Thursday, November 30, 2006

Lady in distress

Migrating the New York Times Co. from public to private ownership could well endanger our most distinguished journalistic institution.

Although some wishful thinkers believe a management-led buyout could shield the New York Times from the disenchanted investors pummeling the stock of its parent company, the heavy debt required to take NYT Co. private would put more profit pressure than ever on the Gray Lady and her sister publications.

That pressure almost certainly would lead to sharp reductions in the abundant resources – staff, bureaus, travel budgets and more – that enable the Times to be the newspaper of record for the world’s largest and most powerful democracy.

If the unthinkable occurred, the Times likely would remain a solid and respectable regional publication. But it would lack the resources and authority to fulfill its unique role as watchdog and national conscience. With all due respect to the Wall Street Journal and Washington Post, even they lack the resources or mandate to fill the void.

The good, the bad and the ugly aspects of private ownership were discussed here in connection with the unfolding drama that will determine the fate of the Tribune Co.

Although private ownership might prove to be the best course for Tribune (if not for the employees whose jobs are sacrificed in the interests of efficiency), it is difficult to imagine a structure more favorable to the New York Times than its existing ownership.

Unlike Tribune, whose management answers more or less directly to the owners of its common stock, the NYT Co. is effectively controlled by members of the founding Ochs-Sulzberger family, who own a super class of shares that gives them the ultimate power in managing the business and setting profit targets.

Even though a rising chorus of investors is pressuring the family to cut expenses to raise profits to 20% of sales or more, the company has produced an operating profit of 16.4% in the last 12 months. The additional resources made possible by lower profit targets are a blessing for the New York Times and its readers, but there’s a problem:

The relatively low operating profits are depressing the value of NYT stock and effectively forcing holders of the shares to subsidize the company. Because shareholders believe their investments would be worth more if the family required management to produce higher profits, they are up in arms.

Led by Morgan Stanley Investment Management, there is a growing movement among common stockholders to pressure the family to abandon the two-tier stock structure. If the movement were successful, the management elected by the common shareholders – and not the family – would set the profit targets. Rest assured, they would be a lot higher than they are today.

In light of the shareholder discord and the fairly depressed value of NYT stock, it is perfectly logical for family members to think about buying the public shares and running the company as a private entity insulated from the scrutiny Wall Street. This would require raising more than $5 billion of debt and equity from financial firms seeking high rates of return.

A leveraged buyout, as such a transaction is called, can work well when management has a plan to improve profitability by accelerating sales, significantly cutting expenditures or, ideally, both of the above.

Given concerns in the financial ocmmunity that newspapers may face up to five more years of weak revenue growth, the only buyout plan likely to win funding would be one calling for even deeper expense reductions than typically demanded by the public shareholders.

If the family decides to take the company private, it's hard to imagine how the Gray Lady could come out whole.

Wednesday, November 29, 2006

Book time for Bonzo

Two of the nation’s most prestigious schools of business management have set out to test a theorem that could not have been investigated without the modern miracle we know as the World Wide Web.

The theorem, which was advanced by either Aristotle or Bob Newhart, hypothesized that an infinite number of monkeys sitting at an infinite number of typewriters eventually would write all the great books of the world.

In an effort to empirically test the theorem, the Sloan School of Management at the Massachusetts Institute of Technology and the Wharton School of Finance at the University of Pennsylvania want you to contribute to the first business book ever to be written as a wiki by an infinite number of online volunteers.

A wiki, as you know, is a website where anyone can write anything, which then can be rewritten by a second writer, then reinstated by the first writer, then changed by a third writer, then reinstated by the first writer, then corrected by a fourth writer, then reinstated by the first writer, then vandalized by a fifth writer and so forth.

I know this, because I looked up wiki on Wikipedia, the site that also provides a wealth of scholarly background on the Infinite Monkey Theorem.

The premise of the new wiki-booki, which is entitled “We Are Smarter Than Me,” is that self-identified communities in the future “can, and should, take responsibility for traditional business functions that are currently performed by companies, industries and experts,” according to the website where would-be authors can begin cointributing their thoughts as soon as they sign away their rights to compensation from the published product.

The wiki-booki organziers say the types of business functions that might be taken over by communities include word-of-mouth advertising, peer-to-peer lending and self-help groups for diabetics or cancer patients. And, of course, writing books.

Sunday, November 26, 2006

Google’s clicking time bomb

With Google blasting through $500 a share to become the world’s most valuable media company, it may seem unsporting to observe that the House That Clicks Built is to some degree a house of cards.

Google isn’t an overt, book-cooking scam like Enron, WorldCom or Computer Associates. But it is the victim/beneficiary of the fact that a meaningful, yet unknown, portion of its $9.2 billion in sales over the last 12 months is based on phony clicks on its keyword ads.

Click fraud, as the phenomenon is known, is committed by bad guys around the world who build web sites; sign up to display Google’s ubiquitous text ads, and then create computer programs to relentlessly click the ads, turning thousands of nickel-and-dime transactions into wads of serious folding money.

Advertisers know this is happening. Investors know this is happening. And Google – as well as competing services operated by Yahoo, Microsoft and others – most certainly know this is happening. But no one, except possibly Google and its confreres, knows how much it is happening. And if they know, they’re not telling.

