspaper executives reacting to the decision fear that the value proposition to advertisers will be compromised.

Not only do newspapers need significant penetration in their designated market areas to continue to appeal to advertisers but they also increasingly must prove to advertisers that the people taking the paper are committed and consistent subscribers.

“The home-delivery customer always has been the value proposition for advertisers,” said a circulation executive who asked not to be identified because of conflicting business relationships. “Historically, single-copy sales were seen as being less valuable than home delivery. How are you going to change that message now?”

The press released issued by the Detroit papers shrewdly included strong endorsements for the restructuring plan from several advertisers. “This is exciting, feels great and goes a long way in preserving the viability of newspapers," said Tom Lias, president of Gorman's Home Furnishings, who was quoted in the press release.

Rather than scaling down two struggling newspapers to make them into a pair of weak sisters, Alan Flaherty believes the wiser choice would have been to shut down the Detroit News.

“I can't figure out why closing the News was not part of the next phase in cost-cutting,” he said. “Does the second news operation result in enough incremental readers to justify its cost? If it doesn't, then closing one title would have been the easy choice in the current extremis position.”

The Gannett Blog reports that MediaNews is in line for a guarateed profit payment of $4 million annually through 2009, which continues for a number of subsequent years at a steadily diminishing amount. If so, then MediaNews would have no motive for closing the News without a buyout from Gannett.

In light of the above, Alan thinks today's announcement may be part of “some kind of a tug-of-war between Gannett and MediaNews that is playing out behind the scenes.”

That sounds about right.

9 Comments:

Anonymous Anonymous said...

That this story appears on the site titled Newsosaur is beyond just appropriate. The News & Free Press brass have outdone themselves in trying to prove that Michigan print consumers only need their products 3 out of 7 days. Indeed, there is struggling behind the scenes which has distracted both parties from 'the mission.'

12:47 PM  
Anonymous Anonymous said...

It's really over for newspapers. How many of them can survive 2009? This is the beginning of mass closures.

Is $12 a week for digital editions a typo. Because that's absurd.

12:54 PM  
Blogger Newsosaur said...

Per the above comment, the fee for the digital edition will be $12 per week, not a month, as erroneously wrote in the original post.

1:11 PM  
Anonymous Anonymous said...

Not to make this more confusing, but your note about the correction in comments appears to correct the error you made in the original post, unless I'm unable to read this correctly.
Thanks.

2:19 PM  
Anonymous Anonymous said...

I agree that closing the News is the best option. Pump up the only paper left in town. But legal issues made that impossible, so now both papers are finished. Make no mistake about it, they are both done, within a year. Once the News folds, the Free Press might be able to start 7-days again.

10:29 PM  
Anonymous Anonymous said...

I read the demise of home distribution with interest, but killing the only continious "reader" of the product by alternative days delivery.... well it is a different spin... One of the strengths of any newsaper is it's home and shop distribution network. Reducing the effectiveness of the home delivery part... in the long run... and then trying to charge them more for a digital edition... good move..

Is it not the root cause that we failed to reflect waht the general population really wanted from the product?
We gave them high spped presses and lots of colour....
They wanted content... and most American newsapers content is often poor to start with... now with less journos where will it end?
Why are so many american newspapers struggling and it is not the case in the remainder of the world? However it is recognised there are effects every where in the world, but not so dramatic as in the US.....

11:29 PM  
Blogger Rob M said...

":: Significantly reducing daily newspaper consumption among the most loyal print readers.

:: Triggering a further erosion of already weak print advertising revenues."

To these points I say "good, get it the heck over with." It's not a dying patient on life support, it's a larva trying to transform into a butterfly ... well, maybe a moth.

Anyhow, from a journalism perspective this is just change. It's not the death of anything, let alone our profession.

4:50 AM  
Anonymous Seamus said...

Well, sure, once you get out of the habit of reading a daily paper, it's gone for good. As an older reader, I resisted the switch for years, but now I don't even need my subscription to the local Sunday paper that I still hang on to for nostalgic reasons. I don't even miss the daily. As Rob M. says, might as well get it over with. I ignore the online ads the same as I ignored the print ads. :)

3:25 PM  
Blogger scott said...

It doesn't matter if the electronic edition is $12 per week or 12 cents per week. Consumers don't want it. There's a much more convenient way to view newspapers online, and it's free.

I agree, however, that it doesn't make much sense to discontinue home delivery on certain days. If we're talking about absolute last ditch efforts, doesn't it make more sense to jettison the web site? After all, it isn't generating much revenue, and it's canibalizing the product that is making money (albeit less and less money every month).

The future of newspapers ultimately lies in the ability to generate revenue online... but I doubt that existing newspaper chains will be in a financial position to support the innovation that could lead to such revenue growth.

7:47 PM  

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