Saturday, May 31, 2008

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Wednesday, May 28, 2008

Lies, damned lies, and SEO

A few weeks ago, a story ricocheted around the Internet about a 13-year-old boy who stole his father’s credit card to hire hookers to play videogames with him in a Texas motel. The problem is that the story wasn’t the least bit true.

But the reaction to the widely discussed hoax was not outrage from many of the publishers and marketers who ply the web for fun and profit. Much to the contrary, several celebrated the stunt, offering hearty congratulations to the perpetrator.

They ought to be ashamed of themselves.

With the Internet the greatest, most open and most accessible forum for information, opinion and entertainment in human history, those of us who appreciate this modern miracle must take its stewardship seriously. And that means working hard to assure the reliability and the usefulness of the information we publish.

But that’s not how many cynics see it.

Hailing the tsumani of traffic the hooker story drove to the originating site, web professionals like Jane Copeland said it “really doesn't fuss me much that I read a story that turns out to be made up.” Writing in her blog that Fox News and other mainstream media foolishly picked up the story without verifying it, Jane said “the fact it makes Fox look stupid is one of my favorite things about the entire episode.”

Far from being on the fringe, her comments were cheered by an overwhelming majority of the more than 125 comments to her post.

While Jane’s sniggering disregard for the truth is dismaying on its face, it is doubly disturbing because she works for SEOmoz.Org, which describes itself as “a hub for search marketers worldwide, providing education, tools, resources and paid services.” SEO stands for search-engine optimization and “moz” evidently refers DMOZ.Org, which describes itself as “the largest, most comprehensive human-edited directory of the Web.”

In other words, Jane’s organization is one of hundreds, if not thousands, of outfits who get paid to help websites gain all-important recognition on Google and other search engines. As such, Jane and her peers know full well the damage a skilled individual can do with a well-crafted, yet deceitful, posting.

The tale of the teenager and hookers was posted on May 9, in a tactic as known as “linkbaiting,” on an inside page of an obscure site covering personal finance. (I am deliberately omitting the name of the site because I am not taking the bait.) The author evidently listed the phony story on Digg and similar user-generated news sites, and it spread virally over the web in short order.

The point of linkbaiting is to attract, by hook or by crook, as many in-bound links to a site as possible, so as to enhance its relevance, or “PageRank,” in the system Google uses to sort search results. When many sites contain the keywords searched by a Google user, the results for the site with the highest PageRank are displayed higher in the results than those of sites with inferior rank.

The hoax worked to the extent that it momentarily boosted the site’s traffic by more than tenfold, according to Alexa.Com. But the incident apparently attracted such notoriety that Google has not advanced its PageRank beyond 3 out of a possible 10 on a logarithmic scale. The site’s PageRank prior to the escapade could not be determined.

What Jane and her ilk fail to recognize is that Google will not long suffer the gaming of the algorithms it uses to sift and sort content. Here’s one example:

In the early days of the web, people loaded tons of keywords into the invisible meta tags on their websites in hopes the words would favorably influence the search engines. Once this practice became widely and aggressively abused, the search engines de-emphasized their reliance on meta tags and developed different ways to categorize content.

If the linkbaiters think they can outsmart Google for long, they are dead wrong. But the baiters are doing far more damage than any transient inconvenience they cause the rocket scientists at Google, who actually relish the challenge of staying ahead of them.

The steady pollution of the web with phony and malicious info-junk could turn an awesome resource for humanity into little more than useless, time-wasting digital flotsam.

How can that be good for users, publishers or advertisers – and, especially, for the people who make a living as SEO sherpas?

Sunday, May 25, 2008

Newspaper war in Silicon Valley

An old-fashioned newspaper war is about to break out among a trio of free publications in the heart of one of the least print-centric places in the universe, Silicon Valley.

The free-for-all may, repeat may, momentarily motivate some residents of the ultra-wired community to pry themselves away from their laptops, Blackberries and iPhones. If so, that would be great for local merchants seeking cheap and targeted advertising. But is not clear the rivalry will turn out to be good business for the publishers, because the jury is decidedly out on the efficacy of the free-newspaper model.

Ground zero in the upcoming Silicon Valley newspaper war is leafy and genteel Palo Alto, CA, a high-end bedroom community about 50 miles south of San Francisco that is home to such institutions as Stanford University, Hewlett Packard and Steve Jobs.

The contenders in the slugfest, which seems like the sort of thing that would be more at home in gritty Manhattan, are:

:: The long-running Palo Alto Daily News, which is owned by Media News Group, the chain that dominates all the Bay Area but San Francisco with such titles as the San Jose Mercury News, Contra Costa Times, Oakland Tribune, San Mateo Times and Marin Independent Journal.

:: The incumbent Palo Alto Weekly, which is owned by the local Embarcadero Publishing Co., the publisher of a number of other free products in the Bay Area.

:: And the newcomer, the Palo Alto Daily Post, which is expected to be launched this week by the enterprising Jim Pavelich and Dave Price, who were among the threesome who originally founded the Daily News. Jim and Dave pocketed many undisclosed millions in early 2005 when they sold the Daily News to Knight Ridder at the last moment immediately before the newspaper industry entered its long nightmare.