The Economist magazine estimates click fraud at 10% to 50% of all online ad transactions. With the range so broad as to be useless, we are forced to resort to anecdotal data to get a fix on the problem. In that vein, here's the case of a friend who operates a small web site in Northern California:

My friend recently was surprised to get an email from Google urging him to increase the limit on his monthly credit card authorization, so he could pay for more clicks on the AdWords be buys to drive traffic to his site.

Intrigued by the sudden popularity of his ads, he quickly learned from Google that about $150 in ads had been clicked in the last 10 days, as compared with average bills of $23 in each of the last three months. In other words, his average daily ad bill increased almost twentyfold in the 10-day period to $15 from the ordinary 77 cents.

After ascertaining that no spike of activity on his web site matched the surge in his bill, he commenced what has turned out to be an extended tussle with Google to get a refund on the clicks that he believes are fraudulent. Google has said in a series of apparently canned emails that its proprietary algorithms show the clicks came from dozens of random web sites and, accordingly, are valid.

My friend theorizes that Google’s algorithms were fooled by cyber-bandits operating phalanxes of computers that can vary and mask the origin of clicks, so as to give the appearance that the deluge spontaneously emanated from hundreds of unrelated and legitimate users.

I think he is right. If you do, too, then his experience suggests that Google’s stock is overvalued. Here’s why:

Assuming the activity on my friend’s ads is normal over 12 months, he would pay Google $280 a year. If Google forces him to pay the additional 10-day bill of $150, then his total advertising outlay for the year would be $430, making his annual ad bill almost 35% greater than his ordinary expenditures suggest it should be.

If something like this happened to every Google advertiser at some point during the year, then logic suggests that a third of the company’s ad sales are bogus. Of course, there is no known evidence to support such a conclusion and I’m in no position to say this indeed is the case.

Still, the click-fraud issue could play havoc with Google's stock. If enough investors got it into their heads one day that, say, 10% of the clicks were phony, the stock would drop $50 a share, based on the metrics that now support its $144 billion value. Once the skeptics triggered a sell-off, there’s no telling how ugly things might get.

In considering Google’s predicament, you find yourself appreciating the safeguards designed to reassure the advertisers who patronize the legacy media.

Imperfect though the systems may be, industry-funded agencies independently measure the audiences of newspapers, magazines, television and radio. Print ads are validated with tear sheets, while program logs and air checks serve the same function for broadcasters.

Google should put a priority on doing the same for its ads. Until then, every bogus click could be the tick of a time bomb.

Monday, November 20, 2006

Second bananas lack appeal

Although it is in the enlightened self-interest of newspapers to partner with Yahoo and Google, publishers had better guard against becoming the second bananas to these 10,000-pound digital gorillas.

We all know what gorillas do to bananas, don’t we?

Barely a week after Google started a pilot program to sell ads in remaindered space in such iconic papers as the New York Times and the Washington Post, several other chains entered into a "transformational" partnership with Yahoo that they either couldn’t, or wouldn’t, fully explain.

While the first stage of the Yahoo deal makes perfect sense (as discussed below), the available information raises questions about whether newspapers are giving the chunky monkeys too much control over the pricing and customer relationships that substantially empower their franchises.

Don’t get me wrong. I think newspapers and the Yahoogles both have a lot to gain by working together. As I said here a year ago:
With formidable brand recognition; deep penetration in their respective markets; powerful relationships with local advertisers, and significant, fast-growing and locally targeted online traffic, newspapers are the perfect partners for the portals….

The online operator who is smart enough to be the first to team with local newspapers will have a long-lasting, unfair advantage over all of its competitors, because (save for a few metro areas) there’s generally only one available newspaper partner per town…

If the next frontier in the battle for web dominance is local…who is more local than your friendly, neighborhood newspaper?
The success of the new print-and-pixel partnerships will depend on how well they are implemented. A seemingly winning example is the plan to link Yahoo’s Hot Jobs with the sites of 150 newspapers owned by Belo, Cox, Hearst, Journal Register, Lee, MediaNews, and Scripps.

By adding Hot Jobs to their own online classified offerings, the newspapers will broaden significantly their listings, enhancing their appeal to both job seekers and recruiters. For its part, Yahoo will gain additional exposure for Hot Jobs and the assistance of each newspaper in selling Hot Jobs packages to the traditional purchasers of print ads. The commitment of newspapers to selling Hot Jobs will be directly proportional to the commissions paid by Yahoo.

Gannett, Tribune and Knight Ridder together benefited mightily from just such a relationship between their papers and Career Builder, the job site in which they not only partnered but also invested. Papers selling online packages to recruitment advertisers not only increased their own revenues but also built the value of CareerBuilder for their corporate parents. Unfortunately, the equity angle does not appear to be on the table for the new Hot Jobs partners.

In contrast to the healthy symbiotic relationships in the help-wanted realm, Google has come up with a plan that potentially could degrade the value of newspaper advertising at the same time it disrupts the valuable, direct relationship that newspapers now enjoy with their advertisers.

As announced last week, Google is offering 100 of its online keyword advertisers the opportunity to bid on print ads that would be carried in participating papers on a space-available basis. Advertisers can ask to be positioned in particular sections of the paper within a certain range of dates, but the publishers retain the right to decide whether and when the ad will run.

