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July 6, 2017, 12:01 p.m.
Business Models

Newsonomics: There’s a newspaper chain that’s grown profits for the past 5 years, and it’s looking to buy more papers

Because it’s privately held, Hearst isn’t as big a part of industry conversations around the future of newspapers as its publicly traded peers. But it’s charting a path forward and ready to open its checkbook to expand.

It’s one of the grandest names in newspaper history, but it’s one seldom heard in the industry conversation about the future of the American press.

As The New York Times and The Washington Post have come to dominate national newspapering, we hear mostly about two kinds of regional companies. There are the three big guys — Gannett, GateHouse Media, and Digital First Media — all consolidators of one kind or another, who now collectively own a quarter of U.S. dailies. Then there are the privately owned or family-directed independents — The Boston Globe, the Star Tribune, The Dallas Morning News, The Seattle Times — caught mid-innovation, fashioning new business models on the fly that they intend will somehow allow them to fulfill their civic missions. Then there’s Tronc, McClatchy, and Lee, all chains on the edge, their status as publicly traded companies complicating their digital transformations.

And there’s Hearst. Founded by William Randolph Hearst in 1887, Hearst is slowly re-emerging anew as a newspaper company. Now owning 22 dailies — from New Haven to Albany to Houston to San Francisco — and 64 weeklies, Hearst now says it’s in acquisition mode. Just a month ago, it became the biggest publisher in Connecticut, buying the New Haven Register, some related smaller titles, and Connecticut Magazine from Digital First Media. That followed three other acquisitions in the past year, the biggest a deal that added 24 weeklies situated around its highly profitable Houston Chronicle. That buy reinforced Hearst’s overall strength in Texas, where it owns six dailies, including the San Antonio Express-News.

Mark Aldam, the Hearst Newspaper Group president, is the architect of that growth, and of a wider strategy that may make Hearst a more important company in those industry conversations.

“You can also expect us to look outside of the markets where we presently have businesses when the right assets are available at a reasonable multiple,” he told me recently.

To be sure, newspapers have become a smaller and smaller part of Hearst, a company that now exceeds $10 billion in revenue. It is one of the biggest — and most diversified — media companies in the U.S. Though its roots are in ink and paper, today 25 percent of its profits derive from selling data and software business-to-business. Owning 30 regional broadcast stations, it’s a major TV player as rollup roils that industry. In magazines, it’s long been one of the Big Four, and its contrarian digital magazine strategy stands out. And its savvy early investments in cable networks, including its 20 percent ESPN stake acquired in 1990, have long been the envy of others in media.

Hearst avoids the limelight; it can be a very private private company. It has a couple of assets that few of its newspaper peers can claim: deep pockets and a longer-term market perspective. In 2016, it spent $2 billion, mainly on the B2B end of the business, seeking more diversification away from media, and specifically from exposure to advertising-dependent businesses.

Newspapers now rank as only the fifth largest of Hearst’s six divisions, but the division’s acquisitions and staffing up definitely stand out among the legacy names in a struggling legacy business.

Rob Barrett, who previously served as Yahoo’s VP for media strategy and operations, took on the new job of president of digital for the newspaper division a year and a half ago. He’s added 56 staffers to the digital development group, including high-profile talents such as Fergal Carr and Esfand Pourmand, both well-regarded alums of The New York Times. Hearst has also hired about 25 data people as it plumbs reader relationships with a new depth.

Even as the pace of innovation as picked up at Hearst newspapers — in those new product and data investments, in branded content initiatives, and soon events and podcasts — Aldam promises a “game-changing” announcement by fall. “We’re going to have something that we believe is a game changer in the way that we manage the consumer relationship,” he told me last week.

In a wide-ranging interview, here edited for clarity, Aldam talks Hearst strategy. He focuses on the role content drives in a half decade of increased profits and increased circulation revenue. We also discuss the continued need for seven-day print, podcasts, and the Hearst Newspapers’ emerging event business.

Ken Doctor: Let’s talk about the New Haven acquisition and the business dynamics of it. What are the major of efficiencies that you get here? Are you able to combine printing and distribution operations?

Mark Aldam: Yes. All the backend functions will be consolidated —‚ printing, packaging, distribution, all of the unique advertising, distribution products will be consolidated. There’s very little overlap between these properties today. In the services area, HR, finance, IT, production, printing, packaging, transportation, distribution, all of that will be consolidated.

They’ll be a lot of opportunity to take those savings and reinvest a portion of them back into what we believe are two essential areas of the business that we tend to invest more in than most: our newsrooms and our local ad sales. Those are the two key areas to make sure the print circulation base remains as healthy as possible.

