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Aug. 4, 2014, 1:44 p.m.
Business Models

The newsonomics of splitting up media companies, with Gannett maybe next

For years, the corporate talk was all about synergy — local newspapers and local TV stations as part of the same media companies. Now the battles will be fought as standalone entities.

The Journal Communications/E.W. Scripps merger and split last week may have seemed like a bolt out of the blue, but it’s a bolt that makes sense in the new cosmic order of local media (“Diversified media companies are hurrying to undiversify”).

In fact, this game of Local Media Split ‘Em is all but done — with one big U.S. exception, its largest daily publisher, Gannett.

Scripps and Journal Communications were two of the last newspaper companies with broadcast assets. For many years, it was the newspapers of such “diversified” companies that served as the cash cows, with broadcast a good but less profitable business. But a look at the financials of any of the diversified companies shows that it’s broadcast supplying most of the profit today, even if the newspapers often produce higher revenues. That’s why we’ve seen the parade of “newspaper” companies, or “magazine” in the case of Time Warner/Time Inc., dividing their print assets from their broadcast, cable, and/or digital ones.

Today, Tribune joins the crowd, becoming a standalone newspaper-based company, Tribune Publishing. Add Tribune to the list of companies that once had both print and broadcast under a single ownership: News Corp, The New York Times Co., the Washington Post Co., Media General, Belo, Time Warner, Scripps, and Journal Communications, among others.

Gannett is now alone among the big newspaper companies; there are a few smaller chains still owning both newspapers and TV, like Schurz Communications. Even with all the growth of its broadcast business (most recently through the acquisition of Belo’s stations), it’s still a company that is defined, at least in part, by its newspaper roots. Investors have had a long love affair with the stock, at least compared to its newspaper company peers. But Gannett’s newspapers are a drag on its earnings. Its Q2 publishing results affirm that things aren’t getting much better — down 3.7 percent year-over-year in revenues overall, 5.1 percent in print ad revenues — and that fueled a little speculation that Gannett may be preparing to sell some of its 81 daily newspapers, a speculation fueled by CEO Gracia Martore’s reply to an analyst.

Those words may now seem even more minor in the wake of the Scripps/Journal deal. Martore will increasingly be faced with the question: Why wouldn’t you split off the broadcast and digital businesses from flagging print?

Newspapers now produce 70 percent of Gannett revenues, but broadcast produces 60 percent of the profits. Those lines continue to diverge, making the mismatch clear from a financial point of view.

The standard three-word explanation for all these splits is the desire to “maximize shareholder value.” Media company CEOs split companies because it usually works. The newly established TV-plus businesses often assume the entire value, or close to it, of the old “combined” company. The standalone newspaper company value may be relatively small, but now it’s icing on the re-frosted cake. Investors like the clarity; in part, it’s optics. More importantly, it’s the projectability of future cash flow. Broadcast, struggling as it may be with digital disruption, offers a more reliably forecastable future than print.

Supreme Court decisions have helped to do that. The Supreme Court’s Aereo decision removed a threat to its growing retransmission fees boon. And the Court’s steady peel-back of campaign finance limits promises increasing political advertising — and that advertising has always fallen disproportionately to broadcast. In a release on the merger/split, Scripps made the point that its TV group, now the country’s fifth largest, will have a presence in eight key election battlegrounds: Arizona, Colorado, Florida, Michigan, Missouri, Nevada, Ohio, and Wisconsin. (Story/video with the two companies’ leaders speaking to the deal, here.)

The new broadcast-centric E.W. Scripps and new print-centric Journal Media offer our latest case. Scripps’ history is worth knowing. It wasn’t a Johnny-come-lately into the TV business, as many newspaper companies were. It bought it first TV station — WEWS, as in E.W. Scripps — back in black-and-white 1947. It then smartly invested in the nascent cable business in 1993.

Then, in 2008, the split began. Scripps Networks Interactive — now HGTV, Food Network, DIY Network, Cooking Channel, Travel Channel, Great American Country — took life as a separate company, with the company’s highest-flying assets. That left both local newspaper and local TV together in one company, at just about the same time that A.H. Belo split its own broadcast assets from its newspaper ones. (Belo’s own trajectory is likewise instructive. It sold Belo TV to Gannett last year for $1.5 billion, and it has sold its non-Texas papers in Providence and Riverside over the past year. It’s back to being a local newspaper company.)

Now, in 2014, the splits are complete, with broadcast going standalone — and retaining the E.W. Scripps name.

Is it a matter of focus? Scripps observers will tell you that pre-split, much executive time was focused on those fast-growing cable properties, giving less attention to newspapers and TV. Then after Scripps Networks Interactive went off on its own, TV seemed to be getting more attention than the struggling newspapers.

There’s a lot to learn in that seeming allocation of attention.