Here’s the problem: If publishers reject ads often enough, they will kill the market aborning. If publishers accept lower than their customary rates to opportunistically fill unsold space, they will begin degrading the value of advertising in their papers.

Taken to its logical conclusion, this anonymous, automated bidding process could hasten the commoditization, and thus the likely reduction, of ad rates.

The publishers partnering with Yahoo appear to be contemplating something like this sort of system as the next stage in their unfolding collaboration. They should proceed with as much care as alacrity.

Newspapers will win if they can share their content, local appeal and customer relationships as full-fledged partners to the online collaborators who are supplying the technology and traffic that publishers individually can't attain.

If publishers yield the leadership of the fast-evolving digital advertising market to The Online Powers That Be, they could find themselves on the wrong end of some pretty nasty monkey business.

Saturday, November 18, 2006

Got digital ads?

The explosive growth of local online advertising represents a significant opportunity for revenue-challenged newspapers and broadcasters – if they develop the products and sales strategies to capitalize on the opportunity.

Local online ad sales are projected to grow 21.7% this year to more than $5.8 billion, according to Borrell Associates. Although the party won’t last forever (see graph below), the independent market research firm believes online ad sales will climb 31.6% to $7.7 billion in 2007.

In a gift from folks who usually get paid for this sort of thing, Borrell is providing for free a detailed, market-by-market analysis that will enable local media executives to measure their production against the total estimated digital sales in their market. Get your copy here; it requires registration but it’s well worth it.

Representing collectively a third of local online ad volume, real estate and automotive are the largest categories, according to Borrell. Media companies hoping to hedge against the softening of traditional advertising in the housing and auto categories should focus on digital alternatives that deliver cost-effective leads for Realtors and car dealers.

“In the near term, online ad spending will continue to migrate toward more targeted forms of advertising, such as e-mail and paid search,” says Borrell. “We also expect to see local video advertising become a trackable category in 2007.”

Although search accounts for 40% of all the dollars spent on online advertising, most media companies to date inexplicably have failed to add to their sites such local search capabilities as those available from Eurekster.Com. Similarly, they have conceded the direct-email initiative to start-ups like the edgy Flavorpill. (Disclosure: I am an investor and adviser at Eurekster.)

“The online advertising stampede in local markets has website operators scrambling to add hunters,” says Borrell. “About half the local web sites were adding to their sales forces this year…increasing the small but growing army of online-only sales people by about 37%.”

With this high-stakes land grab under way, the question is whether the spending-constrained legacy media companies are focusing the proper level of attention and resources on the best – and probably last – opportunity they will have to migrate their businesses safely into the digital age.

As Borrell notes, “the recent growth rates can’t continue forever.”

Wednesday, November 15, 2006

Let the sun shine in

“Maybe in English we all can talk peace,” said the Middle Eastern leader interviewed in the first hours of the first day of Al Jazeera’s new English-language service.

The speaker wasn't a terrorist, imam or potentate trying to leverage the network as a slick new Arab propaganda tool. He was Shimon Peres, the prime minister of Israel.

No one could have made a simpler or more eloquent case for why this important new network should be carried by the major North American multi-channel television services that so far have boycotted it.

Although the English version of Al Jazeera is available in some 80 million homes around the world, no major cable TV or satellite operator is carrying it in the United States or Canada. (The service is available online through a few subscription services and a choppy free feed at the network’s web site.)

In contrast to the near-blackout of the English-language feed of Al Jazeera in North America, you can see it in Australia, Belgium, Bosnia, Bulgaria, Croatia, Cyprus, Denmark, Egypt, Estonia, Finland, France, Germany, Ghana, Greece, Honduras, Hong Kong, Hungary, Indonesia, Israel, Italy, Jordan, Kenya, Kuwait, Latvia, Lebanon, Lithuania, Malaysia, Maldives, Malta, Morocco, the Netherlands, New Zealand, Norway, Poland, Portugal, Qatar, Romania, Slovakia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Arab Emirates, the United Kingdom and Uganda.

At a time when digital technology makes it possible to offer a virtually unlimited number of channels on all but the most antique cable TV systems, there is no excuse for operators to deny carriage to Al Jazeera – other than the obvious commercial fear or political loathing that its coverage might engender.

While cable and satellite operators might balk at the expense of adding another channel to their basic services, they easily could sell Al Jazeera as an individual pay channel or as part of a premium-priced service tier. So, the economic argument doesn’t wash.

As a former cable television executive, I was proud of the industry’s commitment to launching and supporting C-Span, the public affairs network. Although windy congressional deliberations and wonk-rich chitchat hardly make for everybody’s idea of must-see TV, the network sheds invaluable light on the political process and its consequences.

Al Jazeera’s coverage of the inflamed Middle East most certainly will unsettle or outrage us, showing us things we don’t want to see, telling us things we don’t want to hear and perhaps fearing things we don’t want to fear.

But it is information we desperately need to have, because Western correspondents, for all their bravery and good intentions, simply cannot tell us what we need to know.

Instantaneous global communication is the miracle of our age. Every now and then, we have the opportunity to put something on television that’s a bit more meaningful than The Hottest Mom in America.

This is one of those times.

