Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=212937
Story Retrieval Date: 10/25/2014 1:57:31 PM CST
USA Today, Gannett's flagship paper, still ranks No. 2 in the country but Gannett is looking online for growth in 2013.
Gannett Co. faces growing pains in transition to digital
According to Audit Bureau of Circulations, magazines are more likely to charge for content than other online media.
The Audit Bureau of Circulations September 2012 report didn't hold good news for Gannett Co. Inc.
Media giant Gannett Co. Inc, owner of USA Today and 82 other daily newspapers in the U.S., has struggled to shed the skin of the plummeting newspaper industry and emerge as a sleek digital enterprise. This September marked the company’s first increase in revenue since 2006. But Gannett continues to face steep declines in print circulation and online readership doesn’t haul in the same amount of advertising dollars. Local businesses just aren’t willing to pay the same rates for online ads as they once did for print.
The model of free online content isn’t reversing any time soon, but Gannett has refused to abandon the news business. The international firm has developed a diversification strategy in an attempt to boost profit. It already has aggressively cut jobs in its newsrooms, trimming what many industry experts already considered a bare-bones operation. Gannett then took on new media platforms in order to expand its advertising platforms. Most recently, Gannett rolled out a “paywall” for its U.S. community newspapers. Other papers have followed suit. In November, the Chicago Tribune joined the more than 300 North American papers with paywalls.
In a recent presentation to the UBS global media investors’ conference, Gannett reported positive results from the new tactics. Bob Dickey, president of the company’s U.S. Community Publishing unit, said that 78 of 80 local online papers have initiated a paywall that has resulted in a 21 percent revenue increase on average. On a call with investment analysts in October, executives had predicted a similar figure.
“We expect subscription revenue at our local domestic publishing sites will be 25 percent higher than it was at the beginning of this year,” said CEO Gracia Martore, “That build out translates into about a $100 million contribution to 2013 operating profit.”
However, media experts and analysts are skeptical. “How significant is $100 million in new revenue to Gannett, which has had $5.22 billion in sales in the last 12 months?” wonders Alan Mutter, CEO of InterMedia Partners and former editor of the Chicago Sun-Times.
Mutter said that research shows that only 3 percent of people in a typical market purchase Internet subscriptions to newspapers. “The $100 million will boost revenue by 1.9 percent -- a pretty small return against the potential to engage with two-thirds of the audience in the typical market,” said Mutter.
Most of the audience will find other free sources for news, “leaving newspapers with an increasingly gloomy future,” predicts Mutter.
In fact, circulation figures did increase in digital. Gannett reported that by the end of third quarter it had acquired 30,000 online subscribers, an 80 percent increase from the previous quarter.
However, this is still insignificant for a company that until recently derived the majority of its revenue from print ads. According to a September report by the Audit Bureau of Circulations, USA Today saw circulation decline 3.9 percent to 1.7 million in 2012.
“I’m very skeptical about the success of the paywall,” said Joscelyn MacKay, an analyst with Morningstar Inc., “I think what they really need to do is diversify out of the print media.”
Gannett is trying to implement its diversification into digital marketing. In 2013, Gannett plans to court small businesses for online ads: “Navigating the complex and fragmented digital landscape is hard work, particularly for someone running a car dealership or a plumbing supply company or a landscaping business. That's where we come in,” said Martore. Ideally, Gannett could see an increase in ad revenue from online advertisements.
However, analysts don’t think that retailers will take the plunge into digital advertising given the current economic climate. Many small businesses and local stores simply use a Facebook page or a website rather than advertising in online. “The growing number of free online information sources continues to weigh on Gannett's core business,” said MacKay.
Gannett has also poured investment into more service-based online products. Internet job search site CareerBuilder.com, which Gannett co-owns with the Tribune Co., continues to perform well, according to executives. It recently acquired a specialization tool to improve employment data and labor market analysis and continues to profit in a high unemployment environment.
In October, Gannett acquired Rovion, a Boston-based advertising company, which is owned by Local Corp. Rovion’s major product is a technology platform that allows clients to develop media and mobile ads without the headache of employing coding experts. Advertisers increasingly want professional grade ads with a do-it-yourself model, according to Gannett executives. The company anticipates greater growth in mobile marketing from the new tool.
Some analysts think these developments have put the company in a better position. Edward Atorino, from Benchmark Capacity LLC, a market research firm based in New York, said the company offered solid details in their presentation. “I thought it was very encouraging. Looking forward, their strategy seems to be coming together,” said Atorino.
Gannet expects a 5 percent increase in overall revenue for the fourth quarter of 2012. Atorino says most of the growth this year comes from its broadcast segment. “The broadcast industry is doing just fine and that’s about a quarter of the business.”
This year’s U.S. election and Olympics coverage gave broadcast an unusual boost in viewers and ad revenue. David Lougee, president of Gannett Broadcasting, said Olympics billing brought in a record $37 million, which was 58 percent more than the 2008 Beijing Olympics. Political advertising during the election season totaled $150 million. The company is still counting the gains that will result from retransmission consent fees.
That may be enough to turn some doubting investors around. Gannett’s stock rose slightly after the conference Wednesday. “Investors who don’t own the stock may become interested,” said Atorino. But the slight increase doesn’t do much to move the needle, according to MacKay.
Investors of Gannett shares have had a wild ride over the past five years, watching the stock’s value drop in half from around $40 in 2008 to less than $20 today. But those who bought earlier this year have fared much better. So far this year, shares have risen from around $12 in January to about $18 in early December.
Most media stocks are currently considered value investments—with good reason. Gannett shares are trading at a price-to-earnings ratio of about 10, a significant discount to the S&P 500 index’s P/E of 15.77. Still, Gannett shares are trading at a premium to those of its competitor McClatchy Co. McClatchy shares trade at a P/E of about 4.
Overall analysts agree that it’s going to take some time for the relatively small digital gains to offset the plummeting print industry and not even CareerBuilder.com’s growth can compensate for that.
“If 80 percent of the business is going down and 20 percent is going up, the math doesn’t add up,” said Atorino. Gannett operates 82 daily newspapers.
In October, the company reported that profit fell 6 percent to $321 million, or $1.38 per diluted share, from $341 million, or $1.42 cents a share, during the same nine-month period a year earlier. Despite the up-hill battle, Gannett’s fourth-quarter forecast increased hopes for a positive in 2013.
“I think a newspaper like Gannett could stabilize. The debt is in good shape, they raised the dividend, they have a lot of free cash flow,” Atorino concluded.