HAIL MARY PASSES
A New York Times article and a blog post by prominent journalist Dan Gillmor provide a fascinating glimpse of the economic realities facing many local newspapers in the digital age. The subject of both pieces is the fate of the San Jose Mercury News, one of the country's leading regional papers, founded in 1851.
First the background, for those not familiar with the back-story to date, from the Times article:
"Last Monday, the McClatchy Company announced it was buying Knight Ridder in a deal valued at $4.5 billion, but it also said that it would immediately sell 12 of those Knight Ridder papers to help finance the acquisition. The Mercury News, which calls itself "the user manual for Silicon Valley," was to be jettisoned, along with papers in cities like Philadelphia, Fort Wayne, Ind., and Akron, Ohio."
The McClatchy company is taking this action for flinty-eyed business reasons:
"One reason McClatchy has decided not to keep The Mercury News is the paper's high operating costs, the company said.
The newspaper's profit margin of about 9 percent is well below the average of about 12 percent for the Knight Ridder papers that McClatchy is keeping.
Douglas M. Arthur, an analyst for Morgan Stanley, estimates that the newspaper earns less than $22 million a year on revenue of about $235 million..."
"At its peak in 2000, The Mercury News had a Sunday circulation of 326,839 subscribers, according to the newspaper. Last September, the company counted 278,470 Sunday subscribers, a drop of about 15 percent.
Revenue from the company's help-wanted ads fell to $18 million a year from more than $118 million, according to the paper. The newsroom was whittled to 280 people from 404, a 30 percent decline."
As the Gawker notes from the Times article, the classifieds business has seen a decimation of it's business model by free classified listings from companies like Craigslist.com:
"The San Jose Mercury News, for example, in 2000 saw $118 million job-listings revenue; last year that number was $18 million."
The key reason though has to do with more than the growth prospects of the paper as the Times notes :
"The Mercury News is a union paper with higher labor costs than the Knight Ridder papers that McClatchy is keeping. (Indeed, all of the Knight Ridder papers that McClatchy is selling have union contracts.)"
So, that's the back-story...a once great and prosperous paper now under pressure from internet competition, and high operating costs.
There are a number of prospective buyers outlined in the article, including other owners of non-union papers, and a buyout firm that could get tax advantages for investing a union-paper.
Dan Gillmor, who ironically rose to fame as a journalist at the paper, argues for a Yahoo! led initiative to buy the paper, merging traditional content creation with global internet distribution. It's a "hail mary" potential solution, as he himself notes the challenges. He also reviews other initiatives underway.
One of these is a move by current and former employees of the paper to drum up community-based support for a direct buyout of the paper in partnership with employees.
Short-term business cases can be made for most of the options, but the longer-term reality is potentially much more problematic.
Let's compare the prospects for a "digitally-energized" San Jose Mercury News with the most successful example of a community-driven, citizen-powered "digital newspaper" in the world. That label arguably goes to a South Korean website called OhmyNews, which has changed the face of journalism in that country, dramatically influencing the political landscape of that country with it's coverage.
As Wikipedia notes,
"OhmyNews.com is a South Korean online newspaper with the motto "Every Citizen is a Reporter". It was founded by Oh Yeon Ho on February 22, 2000.
It is the first of its kind in the world to accept, edit and publish articles from its readers, in an open source style of news reporting. About 20% of the site's content is written by the 55-person staff while the majority of articles are written by other freelance contributors who are mostly ordinary citizens. OhmyNews' citizen reporters now number 41,000."
Of course, these "citizen journalists are paid far less than regular journalists (typically a few dollars a story). But these folks then get to build their own brands amongst the population, kind of like participants in "The Apprentice" and "American Idol" and other reality-TV shows finding other ways to leverage their 15 minutes of fame. And they're doing it. About 70% of the "citizen journalists" have book contracts apparently.
For a sense of the impact of this company in South Korea, and increasingly abroad as it tries to extend it's formula in other markets, see this compendium of articles by Western mainstream media from last year. You can see the English- language version of the site here. For a look at their operating philosophy, see this article from Indiainfo Online.
This "newspaper" covers a densely populated country the size of Indiana, with a population of over 48 million.
According to an article in sfgate.com last year, the site:
"...gets 1.7 million to 2 million page views each day, a number that shot up to 25 million during the December 2002 presidential election."
By contrast, the Bay area, not all of which is in the coverage area of the Mercury News, has a population of around 7 million. The newspaper has 280 reporters and profits of around $22 million on revenues of $235 million, and a paid Sunday circulation of around 278,000 last year.
Even if you adjust for the 50% lower per capita GDP of South Korea vs. the US, you would get an adjusted comparable population of South Korea of around 24 million folks.
Ohmynews though a private company, recently sold a 12.95% interest to Softbank of Japan last month, for $5.2 million. That implies a valuation of around $40 million for the property, barring other data points that have not been publicly revealed.
Although we don't have profit and revenue data for the company, an SFGate.com article from last year reports that the company was on a revenue track of $10 million for 2005, and has been profitable since 2003.
That implies a revenue multiple of 4 times on trailing 12 month results.
Now in many ways, this is comparing apples to oranges, but it's also illustrative of the compressed economics of the local newspaper business, along with an entirely different operational model that may be required for community-oriented papers to thrive.
Even if Dan Gillmor's idea of merging the paper with Yahoo! were to work, the Ohmynews example provides a template of the possible financial implications. Although we don't have information on the growth rates off the 2005 revenues and profits, the valuation of $40 million provides a starting point.
A similar valuation for the Mercury News would imply a 2x multiple of profits and less than 17% of current revenues. Given the presumably dramatically different growth rates and business models of the two companies, a direct application of the revenue multiple of 4x for Ohmynews would NOT be applicable to the Mercury news.
Not to mention the political wrangling that Yahoo! would have to do with the unions to get the costs down to a level more appropriate for a more digitally leveraged newspaper.
The other competing offers would likely be much higher given the opportunities for scale with other newspaper properties, and the employee cuts would likely be less drastic...for now.
Also, an investment by Yahoo! or another GYMAAAE internet company, would make much more sense if something like this is done in the context of a broader "roll-up" strategy of other regional papers around the country, given the national and global footprints of their businesses.
That would be something the current "growth" investors in these companies would likely have an issue with, given their expectations of growth and the current relative high valuations of these companies. Public investors would also not have the patience to wait for the execution of these types of "turnaround" strategies. That would require a transition to a different investor base.
Yahoo! and/or other internet companies' investors might be more interested if these companies tried to build an Ohmynews type of "citizen journalism" service here. The cost of entry is more modest. As an example, Softbank, in the same announcement with Ohmynews, also agreed to invest $5.8 million for a 30% interest in an joint venture focused on building an Ohmynews Japan. That's less than a $20 million valuation for all of Japan, a top five world economy.
So, for the most part, merging regional community papers with public internet companies is not an idea that would likely fly under the current realities and uncertainties facing these properties.
The answer may vary from community to community in the US, with some papers hanging on with diminished staffs and ambitions, some going to web-based only versions, and some seeing their prominent reporters supplement their incomes off web-based blogs and services.
The best example of that is Dan Gillmor himself. As the NY Times article notes (link mine):
"...Mr. Gillmor...achieved national renown as a columnist at The Mercury News. Last year, he left the paper to start his own Web site."
It's every paper for itself and reporter for himself/herself in the short term.
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Posted by: Halo | Monday, April 03, 2006 at 05:16 PM