Monday, November 13, 2006

Business as un-usual

If newspapers in the hands of experienced operators are flailing…how is it that men who made money selling groceries, building houses or breaking pop music acts will suddenly crack the code?

That was the question posed today in a New York Times column questioning the bona fides, if not the sanity, of the wealthy industrialists and financiers who have emerged as possible buyers of newspaper companies.

How would the new press barons crack the code? They wouldn’t, silly. They would rewrite it. And it’s about time someone does.

At last check, the billionaire publishing wannabes include Eli Broad, Ron Burkle, David Geffen, Maurice Greenberg, Jack Welch and local investors interested in individual properties in Baltimore, Hartford and Long Island.

Far from being hopelessly disadvantaged as outsiders to the newspaper industry, the new investors would bring fresh energy, fresh objectivity and refreshing new perspectives to a myopic business that only recently traded decades of unwarranted self-satisfaction for the sheer terror of competing in a radically restructured marketplace its leaders don’t understand.

Though publishers may be running out of airspeed, altitude and ideas, the billionaires eyeing the newspaper business see some pretty valuable assets. They include prominent, well-regarded brands; monopoly or near-monopoly market positions, and substantial revenues and profits.

They also know the players in this conservative industry – from publishers to pressmen – have been highly defensive and largely unimaginative about making the sacrifices and launching the bold initiatives necessary to compete in what, to them, is the alien environment of the wired world.

Instead of taking a business-as-usual approach to the challenges threatening newspapers, the new owners would:

:: Rapidly gain an objective understanding of the fundamental demographic, economic and technological changes resulting in falling circulation and declining advertising revenues.

:: Leverage the considerable core strengths of the underlying assets to create compelling content that efficiently delivers valuable audiences to advertisers.

:: Take advantage of myriad opportunities to cut unjustifiable operating expenses and invest at least some of the savings in carefully conceived projects to ensure the future growth of their franchises.

Some of the moves would reflect simple common sense. Other solutions would be more radical.

And many, as discussed immediately below, would be personally painful for the individuals forced to make way as the industry moves on.

Outsource ops

In but one example of things to come in the effort to rationalize the newspaper industry, two publishers plan to outsource the production of advertising copy to companies in India.

One of them, the Columbus Dispatch, will eliminate 90 positions by next spring.

Beyond ad make-up, Express KCS, the company that soon will be building ads for the MediaNews Group in Northern California, offers such additional pre-press services as digital picture processing and Quark page layout.

Pre-press isn't the only area ripe for contracting to lower-cost providers.

Several publishers already outsource the phone banks that handle circulation complaints and classified ads. Most such operations are domestic, but the next step could be to send those calls abroad.

Reuters has more than 1,000 journalists feeding the wire from India, while Thomson Financial has software that writes certain types of basic news stories in three-tenths of a second.

Although this idea has yet to be implemented, at least one major chain had considered consolidating copyediting at a small number of regional centers far removed from the actual markets they serve.

Thus, you would have to hope that a copy editor in South Carolina, Ho Chi Minh City or Bengalooru knew the difference between Ninth Street and Ninth Avenue in San Francisco, that State and La Salle Streets are parallel in Chicago and that the Bronx is up and the Battery’s down.

Go back! It’s a trap!

Four good friends recently have joined the hapless, helpless, hopeless ranks of blogging.

Clearly, like me, they have too much time on their hands. Unlike me, however, they are excellent writers who have lots to say.

Mark Potts, who never wears socks, writes Recovering Journalist. Henry Kisor, who wears socks in bed, pens The Reluctant Blogger. Jerry Ceppos, who washes his socks in the shower, runs Media Matters. Mike Zielenziger, who sometimes likes to hang his socks on his ears, authors Asia File.

If you want to read something good after reading Newsosaur, check them out.

Friday, November 10, 2006

Not the best of times

Plunging 2.1% from last year, newspaper ad sales were a “bust” in the third quarter, says Miles Groves, the independent analyst who is to publishing what Madame Defarge was to guillotine victims in “A Tale of Two Cities.”

Unlike Madame Defarge, who savored the aristocratic executions she documented in her knitting, Miles, who authoritatively compiles and analyzes industry data, actually wants newspapers to succeed.

But there was an uncharacteristic note of despair in the latest issue of his publication, MG Strategic Research. “As is no surprise to any reader,’ he writes, “the third quarter finished as a bust.”

In the worst performance in years, newspaper advertising in the third quarter fell 2.1% from the prior year to a bit less than $3.77 billion in sales. The primary drag was September, whose $1.28 billion in revenues were 3.2% below those of the previous year. The weakening sales momentum of newspaper advertising is illustrated in the table below.

With the crucial fourth quarter well under way, let’s hope everyone keeps his head.

Wednesday, November 08, 2006

Lutefisk beats politics? You betcha

The Democrats took control of the House and the President fired the secretary of defense, but the top stories on the minds of newspaper readers in Minneapolis yesterday were a paean to Minnesota wine and a piece entitled, “Lutefisk: It’s not a joke.”

That’s one of the intersting things I found in a quick analysis of reader reaction to the tsunami of election coverage that just crested over us. The study suggests there is a major disconnect between what editors want to print and what readers want to read.