Doctor: There’s a lot of execution under that, but it is that simple — there’s content and sales, right? And especially for digital, content and sales gets to be more and more important.

I remember I was talking to BuzzFeed and Vox Media three or four years ago, and I’d say to them: Tell me about your budget. And they would say, because they didn’t have print operations, 60 to 70 percent of their expenses were content creation. And then I got a number from Inland Press. Their best survey of dailies showed newsroom expenses amounted to, on average, about 12.5 percent of total newspaper expenses.

So you step back from that in the digital age and you say: It’s got to be content and sales, and you’ve got to reduce every other cost you possibly can, right?

Aldam: Absolutely. That’s our belief and I think that that is proven to be at least an effective strategy to this point.

Doctor: In terms of printing plants, will you be able to actually close some printing?

Aldam: Well, we only have one, and New Haven had already outsourced their printing and packaging to Hartford, in their highly efficient plant. We will [soon] print as much of the combined papers as we possibly can on our presses. We will move our Register printing and many of the other weeklies and more than likely both of the other small dailies back to our plant in Bridgeport.

That’s where our printing press is. And our offices have been consolidated recently in Norwalk, so all of our non-local news bureaus are being moved to an office facility in Norwalk. That’s where all of our digital resources are located; many of our important roles are located there. Our layout desk will be there, our page creation desk will be there, copy editing functions will be there.

But the actual reporters will have a bureau office in Bridgeport. The same in Danbury, the same in Greenwich, the same in Stamford, and in Norwalk. These are bureau offices in those communities where local sales reps and local reporters will be able to work from.

Doctor: So that means that these reporters are attached to that local title? Is that what bureau means in that sense?

Aldam: Yes. A beat reporter who is tied to city hall is connected to one of the titles. Sometimes that content can be shared, but generally speaking, the assignment is based on the community interest or uniqueness.

Doctor: You made two other acquisitions last year…

Aldam: We bought three. We bought the Norwalk Hour in Connecticut. We bought the Conroe Courier and the 22 weekly newspapers that are around the Houston outer ring, and then we bought the Big Rapids and Manistee paper from the Batdorff family in Michigan.

And in each of those cases, we have consolidated the operational part of the businesses as best as we think we can. And we reinvested back into product and in staffing. What I am most pleased about in Houston, which is a great story: That acquired asset was not growing the top line, was not growing the bottom line. In one short year, less than a year, revenues are growing substantially and profits are significantly better than they were when we took it over. It proves the concept that you can really improve the value of these franchises when you knit them together smartly.

Doctor: Clustering isn’t a new idea in the business. I first remember the term being associated with Dean Singleton, when he started building MediaNews, and he started using the term. And if you look at that, long story short, with digital disruption a huge pressure point, we’ve had that same question for 20-plus years, about what we were going to centralize and what we weren’t.

My sense is that it’s all in the execution. For instance, I’ve heard criticism that Hearst is sharing too much stuff among its dailies. So in terms of that execution, how do you manage to execute a clustering strategy that not only benefits the business, but benefits the readers?

Aldam: With this investment, we’ll increase our newsroom staffing to very close to 200 employees. So, in addition to the Register and a bunch of weeklies, there’s Connecticut Magazine, which has been a very solid, strong regional magazine for decades and still produces some very good feature, longform journalism every month that readers look forward to. Some of that can be shared — just as an example.

State government is one of the points of interest that span the entire state. It’s a weird state — I’m not sure how much you know about it, but every town has its own form of government, its own school budget, its own service sector, and so how Greenwich behaves differently than Danbury is of more interest to people in those communities than anywhere outside them. So that’s the unique community coverage that we have to anchor to each of the titles to service those towns, right?

Doctor: How do you work that mix between state and very local?

Aldam: Take UConn. It’s an institution. Not just basketball, not just football, but a major employer, a major state-funded institution, and we should be the authority on it. We’re authoritative on everything that’s happening in the institution — and look, Yale is in New Haven’s backyard. We should be deeply sourced across the institution as well, in addition to all of the other secondary and college-level learning institutions. Pratt & Whitney is a big employer as well; Aetna is a huge employer. There’s news moving.

New investment in Connecticut reporting

Doctor: How much of the reinvestment in newsroom staffing will New Haven see?

Aldam: At least 10. The rest of it [other publications acquired in the Register purchase], we’re just not quite sure yet, but New Haven is the first place we need to invest.