The fracas in Silicon Valley is getting under way at a time when the model for free newspaper publishing is far from proven.

The world’s largest publisher of free dailies, Metro International, which boasts 23 million readers a day in 100 countries, reported a 6.1% drop in sales and a loss of €6.4 million in the first quarter of this year. Metro, which is actively shopping its titles in Boston, New York and Philadelphia, has a colorable case when it blames the worst media environment since 1930.

But Piet Bakker, a professor at the University of Amsterdam who writes a terrific blog on free newspapers called Newspaper Innovation, reports that “almost a quarter” of the more than 300 free dailies ever launched in the world were shuttered within a few years.

Although Piet estimates that 70% of the surviving publications are not profitable, he notes that a large proportion of the freebies are fairly new, having been brought to market since 2005 or later. “Launching costs are substantial and almost no paper expects to make a profit in the first three years,” he writes. “Circulation and readership data are not yet available while advertisers have to be convinced, as well.”

Noting that the worldwide popularity of free newspapers is rising rapidly at the same time paid newspaper sales are contracting in places like the United States, Piet believes free papers are attracting new readers who otherwise might be lost forever to publishers. If advertisers agree, then free newspapers will become viable in the fullness of time, assuming their publishers have the staying power to take them to profitability.

If not, then ever more freebies will join such casualties as Boston Now, which characterized itself “as a healthy, growing 119,000-circulation daily” when it announced last month that it was “suddenly compelled to halt operations due to rapidly deteriorating economic conditions.”

While Palo Alto is an economically and demographically succulent market where real estate prices continue to climb even to this day, the upscale community hardly seems like a place where multiple, profitable free newspapers would be likely to thrive.

Unlike the East Coast and European cities honeycombed with the public-transportation systems targeted by the publishers of most free newspapers, the closest Palo Alto comes to mass transit are the Benzes, Beemers and Priuses that shuttle kids to their soccer games. Unlike the East Coast and European cities built around dense, central office hubs, people in Palo Alto work at remote and self-contained office campuses surrounded by acres of free parking. Unlike the many retail districts that dot East Coast and European cities, Palo Alto has a single, modest shopping street and a ginormous mall surrounded by even more free parking.

In short, unlike the readers who consume free newspapers on the East Coast and in Europe, the people who live in Palo Alto not only drive everywhere all the time, but also frequently are observed reading their email and writing text messages as they motor along at speeds surpassing 70 miles an hour.

Will another free newspaper encourage them to pull over for a quick read? In the interests of public safety, I hope so.

Monday, May 19, 2008

Newspaper shares -35%, CEO pay -11%

Things were so tough last year that the top executives of eight of 12 publicly held newspaper companies suffered a pay cut. But things were even tougher for their stockholders.

That’s because the shares of the dozen newspapers dived an average of 35.7% in 2007 at the same time the average compensation of the chief executives fell by a more moderate – but not insignificant – 11.7%.

The incongruity in pay and stock performance occurred even though all the companies have elaborate compensation packages to incentivize their top executives to build shareholder value. The disparity suggests some of the plans could be in for a tweaking.

Public corporations are required by the Securities and Exchange Commission to disclose the compensation of their senior managers in the proxy statements they file prior to their annual meetings, which typically occur in the spring. After the last of the proxy statements became available on Thursday, it was possible to compare the pay of each CEO to the performance of her or his stock. (The Sun-Times Media Group [SVN] was not included in the survey because its CEO changed between 2006 and 2007.)

The proxy statements reveal that the most highly compensated publisher of all last year was Rupert Murdoch, who banked $32.1 million in wages, benefits and other compensation at News Corp. (NWS). Although Mr. Murdoch enjoyed a 24% raise over his 2006 pay, the value of his company’s shares slid 8% in 2007.

The other big winners were:

:: Robert Decherd of Belo (BLC) got a 77.8% raise to $10.2 million in spite of 5.1%-dip in his company’s shares. Earlier this year, the company’s newspaper assets were spun into the new A.H. Belo Corp. (AHC), where Mr. Dercherd has moved as CEO.

:: Mary E. Junck of Lee Enterprises (LEE) pocketed a 17.8% increase to earn a bit less than $3.4 million as her company’s stock skidded 52.3%.

:: The pay of Robert E. Jelenic, the former CEO of Journal Register Co. (JRC), soared 333.2% to $6.3 million despite a 75.9% plunge in his company’s shares.

Mr. Jelenic is a special case in that his pay envelope was fattened by the $4.9 million severance payment he received last fall when he exited the company he ran for two decades. Since then, JRC has been booted off the New York Stock Exchange and its shares, which traded as high as $18.39 in 2006, now are 24 cents apiece on the Pink Sheet (JRCO.PK). The company also has warned that it may default this summer on the hefty debt it assumed on Mr. Jelenic’s watch.

Mr. Jelenic’s severance payment from JRC, which happens to be equal to 52% of the company’s present $9.2 million market capitalization, was not counted in calculating the average pay of the publishing CEOs, because it inordinately skewed the results. (The full amount of the payment is presented in the graphics below.)