Since the majority of newspapers track the stories website visitors send to their friends, I rounded up the three most-emailed stories yesterday at eight major newspapers. The results appear below.

Of the 24 stories in the sample, fully two-thirds had nothing whatsoever to do with the election. Only five (20.8%) contained election results or analysis. Only three (12.5%) dealt with the resignation of Donald Rumsfeld in the aftermath of the vote.

The non-election fare ranged widely from a no-knead bread recipe in the New York Times to the follow-up on an investigative report in the Los Angeles Times to a USA Today story about a naked man arrested for carrying a concealed weapon.

The only paper whose readers put election news in all three of the top spots was the Denver Post. The other two election stories were chosen by readers of the Wall Street Journal. With all the election news concentrated in those two papers, no election stories made the Top Three in any of the other six.

What does it all mean?

As a journalist, I would say news selection, especially in such matters as an election changing the balance of power for the first time in 12 years, is too sacred to be affected by pandering to subscribers who are more interested in where the naked man put his gun than in the details of the Senate recount in Virginia.

As a marketing guy, however, I would say there is an uncomfortable, if not dangerous, incongruity between the intentions of the editors and the expectations of their readers.

One explanation for the apparent indifference to post-election coverage is that readers may be suffering from profound fatigue after days of increasingly intrusive campaign advertising, relentless automated phone calls and wall-to-wall election coverage.

Another possibility is that readers, though still appropriately interested in the electoral process, felt they got all the news they needed in the barrage of TV, radio and online coverage that climaxed on election night.
In that case, they may have viewed the extensive morning-after newspaper coverage as a wretched excess of day-old news.

Editors must pay serious attention to the disconnect between them and their readers. And they need to fix it. Fast.

Top three emailed stories
on the day after the election

Atlanta Journal-Constitution
Woman fatally bitten by snake in church
UPS eyes job cuts in 2007
Rumsfeld quits; Bush taps Gates

Dallas Morning News
Pastor calls non-Christians "doomed"
Man dies in fall at freeway interchange
Crew of TV's "Cheaters" goes on trial

Denver Post
Voting problems overwhelm city
Roundup of local election results
Pot ballot initiative "goes up in smoke"

Los Angeles Times
Boss quits controversial hospital program
Buddy system helps special-ed students
L.A. investors bid on Tribune Co.

Minneapolis Star-Tribune
The Minnesota wine challenge
Lutefisk: It’s not just a joke
Facts behind flu shots

New York Times
The secret of great bread
No-knead bread recipe
Op-Ed: Married couples "too close"

USA Today
Naked man arrested for concealed weapon
Rumsfeld stepping down, Bush says
ABC putting "Lost" series on hiatus

Wall Street Journal
All eyes on congressional races
Rumsfeld resigns, replaced by Gates
Dems hope to control Senate; VA recount

Source: Newspaper sites 5-6 p.m. (EST) on Nov. 8

Nearing the bone

Now that editor Dean Baquet of the Los Angeles Times has been ousted for refusing to cut his staff, his replacement appears likely to inherit the task of streamlining the newsroom.

The Wall Street Journal reported that Dean's tenure was forcibly ended when he refused to agee to the publisher's request to eliminate "50 to 75 jobs."

While we don’t know how far incoming editor James O’Shea will be asked to go, a reduction of up to 165 journalists is theoretically possible, based on generally accepted industry staffing standards.

If the newsroom of the Times were manned at the widely prevailing ratio of one editorial employee for every 1,000 copies of daily circulation, then the staff would be honed to 775, a reduction of 17.5% from the present 940.

Daily circulation at the Times, the nation's fourth largest paper, is 775,766. Because Sunday circulation of 1.17 million is substantially greater than the daily run, it is is conceivable that management could justify a somewhat larger staff than indicated by daily circulation alone.

Although the worst-case cuts may not be in prospect in Los Angeles, dramatic reductions are starting to appear. In but two recent examples, deep staff reductions are planned at one former Knight Ridder newspaper and feared at another.

The San Jose Mercury lost 52 journalists in the fall of 2005 as Knight Ridder commenced the belt-tightening process that preceded the sale of the company early this year. Last month, the paper’s new owner, MediaNews Group, said it plans to eliminate another 40 newsroom jobs.

If MediaNews implements the announced cuts, the newspaper’s staff will have been reduced in less than two years by 47.7% to 240 journalists. The Mercury’s circulation is 225,677 daily and 249,113 on Sunday.

The publisher of the Philadelphia Inquirer said this week that he may have to eliminate as many as 150 of its 425 newsroom positions, depending on the extent of concessions managagement gains in the intense contract negotiations under way between the paper and its unions.

Knight Ridder chopped the Inky newsroom by 90 people in the fall of 2005 to the present 425. If an additional 150 positions indeed were eliminated, the Inquirer’s staff would fall to 275, a decline of 53% from its strength before KRI made its cuts in 2005. The circulation of the paper is 335,723 daily and 682,214 on Sunday.

Against this backdrop, Amanda Bennett, the Inky's top editor, was repalced today by Bill Marimow, a former Pulitzer Prize-winning Inky journalist who most recently headed the news operation at National Public Radio. Meeting his new staff for the first time in his new role, Bill warned that "painful" cuts lie ahead."We have to figure out how to thrive in an era of reduced resources," he added.