Doctor: I’ve visited New Haven over the years and have felt like educated New Haven never had much of a paper. Owner after owner just cut it and cut it. So, if you’re adding at least 10, what will that total?

Aldam: The New Haven newsroom was reduced to 38 employees. So that is as thin as I think you can get. To put out a local product that covers sports, business, the community, the town, city hall, the state, right?

So, it’s 10 [new jobs], and we built into our investment case a reinvestment in both the newsroom and in the local ad sales team.

Doctor: When you talk about the major employers or the major academic institutions, it’s really interesting — with something like UConn, you’re not necessarily talking about major cost, but if you added one or two of the right people, you can have a major impact in the coverage of the institution, right?

Aldam: Absolutely. I was in Hartford when [Courant sports columnist] Jeff Jacobs effectively took down the athletic director. He was doggedly following tips about deals that were being made between the university and advertisers, and he followed that story to the very end, and did some great reporting and wrote some very impactful columns. And, yes, we wrote news stories as well. But Jacobs has got a voice, right? A strong one, across the state. And that effort exposed the A.D. at the time in a way that good newspapers can root out corruption and unethical behavior. That is a great example of what a good newspaper should be doing, and we hope to be able to restore some of that.

Doctor: So do you think there’ll be FTE additions for any of these major institutions?

Aldam: Absolutely. They’ll be assignments to beef up our coverage of the state government, the legislature, the institutions that I’ve described already.

Doctor: That’s great. So we’ve got the 10 in New Haven. The 200 you will have — do you have a comparative number of where you’re at today plus the current DFM standing? That sounds like a total addition of about 25. Is that right?

Aldam: Yep.

Doctor: Digital First Media cut to the bone.

Aldam: Ken, I want to credit them. They’ve raised outsourcing to a magician level. We are doing a lot of that, but not as much, and we will try to do more of it as well — because we want to put more of the investment back on what I think ultimately matters to the consumer.

Doctor: On that strategy, you’ve said in a release, I think, this was the fourth year of increased profits?

Aldam: Sixth.

Doctor: Sixth?

Aldam: Consecutive. [Editor’s note: The release says 2016 was the fifth consecutive year of increased profits in the newspaper division. Aldam further explains that the newspaper group just closed its fiscal year on June 30 and achieved a sixth year.]

Doctor: And I think — as we talked about before, but I’ll tuck it into this piece too — you’re obviously having the same kind of price pressures everybody is having, but on the cost side, it’s the kinds of efficiencies that you’re bringing overall.

Aldam: Our revenue picture is on average, for the past three years, six points better than the industry average.

Doctor: And the major drivers of that are?

Aldam: Local, and our digital growth continues to outpace the industry average. So we’re in marketing services, and we’re in custom agency.

Doctor: Let me understand those. Is marketing services Local Edge [the early marketing services business that Hearst developed]?

Aldam: It’s partially Local Edge, and a lot of other services that support businesses, both in discovery and servicing their clients. We are in the traditional digital businesses, and we’re in the custom digital agency business in our five large markets. We are also adding staff to pursue volume. So, in a market like Connecticut, I had 60 active customer-facing sellers. The New Haven Register had 16. In Houston, I had 90 field reps out on the street selling everything that we just talked about. It’s a volume game, and that takes headcount, it takes talent. It is complex to manage, but we think it’s a key differentiator in our performance.

Doctor: Is Connecticut now big enough to support a full agency business?

Aldam: So we actually piloted the whole concept of a digital agency in Connecticut and then we quickly rushed to Houston to prop it up, followed by San Francisco, and now San Antonio and Albany are also in the game. It will only get bigger in Connecticut with the purchase of New Haven. Tower Agency is the name in Connecticut.

Print, podcasts, and the new events business

Doctor: Advance made a lot of news when it cut its number of print days way back in 2012. Since then, I’ve talked with many on the tremendous need for cost consolidation, but few have cut back on days printed. What do you think now of going fewer than seven days? Is that something that is inevitable but longer term, or do you think that it just doesn’t make sense given the economics of the business?

Aldam: In some of our smaller markets, we’ve made frequency changes, and it has worked. These are very small markets, though.

Doctor: Which ones?

Aldam: Like the Huron Daily Tribune in Michigan, like Edwardsville, Illinois. All of Michigan is six days a week. We have a weekender as opposed to two editions on the weekend, and I think in smaller community markets, we will get to that frequency question sooner than we will in large markets.