Although the rest of the CEOs made less money in 2007 than in the prior year, their pay cuts in many cases were not nearly as steep as the losses booked by their shareholders. Most notable are:

:: Gary E. Pruitt of McClatchy (MNI), whose pay tumbled 17.3% to $4.6 million while his company’s shares slumped 71.1%.

:: Craig A. Dubrow of Gannett (GCI), whose comp fell 7.4% to $7.5 million as his shares plunged 35.5%.

:: Steven Smith of Journal Communications (JRN), whose pay fell 13.4% to a bit under $1.2 million while his company’s shares dropped 29.1%.

The declines in the pay and stock prices of the top officers at Media General (MEG) and the New York Times Co. (NYT) were fairly closely correlated. In both cases, though, shareholders took a slightly larger haircut, percentage-wise, than did the executives.

While all of the above managers enjoyed compensation surpassing the performance of their shares, three CEOs suffered significantly more than their investors in 2007. They were:

:: Michael E. Reed at Gatehouse (GHS), whose pay swooned 85.7% to $925,633 while his company’s stock fell 52.3%.

:: Donald E. Graham of the Washington Post Co. (WPO), whose comp dropped 52.4% to $411,700 as his shares slid 17.9%. (Mr. Graham also is, by far, the worst-paid member of the group.)

:: Kenneth W. Lowe of Scripps (SSP), whose pay fell 20.3% to $7.9 million while his stock dropped 9.9%.

It may be just a coincidence, but Mr. Graham and Mr. Lowe head two of the most diversified and progressive companies in the publishing industry. Even though their sagging shares performed better than the average for their peers, the compensation programs at their companies evidently penalized them for failing to achieve the undoubtedly loftier goals set by their boards.

Disclosure: I own shares of JRC, MNI and SSP.

Thursday, May 15, 2008

CNET, a welcome SOS for CBS

It took a decade and a half to get there, but CNET finally is making it big in the TV business. Now, the $1.8 billion question is whether CNET can help CBS make it bigger in the Internet business.

On track to have its shares acquired for a juicy 45% premium by CBS, CNET originally was formed as CNET-TV in 1993 by Halsey Minor and Shelby Bonnie to create a technology channel for cable television in the days when the Internet was still a gleam in Al Gore’s eye.

Despite getting some programs picked up on the Sci-Fi Channel and the USA Network, the idea of an entire channel devoted to technology was deemed at the time to be way too geeky by cable-television executives, like me, who felt far more comfortable with shopping channels, old movies, bass-fishing derbies and pay-per-view wrestling extravaganzas.

With spare channels largely unavailable in the era before cable systems upgraded to digital broadband systems, the CNET crew decided to try its hand at creating programming for the then-emerging Internet. And the rest is history.

At the same time CNET was figuring out the Internet, “Dr. Quinn. Medicine Woman” topped the charts for CBS and the biggest headache at NBC was worrying about how to replace the blockbuster ”Cheers,” which was going off the air after a 10-year run that left it the fifth most popular show in TV history. (“I Love Lucy,” of course, will forever reign as No. 1.)

By the time the Internet got big and disruptive enough to merit the attention of TV and other legacy media executives in the late 1990s, the solution was to throw money at the problem. CBS bought a third of Sportsline, a feeble rival to ESPN.Com, for $100 million and was part of the group that plunged a collective $89 million into Third Age, a site for e-Geezers that essentially fizzled despite such puffery as a piece in Fast Company saying it was “poised for total media domination.”

Perhaps the best Internet investment CBS ever made was funding MarketWatch, which was sold to Dow Jones for $528 million in 2005. When Dow Jones finally woke up to the possibility of delivering market news over Internet after a dozing for more than a decade, CBS (then Viacom) owned a bit less than 25% of the business website. At that rate, CBS probbaly just about got its money back.

Critics of the CBS purchase of CNET say traffic on the site is growing too slowly and the price is too high. You also can add that CNET is a dilutive transaction, becasue its operating margin of 13.4% on sales of $408 million falls well below the 22.2% margins that CBS generates on $14 billion in revenues. Further, the 45% premium seems pretty strong for the apparently non-competitive purchase for a company that the New York Times said “no one wants to buy.”

On a strict financial analysis, therefore, the deal doesn’t pencil out (and that’s why CBS stock was falling this morning). But there’s more to this deal than dollars and cents, strategically speaking.

If CBS and CNET can be made to play nicely together (always a major "if"), each has a chance to help the other build stronger and more forward-leaning interactive businesses.

CNET possess the true Internet DNA that CBS can never hope to achieve. That’s why it had to do buy it. But CBS has a lot to offer, too, in its rich content, considerable financial resources and the inveterate showmanship that CNET can only dream about.

Given that he serves at the pleasure of the mercurial Sumner Redstone, Leslie Moonves is staking his career on making this work. But his risk is modest. If he didn’t do something like this to try to drag CBS into the 21st Century, he wouldn’t have much of a career, anyway.

