Thursday, August 04, 2005

Swap meat

Though some critics regard the unprecedented newspaper swap engineered by Gannett and Knight Ridder as little more than rearranging the deck chairs, the moves are a sophisticated approach to managing their assets.

Shuffling portfolios, even in a sophisticated way, won’t alone solve the problems of declining circulation, shrinking advertising market share and eroding reader confidence. But concentrating assets in tight, efficient clusters is one sensible step toward equipping newspapers to be more viable competitors in the age of good, fast and cheap new media.

Newspaper companies for some time have been building or buying non-daily publications in the markets where they operate, so as to better serve advertisers, readers and the legitimate interests of their investors. More on this in a moment.

The fresh twist in the Gannett-Knight Ridder swap is that these operators have signaled a willingness to trade long-held franchises in one place to gain greater dominance in markets they covet elsewhere.

Gannett bought the Tallahassee Democrat from Knight Ridder to beef up its holdings in Florida, while Knight Ridder acquired three Gannett papers in the Pacific Northwest. In a tripartite transaction, Gannett also bought Knight Ridder’s interest in the Detroit Free Press and sold its own stake in the Detroit News to MediaNews Group.

Commentators with particular affection for one newspaper or another denounced the ownership swaps as cynical financial maneuvering, which I suppose you could say it is. With all due respect to the sensitivities of the many affected individuals, however, the strategic reshuffling is a sound business practice.

And we’re likely to see more of it, because “clustering” makes sense. Clustering simply means gathering assets in tight geographic patterns to make it easier to sell, produce and distribute product. Here’s an example of how well it works:

When I entered the cable TV business in 1988, the industry was in the midst of a land grab. Operating companies bought systems anywhere they could, so long as the price was right. From a strict financial point of view, the cash flows from the assets were fungible – money from one was as good as money from another.

It soon became obvious that a series of small, far-flung operations would be difficult to manage, casting doubt on the continued ability of the companies to keep cranking out cash at the desired levels. In the San Francisco market, where there were probably a dozen or more cable operators, a truck from Company A would have to drive through towns owned by Companies B, C and D to get to another community owned by Company A, where the technician could get out and finally do some work. Windshield time was a costly waste of time.

The solution was obvious. Buy, sell and swap systems until one company owned all the contiguous towns in a metro area, enabling the operator to manage each aspect of the business in the most efficient manner. That’s why Comcast today owns all of San Francisco, Time Warner is the largest cable operator in Los Angeles and New York, and so forth.

If the cable guys hadn’t gotten together to sensibly cluster their properties years ago, service would be worse and – difficult though this may be to imagine – bills would be higher than they are today.

As dominant or near-monopoly players markets they served for decades, newspapers didn’t have to worry as much as most other businesses about competition or efficiency. The rise of low-cost printing technologies, the Internet and other new media has changed all that, enabling upstart producers to compete credibly with publishers for advertising revenues and readers.

In response to such pressures, publishers have been investing not only in online operations but also in such additional print products as micro-local papers, free advertising vehicles and products in Spanish, Vietnamese and assorted other tongues.

In 2004 alone, according to the Institute for Rural Journalism and Community Issues, Gannett purchased or launched 85 new weeklies, making it the nation’s largest publisher of non-daily papers with 207 titles. Gannett says the total number of its specialty products is about four times higher, when you add the alternative weeklies and other publications not technically classified as weeklies.

While most publishers have the means to build, rather than buy, strategically vital neighboring publications, it is appealing to neutralize successful competitors by purchasing them.

Utilizing the formidable cash flows and strong balance sheets produced by their existing operations, such well-established chains as Advance, Gannett, Hollinger, Knight Ridder, Lee, McClatchy, Media News, Tribune and others have acquired strategically significant publications adjacent to the markets in which they operate. The Top Ten list of weekly publishers is above.

The concentration of dailies and weeklies into ever-larger contiguous regional clusters creates new advertising products for publishers to sell, thus helping them efficiently increase top-line growth. The costs of content, production and delivery can be reduced through the consolidation of staffs and capital-intensive printing facilities.

Greater media concentration inevitably will lead to a decline in the diversity of editorial voices serving our communities. This is matter of significant concern that the industry would be well advised to forthrightly address.

One creative solution comes from Las Vegas, where the evening Sun is being discontinued as a free-standing title and a 6- to 10-page “Sun” section produced by a sharply scaled-down staff will run daily in the surviving Review-Journal. It remains to be seen how effective this will be and how long that will last. But it’s a try.

From a commercial point of view, higher sales and greater efficiency will give publishers the ability to compete more energetically with the new media threatening to snatch away their advertisers and audience. But this will work only if the additional profits are invested in creating compelling and competitive new products.

If the goodies garnered at the swap meet go only to pumping up short-term profits, the industry will be cheating its readers, its investors and itself.


Anonymous Anonymous said...

You are absolutely right about clustering, but I don't that Gannett is getting much benefit in Tallahassee. The company's papers and TV stations are all too far away to profit from, say, sharing presses or trucks--Jacksonville, Brevard County, Fort Myers
and Pensacola--though there might be some news sharing for state government coverage.

10:57 AM  
Blogger Newsosaur said...

In re the above comment: The opportunity for Gannett in Florida is on the revenue side, not necessarily in cost savings. The more turf the papers control, the more regional products they can offer efficiently to advertisers.

12:13 PM  

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