E.W. Scripps CEO Rich Boehne is a former newspaper reporter, but he believes that local TV is best positioned to be the last man standing in local news. Why? Big reach, a big marketing bullhorn, and a more solid legacy cash flow. So Boehne’s been investing in local broadcast. Significantly, part of that is in news and journalism. At year’s end, I wrote about his contrarian digital/TV news play in Cincinnati (“The newsonomics of Scripps’ TV paywall and the Last Man Standing Theory of local media”). WCPO now sports more than 30 new news staffers, bringing its total to more than 100.

“There has been this idea that newspapers ought to play hard and heavy in digital, and we have always subscribed to the belief that it didn’t matter what your traditional platform, newspaper or TV, that the future of local media will be in digital,” Adam Symson, Scripps chief digital officer, told me in the wake of the deal. Symson, a TV veteran, is staying with the new broadcast Scripps. “We weren’t resigned to let newspapers own the B2C relationships with the consumer. Television has the opportunity to play offense while newspapers are still playing defense.”

In its half-year of Cincinnati experimentation, WCPO is doing a lot of testing and learning. Its pay plans are membership-oriented, running $79.99 a year or $7.99 a month, with a penny for the first month. The company isn’t releasing any subscriber numbers, but Symson says it is “on plan.” That “insiders” membership proposition is being fleshed out with unique-to-Cincinnati commercial offers to the high-minded goal of helping locals “lead a much more fulfilled life here in Cincinnati, with a passion and sense of play.” WCPO’s coverage of the local craft-brewing boom is one example of that.

Connection is the key — and that goes beyond the traditional local media relationship: “Journalism content is the center of this relationship, but we never expected or wanted to leave consumers with the sense that this was a retail transaction. You give us money, and we give you journalistic content.” That means efforts at community connections of several kinds, including physical events, as well as more knowing coverage, some of which is provided by local bloggers. It further incorporates the innovative Newsy video news service, which it bought last year (“Newsy’s Mobile + Video + Social + Curation Model Stands Out”).

Symson is looking at the “hard marketing launch” of WCPO this fall, after taking in many data-driven lessons from its first half-year. We can then see the direct connection to what the new expanded Scripps can apply — and not apply — to all its TV markets out of the WCPO experiment.

Can Boehne prove out a model of a paywalled local broadcaster as the ultimate survivor in the local media wars? His canvas just got bigger, post merger: The new Scripps will reach about 18 percent of U.S. television households in 27 markets. Further, it won’t have to concern itself with FCC cross-ownership rules that limit newspaper/TV combinations in cities. Also, significantly, the new broadcast company remains Scripps family-controlled.

The new newspaper company Journal Media, which will be headquartered in the city of its biggest property, the Milwaukee Journal Sentinel, won’t be family controlled. (From the release: Scripps shareholders will own 69 percent of the combined broadcasting company and 59 percent of the newly formed Journal Media Group. Journal Communications shareholders will own 31 percent and 41 percent, respectively, of Scripps and Journal Media Group. Scripps shareholders also will receive a $60 million special cash dividend as part of the deal.)

The company starts clean. No debt and the newspaper pension obligations are staying with Scripps. At split, it even gets $10 million. That’s a nice chunk, but a rounding error of a rounding error if compared to the dowry afforded by Rupert Murdoch when he separated out News Corp from 21st Century Fox last summer: $2 billion. New Journal Media CEO Tim Stautberg comes into the job from his post as Scripps’ senior vice president for newspapers. He led the consolidation and centralization of Scripps’ systems and processes.

His challenge is like that of Jack Griffin, as he formally takes over the new Tribune today, and the head of every other newspaper-based company: How to grow revenues. At its last report, for Q1, Scripps was down “only” 1 percent in publishing, largely on the circulation revenue increase of 6 percent. Ad revenues were down 5.4 percent; digital ads were down 5.6 percent. The Journal publishing results Stautberg inherits (the deal should close in early 2015) were worse: revenue down 2.7 percent, with circulation revenue down a troubling 5.7 percent.

The separation of these newspaper assets — and their future fortunes — gives new meaning to the word standalone. Standing alone means operating without a safety net that steadier broadcast revenues have recently provided.

One thing that Tim Stautberg won’t be talking a lot about is “synergy.” Like all the CEOs of the new standalone print-based companies, the age of talking up the value of owning TV and newspaper assets in the same company is all but over. CEOs loved to talk about those synergies, but in two decades, we have seen few examples of synergistic working together between the pictures people and the ink-stained wretches. “Video” is on everyone’s lips — there’s still more ad demand than supply, and that supply can fetch as $30 CPM rates for local companies. But video, like all else, will be pursued separately.

Photo by Ian Sane used under a Creative Commons license.

POSTED     Aug. 4, 2014, 1:44 p.m.
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