Wednesday, May 14, 2008

The inconvenient truth for publishers

Another shoe is about to drop on the battered newspaper industry and it is going to be a big, fat, green Birkenstock.

With global warming and soaring gasoline prices focusing consumer, political and eventually regulatory interest on environmental sustainability and energy consumption, people looking to be kinder to Mother Earth are going to start wondering about the impact their daily paper makes on the environment.

They might not like what they learn.

A prototypical publisher selling 250,000 newspapers on each of the 365 days of the year adds nearly 28,000 tons of carbon dioxide to the atmosphere, according to calculations we’ll explain in a moment. That’s roughly equivalent to the CO2 spewed by almost 3,700 Ford Explorers being driven 10,000 miles apiece per year. (Disclosure: I own a 12-year-old Ford Explorer. Anyone want to buy it?)

CO2 matters, because a dangerous buildup of the gas in the atmosphere – caused by the growing consumption of fossil fuels and the decimation of our forests – is causing the earth to warm to such dangerous and unprecedented levels that the health of the planet and its inhabitants are imperiled.

The problem for even the most environmentally sensitive print publisher is that every aspect of the business does uncontestable violence to the environment.

From chopping down trees, to carting them to mills, to processing them into pulp, to hauling reels to warehouses, to powering massive presses, to delivering the finished project by truck and automobile, newspapers and magazines not only consume tremendous amounts of energy but at the same time require the harvest of millions of trees that otherwise would be gobbling up CO2 via photosynthesis.

But that’s not all. Even more energy is consumed when old newspapers and magazines are responsibly collected and hauled off for recycling, where the process (apart from felling more trees) essentially begins anew.

A neat summary of the newspaper supply chain is below in a clip of the introduction to the first “Lou Grant” television show in 1977. (It’s the one where he has to take an airport bus to his job interview, because he feared the publisher wouldn’t pay $22 for a taxi.)

In contrast to the inherent un-green-ness of print publishing, companies like Google assert their goal is to avoid adding CO2 emissions to the environment. The company’s plan for carbon-neutral operation in 2007 included generating electricity through massive solar arrays at the Googleplex and a dam to power an Oregon computer center. To offset unavoidable CO2 emissions, Google invested in such programs as a project to make electricity out of manure in Brazil.

I say Google “asserts” that it intended to be carbon neutral in 2007, because the company can’t yet confirm it achieved the goal, according to Niki Fenwick of its public affairs department. “Currently, we have a third party assessing our corporate emissions inventory and verifying our footprint,” she said in an email. “Our footprint is calculated globally and includes our direct fuel use, electricity, business travel, estimates for employee commuting and server manufacturing at our facilities around the world.”

She did not answer the specific question of whether Google’s carbon audit took into account the custom-fitted Boeing 767-200 that ferries the company’s founders. Information gleaned from ChooseClimate.Org and Boeing.Com suggests that a B-767 filled with 225 passengers and crew would generate 337.5 tons of CO2 on a round trip from San Francisco to London. With the flagship of the Google air fleet reportedly configured for only 50 lucky souls, the carbon footprint would be 6.75 tons per passenger.

Having said all that, it must be emphasized that there is more art than science to the task of estimating the carbon footprint for any product or activity. Several of the online sites offering free calculators even give slightly different outcomes for the same input. So, we have to take this stuff with a jumbo grain of kosher salt.

But one thing is sure: The growing concerns over fuel costs and global warming virtually assure that consumers (and the government) increasingly will begin scrutinizing the carbon produced by every sort of product or service. It’s already happening in the United Kingdom.

With the UK government aggressively prodding businesses to disclose and reduce their energy consumption, British Airways is selling carbon offsets when you book a ticket and the Tesco supermarket chain is starting to post carbon counts on the labels of everything from orange juice to light bulbs to detergent.

Trinity Mirror PLC, which publishes some 150 titles in the UK, undertook a study of the environmental impact of its operations with the goal of striving for carbon neutrality. In so doing, it funded a study that determined its Daily Mirror, which is said to be printed on 100% recycled newsprint manufactured in England, consumes about 0.956 ounces of carbon for every ounce of the paper’s weight.

Applying the Daily Mirror figure to a newspaper with daily and Sunday circulation of 250,000, the paper would generate in 27,965 tons of CO2 in a year, assuming it averaged 8-ounce papers during the week and 24-ounce editions on Sunday.

Here's the problem for publishers:

While thriving companies like Google have the profits to invest in green projects or buy their way to carbon neutrality, the deteriorating economics of publishing argue against the likelihood of similar voluntary investments by newspapers and most magazines. Future government mandates, no matter how well-conceived, would amplify the commercial stress. And even in the best of circumstances, there is no getting around the fact that printing on paper requires the sacrifice of millions of trees a year at a time we can ill-afford to lose them.

Meantime, at the bottom of the publishing food chain, Newsosaur is happy to report that it produces less than a quarter of a ton of CO2 each year by limiting energy consumption to a single laptop that is turned off a night, a DSL router shared with the family, a single-bulb desk lamp and the power required to run a simple mobile phone.

