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June 20, 2018, 8:59 a.m.
Business Models

Newsonomics: GateHouse Media thinks services for small local businesses can help replace long-gone advertising

“We’re never going to beat Google and Facebook in advertising. Let’s focus on what we can beat them at, and that’s being local and selling business owners something that they need terribly.”

GateHouse Media claims to serve 219,000 small- and medium-sized businesses in its hundreds of markets. Like most of its newspaper chain peers, GateHouse expanded its ad selling to “marketing services” more than a half decade ago. Unlike those peers, the company now aims to move profoundly beyond selling ads.

Mike Reed, CEO of GateHouse parent New Media Investment Group, lays out the strategy in our interview below. (Here’s my full, much longer interview with Reed.)

He makes the case that America’s burgeoning base of 29 million smaller businesses — those with 20 or fewer employees — want a one-stop shop for help with everything from financing to IT to human resources. The company’s UpCurve division leads this new charge.

For the first quarter, UpCurve generated $19.4 million in revenue, an increase of 36 percent compared to the first quarter of 2017. Yet it’s a small revenue — and profit — contributor so far, accounting for less than six percent of revenue.

Mike Reed’s hope: Small businesses “want to deal with a local business partner. So why can’t we be their business partner?”

Ken Doctor: Let’s talk about both ThriveHive and UpCurve.

Mike Reed: Our B2B business, which was selling advertising, has had to evolve. For us, the evolution is to selling services to the small businesses. So that’s UpCurve.

Doctor: As I understand it, you’ve moved away from digital space advertising. I talked with [UpCurve CEO] Peter Newton recently, and he laid it out for me; let me see if I have the history right. What we would call the marketing services business for newspapers is about six to eight years old. It’s a logical strategy, selling digital marketing to local businesses. But it’s really hard to make much in the way of margins. Have you figured out a better formula?

Reed: I don’t know that we’ve figured out a better formula. We do sell them profitably and it’s growing. But we’re not just focused on digital marketing services. We’re selling IT services, financial services, and more.

Doctor: Let’s talk a little about that, because that’s one thing that’s really unusual about GateHouse.

Reed: Think about UpCurve like Barry Diller’s IAC [a holding company]. Underneath UpCurve, we have a digital marketing services company, an IT services company, a financial services company, and an HR services company. And so UpCurve looks to provide a small business owner with a suite of products that could solve any issue they may have, whether it’s employee- or HR-related, and access to capital.

We started with ThriveHive [formerly known as Propel], digital marketing services, and that’s the biggest.

Doctor: Where did this idea come from, to go after the non-advertising, non-marketing needs of small businesses?

Reed: We held focus groups around the country, to try to understand better the issues and problems that they have. We brought business owners into a hotel conference room for a two- or three-hour session, and we paid them a couple hundred bucks to talk about their business problems. They didn’t know who paid them. We had a moderator, a third-party company.

We sat behind the mirror — kind of like a Law & Order episode. We were able to listen to the entire conversation. We left with two things.  One is that the business owners had major issues dealing with employees and HR. They had major issues trying to access capital; banks aren’t lending to them anymore. Multiple banks are gone. And they had issues with IT services. Sometimes they would come in in the morning and the computer didn’t turn on: “What do I do?” Or, “I want to have a CRM system but I don’t know anything about it. I don’t have time to do it. I don’t have an IT department.”

Digital marketing services was also still a very high priority for them. They knew they needed to be in the digital world, but they didn’t really know how, or what to do.

The second thing we heard: “We want to do business with somebody local that we trust, that we can see. It doesn’t mean we want somebody calling on us every day in person. But we want to do business with somebody here in the community that we can get to if we need to.” And so I thought, “Wow.”

We have these media brands across the country. We’re in the local markets. We have the ability to continue to market these new businesses through our print and digital products. We have buildings that are too big. We have space to add staff for these new businesses.

So let’s develop a business that solves for all of these issues, and then we can have a customer in Peoria, Illinois, who buys our HR services or who gets a loan through the financial services and we’re able to connect them on the back-end to [lender] Kabbage. And just developing our B2B business in that manner will then allow us to have a business relationship with the customer that we can then maybe transcend into other things.

We’ve sold over 100,000 licenses on behalf of Sugar, the CRM system company. So now we’re incredibly sticky with those customers. And we can talk to them: “Hey do you need capital? Do you need HR services? Do you need your website? Does it need to be mobile-enabled?”

The thought was really just to convert our B2B business from one where we sold advertising. We’re never going to beat Google and Facebook in advertising. Let’s focus on what we can beat them at, and that’s being local and selling business owners something that they need terribly, that they want. That’s how it developed.

I was also looking at the data of who small- and medium-sized businesses [SMBs] were. Part of the reason our advertising declines have been so severe and continue to be so severe is that newspaper advertisers, historically, are merchants and retailers who are pushing product to the market — hardware stores, department stores, grocery stores. Those guys are not robust on a local level anymore. They’re all big-box stores. On top of that, Amazon has hurt the big-box stores.

Doctor: That’s true. I remember in the old days, we’d say, “We’re a newspaper. We’re product-oriented. The Yellow Pages, they’re service oriented. That’s their business. We’ve got ours.”

Reed: And the thing is, the local business owner is now almost exclusively service-oriented. There’s a customer base that the phone books used to have. That’s primarily the entire SMB space.

The Small Business Administration put out a report in 1997, saying there were 15.4 million SMBS that had no employees. By 2014, that number had grown to 23.9 million — no employees, so they’re sole-proprietors.

There are 29.6 million SMBs in the country. 29 million have less than 20 employees. And so, I think everybody is trying to sell services to those 600,000 that have more than 20 employees. But nobody is really going after the 29 million with less than 20 employees.

So that was thought that I had. Those are the customers that we have to win over. They’re not historically newspaper advertisers.

Doctor: That’s a huge transformation in the business sector.

Reed: That’s why we did the focus groups, because I was thinking, “How do we go do business with these 29 million? We can’t sell them advertisements. They’re not going to buy advertisements.”

Doctor: Was there a model that you looked at? Maybe a services vendor to those larger 600,000?

Reed: That’s a great question. I couldn’t find one.

What we’re undertaking, nobody’s done before. The bigger companies have the capacity to do business with lots of vendors; there’s not somebody that does that broad-base service scope for the bigger companies. There are too many individual companies that already dominate the space.

But nobody 29 million that have less than 20 employees. We say they want to do business with somebody local. We know they don’t want to deal with 20 different vendors; they want to deal with a local business partner. So why can’t we be their business partner?

Doctor: How many clients do you have across UpCurve?

Reed: 15,000 clients, and we have 100,000 licenses that we manage for Google and Sugar.

Doctor: And what kind of retention do you have, year over year on that 15,000?

Reed: We turn about 30 percent, retain 70 percent. In the IT services, 100,000 licenses, our turn is less than 5 percent.

Doctor: Are the margins better in non-marketing services than they are in marketing services?

Reed: On our IT services, we’re doing 15- to 20-percent margins. With the marketing services, the margins can range from two or three percent to 80 percent, depending on the service that gets bought.

Doctor: Depending on whether you are creating or reselling, right?

Reed: Yeah. If we’re selling them the SEO, the SEM, that’s two or three percent margin. But if we’re building their website and hosting it for ’em, it might be 80 percent margin.

Photo by Annie Spratt on Unsplash.

POSTED     June 20, 2018, 8:59 a.m.
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