Although heavy staff cutting at these high-profile metros may have garnered the biggest headlines, hundreds of other positions have been eliminated in dozens of newsrooms since the fall of 2005, when publishers began aggressively trimming headcount in the hopes of bolstering their profitability and improving the performance of their swooning shares.

So far, it hasn’t worked too well.

Monday, November 06, 2006

Fizz vid rips lid off ad biz

When half a dozen Mentos are dropped into a two-liter bottle of Diet Coke, they instantly create an explosive, yet harmless, jet of fizz that spectacularly spews a dozen feet in the air.

When an online video of this phenomenon is combined with the marketing might of Google and the Coca-Cola Co., you get not only an instant viral classic but also a perfect example of the explosive, and not quite harmless, changes about to roil the relationship between advertisers and the mass media who rely on them.

The fizz-vid genre was popularized in the spring by a pair of goggled geeks in white lab coats, who dumped dozens of Mentos into dozens of bottles of Diet Coke and posted videos of the elaborately choreographed eruptions at Links to the clips were gleefully disseminated by everyone from the Wall Street Journal to the authors of any number of emails, instant messages, blogs and MySpace postings.

Back then, it was all in good fun. Now, it has become serious business. And probably very good business, too.

Unlike the first effort – which was an adless, ad-hoc undertaking – the new fizz vid is being promoted by Google and sponsored by Coke and Mentos, the latter being a brand owned by Perfetti Van Melle S.p.A., the Italian confectioner. Google has sewn up exclusive rights to host the clip for the next six months.

Every time you click on the video, which is essentially a wall-to-wall product placement for Diet Coke and Mentos, Google gets paid a little something by the soda and mint companies. Every time Google gets paid, it splits a littler something with EepyBird.

National Public Radio reported that the first fizz vid was viewed more than 6 million times and that the new release was clicked some 620,000 times in the first week of its release.

Eager to surpass the success of the original video and, thus, enhance the return on its investment in soda and goggles, EepyBird offers every visitor the code that makes it possible to embed the video in a web site. When you click on the video below, you'll help feather EepyBird’s nest.

We don’t know how much Google is collecting for each click or what percentage of the revenue is being split with the video’s producers. But the speculative math gets pretty interesting.

If the second video does as well as the first, it would produce revenue of $1.5 million for Google at 25 cents per click. If the fizz kids collect a third of the take, they would earn $500,000 – or more than enough for a life’s supply of Diet Coke and Mentos. (Since the producers probably get free product, they should bank the proceeds against the day the fizz craze fizzles.)

In assessing the implications of this new advertising model, there are several winners, as discussed immediately below, and one big loser: The legacy media companies.

As to the winners:

:: Google adds a powerful new dimension to the pay-per-click advertising model that to date has depended largely on its search traffic, which, while historically impressive, probably can’t sustain its robust growth for an indefinite period of time. Google also is previewing the way it plans to capitalize on the $1.6 billion purchase of YouTube. In the process, it gains at least a partial solution for populating YouTube with safely un-copyrighted content, a problem that has been – and likely will continue to be – a major headache.

:: Advertisers add a low-cost, high-impact and highly targeted tactic to their arsenal. They are gaining a superior way to showcase their products in a welcome manner that will be well tolerated, if not embraced outright, by the young and restless audience they covet.

:: Individual content producers – or at least a lucky and talented few of them – will gain unprecedented outlets to showcase and, better still, actually sell their wares. In the wondrously viral way of the web, the new fizz vid urges viewers to enter their own home-baked (half-baked?) productions in a contest sponsored by Coke. To make it as easy as possible for other wannabe producers to help stock the shelves at YouTube, Google is soliciting contributions here.

The degree of success enjoyed by the above playes will determine how badly mass-media advertising is hurt.

Eroding broadcast audiences and tumbling print circulation are the direct result of the power the digital media gives consumers to control what they read, what they hear, what they watch, which ads they heed and when they elect to do so.

Although many advertisers are eager to vector larger portions of their budgets away from the old media and into the new, they have been put off by the fragmented and unruly nature of the digital realm.

If Google can leverage the labors of independent content producers to create well targeted, mass media-sized audiences that can be delivered at lower-than-mainstream-media prices, then it – and other online imitators – will gain ever-larger slices of the advertising pie.

Google has the ability to usurp the last great advantage of the legacy media, which for centuries have thrived as one-stop shops where advertisers could buy lots of impressions for lots of money. Advertisers always knew that a good portion of their expendutures was squandered on readers and listeners who didn't care, but it was the best alternative they had. Until now.

If Google proves that it can efficiently synthesize large and psychographically cohesive audiences from countless bits of disparate content and billions of seemingly random clicks, then it truly has a chance to blow the classic paradigm to bits.

With production and distribution costs at essentially zero, Google would emerge not only as a highly effective advertising alternative but a hell of a bargain, too.

An inelegant variation on the theme

In another example of Google’s effort to become the Big Board of advertising, the company now is helping online keyword buyers buy spots in the New York Times, Washington Post and several other major newspapers.

The three-month newspaper experiment is similar to an ad-brokering program Google piloted in select magazines to “little success,” according to the Post, one of its new print partners.

Unlike the fizz biz described above, the newspaper ad plan seems considerably less slick.