Because a daily and Sunday New York Times subscription theoretically adds only a dainty 0.02 tons to my carbon footprint, I think I’ll keep it. But the Explorer has got to go.

Monday, May 12, 2008

Cablevision overpaying for Newsday?

Cablevision is valuing Newsday at more than twice the amount Rupert Murdoch thought it was worth, according to a side-by-side comparison of the two deals.

While the Cablevision offer for Newsday appears at first to be “only” $70 million more than the $580 million originally offered by News Corp., a proper comparison of the deals has to take into account the considerable benefit that News Corp. would have achieved by consolidating certain operations of the Long Island daily with those of its New York Post.

But Cablevision won’t be able to take advantage of most of the administrative, sales, production and distribution synergies that Mr. Murdoch said would have added an additional $100 million to the annual cash flow of $85 million that industry insiders believe Newsday produces.

If you divide Mr. Murdoch’s $580 million offer by $185 million in enhanced cash flow, he would have bought the paper for a bit more than 3 times its projected future operating margin. When you divide Cablevision’s offer of $650 million by the existing $85 million in cash flow, the cable company would be paying more than 7.6 times Newsday’s earnings.

In other words, Cablevision has agreed to buy Newsday for nearly 2½ times more than the value placed on it by the most daring and sophisticated publisher in the world. Do Charles and James Dolan, the father-son team leading Cablevision, know more about newspaper publishing than Rupert Murdoch?

Even discounting the improved profitability that News Corp. projected for the combined publications, the price Cablevision is paying for Newsday still seems too high.

While it is not easy to make an apples-to-apples comparison among newspapers in different markets, the case of the Minneapolis Star Tribune is instructive, because it, like Newsday, was a free-standing acquisition that was not consolidated with a neighboring property. (Unlike Newsday, it also was not destined to be partnered with the dominant cable television company in its market, the bold but untested strategy planned by Cablevision.)

The Strib was purchased by a private investment group for 6.5x cash flow in December, 2006, when it was generating almost the same profits (approximately $81.5 million) as Newsday does today. But the deal soured rapidly, with the paper’s sales slipping a reported 14%, operating profits falling by at least a like amount, its bonds trading today for barely 50 cents on the dollar and its investors writing off 75% of their equity.

In the 18 months since the Star Tribune was purchased, the value of newspapers has plunged so much that even the some of most well-regarded publishers in the country have been forced by accounting rules to drastically reduce the book value of their recent acquisitions. Among them:

:: The New York Times Co. wrote off 58% of the combined $1.4 billion it paid to acquire the Boston Globe and its sister papers in New England.

:: Lee Enterprises wrote off half of the nearly $1.5 billion it paid to acquire Pulitzer Inc. in 2005.

:: McClatchy wrote off three-quarters of the $4 billion it spent to buy the several Knight Ridder newspapers it purchased for 9.5x cash flow in 2006.

Given this treacherous environment, Cablevision's brass may have a tough time selling their shareholders on the rationale and pricing for this deal.

Cablevision's rosy vision for Newsday

Cablevision’s bold plan to purchase Newsday will test as never before the concept – and the economics – of the hyper-consolidation of local media by a single company. Don’t count on it succeeding.

By adding the dominant Long Island daily and the free amNewYork to the largest and most highly concentrated cluster of cable systems in the country, Cablevision has the potential to become nearly all things media to many of the more than 4.5 million households and 600,000 businesses who use its cable services in New York, New Jersey and Connecticut.

In addition to delivering the triple-play services of television, Internet and telephone, CableVision now intends to augment its arsenal with Newsday’s circulation of 387.5k daily and 454.2k on Sunday, plus the 310.3k free copies of amNewYork that are distributed weekdays in Manhattan and the neighboring boroughs. This not to mention News 12, the local television news channel fed to Cablevision subscribers in the Tri-State Area and such legendary venues as Madison Square Garden, Radio City Music Hall and the Clearview Cinemas chain of movie theaters.

The strength of Cablevision’s pre-Newsday strategy is revealed in the 11.3% surge in sales that lifted its revenues to just short of $6.5 billion in 2007. Its operating earnings grew almost 1½ times faster than its revenues, generating more than $2 billion in cash flow, much of which is earmarked for servicing the $11.6 billion in debt that makes Cablevision one of the most highly leveraged companies in the media business.

In contrast to Cablevision, which has been growing briskly despite direct competition from Verizon for nearly every one of its existing and potential triple-pay customers, business at Newsday, like that of most newspapers, has been deteriorating rapidly and uncontrollably for the last four years.

How rapidly and uncontrollably? Very.

Newsday has lost a fifth of its sales since hitting a modern-day peak of $622 million in 2003, according to filings at the Securities and Exchange Commission. With revenues tumbling every year since 2003, Newsday reported $498 million in sales in 2007. Based on the recent deterioration of the economy and the 11.2% drop revenues collectively suffered by the Tribune Co. newspapers in the first three months of this year, there is no evidence to suggest the situation is turning around.

Although the debt-laden Tribune Co. does not individually report Newsday’s profit, industry sources estimate the paper’s operating earnings were $80 million to $90 million in 2007. Further, they report that the profit margin has been falling more rapidly than the newspaper’s sales, notwithstanding a series of cutbacks that have shrunk the newshole, the distribution footprint and the newsroom.

If the estimates are correct, then Newsday’s 17% operating margin is close to the average in recent years for the newspaper industry. But its profits are only half the size of those that Cablevision is accustomed to extracting from its existing lines of business.

So, why would Cablevision want to buy Newsday and all of its associated challenges?

Cablevision’s vision evidently is to develop a holistic advertising sales program that will enable merchants to buy everything from print to cable to Internet from a single representative offering a comprehensive bundle of integrated and interactive services. The pitch most likely will be sweetened by discounts that enable advertisers to save ever-greater amounts of money by directing ever-greater portions of their budgets to the Cablevision media.

Cablevision can boost News 12 with more and better local content from Newsday and amNewYork. It can use News 12 to put more video on Newsday.Com and steer more traffic to the newspaper’s website by making it the default home for the 2.3 milliom subscribers of its broadband Internet service. It could start a 24/7 video classified channel featuring homes and cars for sale. It might even try to boost sales at Madison Square Garden and its movie theaters by leveraging the newspapers to tout upcoming attractions.

For all the theoretical synergies that could be produced by this transaction, the reality is that Newsday is suffering from the powerful secular declines in readership and advertising that are affecting almost every newspaper in the United States.

Can Cablevision really build sufficient revenues and/or wring enough savings out Newsday to make the consolidation work? Only time will tell.

But the prospects for success seem less clear for Cablevision than they might have been if either News Corp. or the New York Daily News were buying Newsday, instead. Here’s why:

:: The consolidation of Newsday with either the New York Post or the Daily News would have created a single, overwhelming leader in the four-way battle for Sunday dominance in the Tri-State market (the New York Times, of course, is the fourth player). Sunday matters, because it typically generates half of a newspaper’s revenues.

:: As Rupert Murdoch said in advocating the Newsday deal before he abandoned it, the savings associated with the consolidation of the Post and Newsday could have yielded another $100 million in operating profits – or enough to turn the Post from a money-loser to a money-maker. The case would have been roughly the same for the Daily News.

Unless Cablevision goes out and buys a second newspaper in the New York market, it has no opportunity to achieve the revenue gains or cost savings that could have been reaped by Mr. Murdoch or Mortimer Zuckerman, the publisher of the Daily News.

Given the powerful reasons why News Corp. in particular should have purchased Newsday, why did Mr. Murdoch reverse course? Mr. Murdoch most likely concluded that (a) Cablevision is unlikely to pull off a successful quadruple-play with Newsday and (b) there was no need to over-pay for an asset in due course would come back on the market at a lower price.

Rupe might be wrong. But I doubt it.

Sunday, May 11, 2008

Why Tribune has to sell Newsday

If you can imagine your mortgage payment tripling at the same time your take-home pay is shrinking, then you can understand the financial pain forcing the Tribune Co. to sell Newsday.

The first-quarter earnings release issued by the company late Friday, which touts a $1.82 billion “profit” based on an technical accounting adjustment, dances around the magnitude of the challenge the company faces in servicing a debt load that climbed to $263 million in the first three months of this year from $83 million in the same period a year ago.

As Tribune’s interest payments surged 317% in the three-month period, revenues fell 7.8% from the prior year to $1.1 billion. The situation would have been worse, if the 11.2% drop in newspaper revenues in the first period had not been offset by a 5.2% increase in broadcast sales.

The huge sums necessary to service Tribune’s debt, as well as the requirements that some of the $12.6 billion it has borrowed be paid down at yearend and in mid-2009, has motivated the company to sell its Connecticut newspapers, dispose of its Hollywood studio, put Newsday on the block and promise to auction off the Chicago Cubs. More dispositions could be in prospect, if revenue-generating or cost-cutting initiatives don’t produce cash fast enough to satisfy the lenders.

The magnitude of Tribune’s indebtedness at the most perilous time in the history of the American media is best illustrated by one simple fact: Its interest obligations in first three months of the year were equal to 24% of the company’s total sales. A year ago, interest payments represented only 7% of its revenues.

Although the Tribune may be the most heavily leveraged publishing company, it is far from alone. McClatchy, Lee, Media News Group, Journal Register, the Minneapolis Star Tribune and the Philadelphia Newspapers all borrowed vast sums to fund acquisitions in recent years.

They, like Tribune, today find themselves struggling with rising principal and interest obligations at a time of deteriorating sales and rising expenses for paper, fuel and health care. Some of them, including JRC and the Strib, appear to months from potential default, assuming they cannot boost sales, divest assets or significantly lower their operating costs.

The Tribune’s bodacious interest bill results from the $7.6 billion in debt that was added to the company’s existing $5 billion in obligations when Sam Zell took the company private in December in a complex employee stock ownership plan (ESOP).

One place that cash won’t magically appear to pay down Tribune’s loans is from the $1.82 billion in “profit” that the company claimed as the result of a bookkeeping adjustment in its first-quarter financial statement.