As reported in the Times, 100 selected Google advertisers will be offered the opportunity to post ads in participating papers on a space-available basis within a range of dates. While advertisers can ask to be positioned in the particular sections of the paper, the publishers retain the right to decide whether and when the ad will run.

If you are in the turkey-baster business and depend on buying a certain amount of advertising to ship a certain amount product between now and Thanksgiving, would you entrust the fate of your enterprise to the uncertainty of this sort of arrangement?

Sunday, November 05, 2006

Discounts and dat count

An unsettling new analysis of newspaper circulation has found that fully paid circulation “is typically falling even faster” than the overall declines reported last week.

While the study may be taken as further evidence of the hopeless decline of the industry, the intelligent use of increased discounting may, repeat may, reflect a growing degree of sophistication and realism among publishers.

The fact of discounting is not damning in itself. The good or evil of it depends on how it is used.

Based on an analysis performed by Merrill Lynch, Journalism.Org reported that newspapers are relying on discount subscriptions to maintain their numbers at the same time they are junking expensive vanity and promotional circulation.

In one example, the six largest papers operated by Lee Enterprises, which achieved the best circulation performance of the public companies in the last six months, reported that the number of subscribers paying less than 50% of the cover price rose 43.9% in the period ended in September. The story was the same with many other publishers.

Although discounting may be the last-ditch effort of a flailing, failing business, it is also a long-standing, widely used and potentially productive marketing tactic.

When I ran a cable company in the days before broadband and satellite TV, the list of our different discount packages filled several binders as thick as New York telephone books. As the only multi-channel TV guys in town, we were anything but a failing business with our consistent 50% operating profits.

Although many people willingly would have subscribed at full price to our services, we found it efficient to offer bulk discounts to landlords and homeowner associations, because the captive audiences they controlled ensured that anyone wanting to watch TV would have to buy from us. This dropped to zero the cost of acquiring customers in those venues.

We discounted HBO and other premium services for basic cable customers to encourage them to send us bigger checks every month. With our wire already in their living rooms, the monthly fee we paid HBO to add a subscriber was a nominal expense against the long-term incremental revenue we gained.

Notwithstanding our best efforts, there were still perhaps 30 households out of 100 that didn’t subscribe to cable TV. We went after them aggressively with free installation and discounted introductory programming packages. Even though we were perfectly happy to provide free installation as the necessary cost of acquiring a new customer, we always said it was worth $49.95 to establish the value of our service in the eye of the householder.

Airlines are famous (or notorious) for charging different prices for the same seats on the same plane. Restaurants offer early-bird specials to recruit patrons during the slack period between 5 and 6 p.m. Movie discounts get seniors out of their La-Z-Boys and over to the popcorn stand, where theaters make the real money.

Fearing anemic Christmas sales this year, Wal-Mart took $20 off the price of many popular toys and whacked $500 off some laptops and flat-screen TVs. If traffic is going to be weak this year, the folks in Bentonville hope that low prices on high-profile products will draw customers into their stores, instead of those of their competitors.

In the event all the laptops still aren’t sold by January when the new Vista-equipped computers come out, Wal-Mart will roll back prices on the obsolete stock. The same goes for Halloween candy on Nov. 1 and the 2006 Chryslers clogging the lots of the dealers who are supposed to be selling the 2007 models.

Now that we have established a few of the reasons why discounting makes sense, the question for the newspaper industry is whether it is discounting sensibly.

As illustrated at left, a newspaper would be nutty to spend $40 per order to sell a 12-week trial subscription for only 25% of the cover price. The paper would lose $26.50 per $13.50 sale.

The paper would be even nuttier to spend another $40 toward the end of every 12-week period to recruit a new discount subscription to replace each expiring order. If the insanity were reprised four times a year, the paper would lose $106 for every $54 in revenues.

The paper would be nuttier still, if it sold the subscriptions in far-flung communities of marginal value to advertisers.

On the other hand, the newspaper would be making a wise investment, as well as a tiny profit, by selling a 52-week subscription at a 25% discount to a customer in a demographically desirable part of its market. Although no one is going to get rich on a profit of $18.50 a year, the newspaper in this case would be securing a long-term subscriber at a reasonable cost.

Assuming the newspaper did its job right, the new customer would come to value the product and remain a loyal subscriber for well beyond the introductory period. Ideally, the discounted subscription would pay handsomely for itself for many years to come.

Although it is emotionally difficult for newspaper people to accept that a growing number of consumers object to paying the full price for their product, it is common for the marketplace to rebel against existing pricing models when faster, better or cheaper alternatives emerge.

After color televisions came out, the price of black and white sets collapsed. The same phenomenon now is well under way with respect to flat-screen vs. tube TVs.

With the Internet offering many free ways for people to get information and amuse themselves, infotainment has become more of a commodity than it was when only Benjamin Franklin and a couple of other guys in Philadelphia wielded the power of the press. (As postmaster, BTW, Franklin also controlled the primary means of distribution, to the understandable dismay of his few competitors.)

When something becomes a commodity, as opposed to a product uniquely available from a single vendor or a limited number of sources acting more or less in concert, then competition drives down its price.