The “profit” is a legitimate accounting transaction occasioned by the reorganization of the New Tribune as a Subchapter S corporation, which is not required to pay taxes as Old Tribune did when it as a Subchapter C corporation. Gains and losses in an S corp are passed through to shareholders, who then are personally on the hook for any resulting taxes.

While Old Tribune was required to carry $1.86 billion of deferred tax liabilities on its balance sheet, New Tribune doesn’t have to, because any future taxes would be the obligation of such S-corp shareholders as Mr. Zell and the ESOP.

Even though the accounting adjustment didn’t produce any extra cash to fund interest payments or retire Tribune’s debt, the company this year did get to save the $19.4 million it spent on taxes in the first quarter of 2007. The $19.4 million in savings, however, hardly puts a dent in the $180 million in additional interest payments that the company had to pay in 2008.

Given the circumstances, it’s easy to see how an extra $70 million for Newsday could come in handy.

Wednesday, May 07, 2008

How the Net clobbered U.S. media

The abrupt decline of the newspaper business in the United States is strongly correlated with the rapid adoption of inexpensive broadband Internet service – a phenomenon that likely threatens most other media companies throughout the world.

That’s the conclusion of a presentation I delivered today to the annual world congress of the International Newspaper Marketing Association, which is meeting in Los Angeles. (For a free PDF of the presentation, email alan [dot] mutter [at] broadbandxxi [dot] com.)

In comparing data on the rise of high-speed Internet services with the decline of the U.S. newspaper industry, it is evident that circulation began deteriorating when household broadband penetration reached 23% in 2003 and that advertising began faltering when high-speed Internet adoption hit 31% in the following year.

The accelerating deterioration of the U.S. newspaper business since 2004 coincides with the near doubling of broadband adoption in the same period. With broadband penetration at a record 57% at the end of the first quarter of this year, print advertising sales were down by unprecedented double-digit rates and daily circulation was off by a record 3.5%.

Even though the U.S. population has more than doubled in the last 60 years, absolute newspaper circulation this year will be lower than it was in 1946. Newspaper penetration today amounts to less than 18% of the U.S. population, as compared with more than a third of the population in 1946.

There is evidence to suggest that the broadband effect is not unique to the United States. In comparing high-speed Internet penetration with circulation and ad sales around the world, it is clear that circulation and ad sales have declined the most at newspapers in the countries when broadband penetration has risen to 20% or more.

Although the wealth and sophistication of a country’s population are associated with broadband penetration, one of the clearest predictors of broadband adoption is the price of the service. High prices and limited availability appear to have held back broadband adoption in countries like Mexico, New Zealand, Slovakia and Turkey, according to data from the Organisation for Economic Co-Operation and Development. By contrast, inexpensive and widely available service is correlated with high penetration rates in China, Korea, the Netherlands, the Scandinavian countries, the United Kingdom and the U.S.

Newspapers tended to show the largest circulation declines between 2002 and 2006 in countries where broadband penetration today exceeds 20%. Canada, Germany, the Netherlands and the U.K. each lost between 9% and 11% of their circulation during the four years when broadband adoption surpassed 20% in their countries, according to data provided by the World Association of Newspapers. Mexico and Turkey both suffered steep circulation declines despite low broadband penetration in each country, suggesting that other variables were in play. Those variables could range from local economic conditions to changes in reporting standards.

The momentum in advertising sales between 2002 and 2006 generally was weak in countries where broadband reached more than 20% of households. Newspapers in such well-wired countries as Canada, France, Japan, the Netherlands, Sweden, the U.K. and U.S. reported notably weaker advertising growth than countries like China and India, where Internet penetration is far lower. To be sure, the rapid expansion of the economies in China and India had a major impact on ad sales in those countries, underscoring the reality that broadband penetration is but one indicator of the future health of a media business.

While this study concentrated on the impact of the Internet on the newspaper business, the findings may well be applicable to other media ranging from broadcasting to Yellow Pages.

In a new analysis of the global Yellow Pages business, Paul Ginocchio of Deutsche Bank found that print advertising sales tend to decline in direct proportion to rising Internet penetration. Based on his analysis, Paul predicts that a 1% gain in broadband penetration in a country will drive a drop of approximately 0.8% in sales for print Yellow Pages.

The impact of the Internet on broadcasting is equally profound. As but one example, Americans on average spend twice as much time on the Internet today (32.7 hours per week) as they do watching television, according to IDC, an independent research company.

If history is any guide, there is nothing to suggest that Internet adoption in the typical developed country will stop at anything less than 90% (or more) of households. It took only two years for the penetration of television to triple from 9% of the households in the United States to a third of the homes in 1952. By 1955, two-thirds of homes had a TV. By 1962, televisions were in 90% of U.S. households. With nearly one television in existence today for every American, 98 out of every 100 households has at least one set, according to the website TVHistory.TV.

To ensure the future health of their business, traditional publishing and broadcasting companies must adapt not only to the existing technology environment but also to such major future challenges as mobile computing on small, handheld devices like the iPhone and its eventual successors.

Publishers operating in countries where English is not widely spoken will have a distinct advantage over those who operate where English is more prevalent. First, language will slow the diversion of non-English speakers to the millions of Internet sites that are published in English (though Google translation services can help overcome the language barrier). Second, publishers will have the opportunity to adapt to their own languages and cultures many of the characteristics of the most popular English-language sites.

Successful transition to the new media will require far more than distributing existing content on the emerging platforms. New types of content must be developed to appeal to the young consumers who have a completely different relationship with the media than their parents.

U.S. media companies cannot be faulted for failing to foresee the rise of the Internet – or the speed with which it has been embraced. But they have been far too unimaginative and entirely too slow in developing the content and advertising solutions necessary to appeal to the next-generation users whose patronage will determine the prospects of their businesses in the coming years.

As such, those once-formidable franchises face the future as far weaker competitors than they ought to be.

Sunday, May 04, 2008

Will Murdoch be Zell's exit strategy?

Rupert Murdoch may be standing pat on his bid for Newsday, because he knows that Sam Zell knows that News Corp. is probably the only plausible acquirer if the highly leveraged Tribune Co. deal goes south.

Like a pair of masters plotting several moves ahead in a chess game, Rupe and Sam may be using the Newsday transaction to see how News Corp. could come to the rescue in the event the Tribune Co. can’t reverse the declining performance that threatens to plunge it into default on its $12.8 billion in debt.

With Tribune owing approximately $1 billion a year in interest payments and the company producing less than $1.2 billion in free cash in 2007, it is perilously close to being unable to satisfy its obligations within a couple of years. The skinny margin for error is why the major bond-rating agencies have dropped Tribune’s ratings deep into junk territory and have warned within the last three weeks that the rating could be reduced even further.

The bond agencies, and Mr. Zell, have reason to be concerned. As Sam and his CFO reported in a recent conference call for investors, publishing cash flow fell 16% in 2007 and newspaper ad sales, which historically have produced three-quarters of the company’s revenues, slid at double-digit rates in the first three months of this year.

While Plan A for Sam and his crew of Clear Channel alumni certainly is to reverse the declining fortunes of the company, they would be remiss if they were not at least considering Plan B. And the most likely one would be selling Tribune to News Corp., the only company with the financial capacity, the demonstrated appetite and the testicular fortitude in the person of Rupert Murdoch to heavy up on traditional media at a decidedly inhospitable time for such businesses.

Assuming the News Corp. acquisition of Tribune were blessed by the federal authorities (more on that in a minute), the combined company would possess, among other things, three television stations and three newspapers (including the Wall Street Journal) in New York; three television stations and the major newspaper in Los Angeles; three television stations, one cable channel and the major newspaper in Chicago; two television stations and the newspaper in Orlando, and one television station and one of the major papers in Miami-Fort Lauderdale.

This is not to mention such enviable assets as the WGN superstation carried widely on cable TV and Tribune’s shares of Cars.Com and Career Builder, the only successful online ventures produced by the newspaper industry in the last 1½ decades.

Careful readers, which may include certain federal antitrust authorities, will note that the rich collection of assets in these major markets would surpass the cross-ownership limits now in place. But that’s where the Newsday deal comes in. Rupe and Sam hope to convince regulators that massing mainstream media properties in a market is necessary to assure their survival in an age of competition from the likes of Google and myriad other web and mobile upstarts.

If Rupe and Sam are successful in pulling off the consolidation of Newsday and the New York Post to achieve new efficiencies in marketing, ad sales, news gathering, production and distribution, then how hard would it be to argue that there is no harm in combining WPIX, WNYW and WWOR to do the same thing on the broadcast side of the business?

Careful readers also might observe that Fox and Tribune both own CW affiliates in certain markets. But this is an opportunity, not a problem. News Corp. could use one of the spare CW outlets to air the Fox News Channel, the Fox Business Channel or perhaps something like a 24/7 interactive version of its wildly popular American Idol. In a regulatory pinch, News Corp. simply could sell off the third stations to mollify the feds.

The knowledge that he is the most realistic, if not the only, exit strategy for Tribune Co. is likely why Mr. Murdoch has been patiently letting the bidding for Newsday play itself out.

Mortimer Zuckerman, the publisher of the New York Daily News who stands to lose the most if Newsday goes to News Corp., essentially has matched the terms of Mr. Murdoch’s offer in the hope the government will block the combination as anti-competitive. Although Cablevision reportedly has bid $70 million more than the $580 million that Mr. Murdoch and Mr. Zuckerman each has offered, the deal includes real estate that Mr. Zell , the consummate landlord, evidently is not disposed to sell.

If Mr. Zuckerman is right, then he presumably will get to buy Newsday and give the New York Post a proper run for Mr. Murdoch’s money. If Mr. Zuckerman is wrong, then his marginally profitable newspaper will be in the fight of its life.

Either way, the sale of Newsday will buy Mr. Zell a bit more wiggle room to pursue a profitable outcome for Tribune Co. If the wiggling goes badly, however, Rupert Murdoch is most likley the guy Sam Zell will call for help.