One great example is what has happened to the cost of a long-distance telephone call. When Ma Bell’s monopoly was forcibly unbundled, competing carriers rapidly emerged to sell identical services at discount prices. Today, Skype does it for free.

In addition to being a valid tactic to promote circulation, therefore, discounting also represents the opportunity to begin subtlely reducing newspaper prices to a level that will sustain a sufficiently large audience of attractive readers for advertisers in an era of widely available free media. How low will publishers have to go? That's hard to say, but free is not out of the question in some situations.

The Chicago Tribune, Dallas Morning News and Washington Post, have decided to fight free with free by publishing giveaway tabloids. Although the value of this strategy has yet to be definitively proven, these initiatives demonstrate a thoughtful attempt to address the powerful competitive forces challenging an industry beguiled far too long by its unwarranted self-satisfaction.

If newspapers use discounting and giveaways to build loyal, long-term audiences that can be delivered efficiently to discerning advertisers, the industry will emerge as a healthy competitor for the future.

If publishers think they can use these tactics to fake us out, then they – and we – will be sorry.

Friday, November 03, 2006

Private party?

Although many analysts believe the Tribune Co. is poised to follow Knight Ridder into liquidation, it actually is a prime candidate for going private in a management-led buyout.

In an LBO, the company would be purchased from public shareholders by private investors supported by substantial loans. Management, which would be retained and powerfully motivated by attractive incentives, then would be free to radically restructure the business without worrying about producing the orderly earnings demanded by Wall Street.

Radical restructuring would include, but not be limited to, trimming non-strategic newspaper circulation, slashing expenses (including headcount at newspapers and broadcast properties) and investing more aggressively than today in new print and digital products.

If the stars aligned correctly and management executed well, the company could emerge from private ownership within three to five years as a lean, mean media machine. The payday for investors and management would come in one of two ways: Either the company would refloat as a public stock or it would be sold as a plumb strategic asset to another media company like Gannett, Google or Fox.

As discussed here and here, private ownership would put a heavier burden of debt on Tribune than it carries today. And the loans would have to be paid on time. Or else.

The local investors who bought the Philadelphia newspapers in an LBO just a few months ago are planning layoffs and other cost reductions to assure they meet loan payments of some $40 million this year.

Although the Philadelphia papers generated $100 million in profits in 2004 and $76 million in profits in 2005, management estimates that it will make only $50 million in 2006. That leaves less than $10 million “to invest in the business,” according to the Philadelphia Inquirer.

With due respect to the known knowns of private ownership and unknown unknowns of the newspaper business, Tribune Co. is a bargain by historic standards.

At an enterprise value of less than $8 billion, the company is trading at 7.4 times its trailing operating cash flow, while Knight Ridder sold earlier this year for 9.5x earnings and Pulitzer sold in 2005 for 13.5x earnings.

The biggest risk investors in Tribune would take is whether these multiples would rebound to earlier levels or continue trending lower. If multiples kept declining, it would be difficult to preserve, much less improve, the value of the company.

At the insistence of dissatisfied investors, the Tribune management has shopped the company among private-equity groups and likely buyers in the newspaper industry. The initial expressions of interest were lukewarm from financial buyers and, so far as can be determined, nonexistent from newspaper publishers.

Now that the present market value of the company has been verified by third parties as being near a historic low, management has a chance to line up the financing necessary to take the company private and get about the business of fixing the business.

Wednesday, November 01, 2006

Time is not on their side

Before newspaper publishers congratulate themselves on the recent 10.9% increase in the time readers spend on their web sites, they ought to take a look at how much better the competition is doing.

The Newspaper Association of America, the industry-funded trade group, reported this week that nearly 57 million Americans spent an average of “more than 41 minutes” perusing newspaper web sites in September. That’s a respectable gain of 10.9% from the previous year.

But the 41 minutes spent at newspaper websites in a month is fully 40% lower than the average 1 hour and 40 minutes that visitors linger at the 10 busiest web sites in a month, according to traffic statistics compiled by Nielsen/NetRatings in April.

While surfers are spending an average of 41 minutes per month on newspaper web sites, they are averaging more than six hours per month in visits to AOL, more than three hours at Yahoo and more than two hours at MySpace (see table below).

Putting it another way, the average visitor spends 1.37 minutes daily at a newspaper web site vs. more than 12 minutes a day at AOL, more than six minutes daily at Yahoo and more than four minutes a day at MySpace.

It might be argued that it isn’t fair to compare newspaper sites with the likes of AOL, Yahoo and MySpace.

The web biggies, after all, are loaded with sticky, audience-participation features like IM, email, search, music, video and personal web sites that not only suck up lots more online time but also deliver billions of ad-sponsored page views.

On the other hand, visitors can zip in less than two minutes through the typical newspaper site, where, in the best of cases, the day-old news is enriched by a few wonkish blogs.

I am not arguing that newspapers should emulate the mega-portals, a costly strategy that most likely would fail at this late date. But they do need to get a lot more creative, if they hope to save themselves through sustained and robust online growth.

To succeed in the digital realm, pubishers must pay scrupulous attention to the indigenous competition on the Internet – and start developing products and services far more relevant to their readers and advertisers (and, significantly, their non-readers and non-advertisers) than they are today.

With only 1.37 minutes a day to captivate online readers, time is not on their side.