In the larger markets, where our philosophy has been, right or wrong, “premium product delivery at a premium price, delivered to your doorstep seven days a week,” it’s an economic model that we think has a long life. When more than 45 percent of our revenue comes from the consumer — and that’s growing — we have an obligation to provide a seven-day experience.

Now, that’s going to change, and it’s going to change and evolve over time. But you come back and talk to me in about three months, and I think we’re going to have something that we believe is a game changer in the way that we manage the consumer relationship. It moves us out of just selling subscriptions to a very different relationship with the customer.

We’re not ready to open it up yet, but once we test drive it and measure the results, I think we’ll be prepared to share it with anyone who will listen.

Doctor: I would assume this is based in part on all the investment you’ve made in data and better understanding audiences. You’ve hired about 25 people in data, right?

Aldam: In data, yes, but our digital development team is now 56 people stronger than it was a year ago, so we’re iterating products. We’re testing more rapidly. We’re using data and business intelligence tools that this group has brought to life to help inform us about what customers want.

Doctor: And the digital development group, remind me on the timing of it? Is that an older group that’s been revitalized, or is it a new group?

Aldam: Well, it’s the same group plus 56 more people. Rob Barrett was the guy we brought in — formerly L.A. Times, Yahoo background — and then three or four really key senior-level hires, two of whom came from the Times, and a couple others from other digitally oriented media companies that we’ve built the new team around. So those folks helped build out the team, and this has been a year and a half in the making, and we’re now actually getting a good result from that investment.

Doctor: Let’s talk about two other areas where a number of companies are making investments. One interesting one is podcasts. McClatchy made an announcement recently about its build-out of regional podcasts, and the company tells me more are in the pipeline. Gannett just announced a new investigative one as well. I did a series on the podcasting business last fall and it’s clear that high-rate sponsorship money can be tapped. Is that part of your mix at this point?

Aldam: Yes. A growing part.

Doctor: About how many do you do, do you know?

Aldam: We’re not doing as many right now in volume [less than a half dozen], but we are doing more qualitative podcasting around key topics — and this is part of that “let’s talk in three months.” Our media view of the future of podcasting is that it’s one important way of connecting to a larger population and the local community. So we’re heavily investing in developing that capability across our large markets.

Doctor: As with a lot of things digital, scale helps. Are the podcasts that you have now or that you’re developing mainly national, or are they local and regional?

Aldam: They’re mostly local and regional. Now from time to time, there may be a story that has relevance outside the boundaries of Texas, but that’s not our strategy. Our strategy is to provide podcast experiences that connect with regional communities around local issues that matter.

Doctor: Good. The second area I see investment in is events as a revenue source. Is that part of your plan?

Aldam: Yes. It’s a big part of, again, 90 days from now. You’re piecing together a lot of where we’re going.

Events can really springboard off of brands that we have our company. I’ll give you an example. [San Francisco Chronicle restaurant critic] Michael Bauer’s Top 100 Restaurants list. Esther Mobley, who’s our wine critic in San Francisco, is frequently out in the community. We have events that are centered around wine tasting, bringing wineries together. These are experiences that consumers might be interested in attending. Those events both capitalize on our existing brand and bring new experiences to life that are connected to content that consumers are telling us they care about. We intend to invest more in that.

Doctor: Of course, this is an area that’s been proven out nationally. Atlantic Media has been working this area with a number of its brands as David Bradley has built out the company. And GateHouse, with Jason Taylor’s leadership, says it is doubling the number of events it is doing this year to 250. Just recently, I heard that the L.A. Times just did a big food month. I take it you’re looking both at sponsorship and advertising and at some consumer revenue, of people paying to attend events, right?

Aldam: Yes.

Doctor: Both, okay. And is that organized on a local level too, or is that national, or a combination?

Aldam: Incredibly local. We’re sharing our practices with one another so that we learn from the experiences across San Francisco, Houston, San Antonio, Albany. But, they’re executed and managed locally.

On staff reductions, reader revenue — and buying more newspapers

Doctor: Your stretch of increasing profits is one mark. Another mark is really staff size. We know there’s a necessary reskilling that is an ongoing process at this point. Just in the last month, I’ve heard about layoffs at Gannett, McClatchy, Tronc, and Advance. Has Hearst newspapers done layoffs at any of its papers — layoffs, buyouts, over the last, say, three four years? Or is it more selective than that?

Aldam: We haven’t had a layoff of any significance in six years. Seven years.

Doctor: Really?

Aldam: And we haven’t had any layoffs in newsrooms where we’ve had journalists who’ve been part of that process. Now, selectively we’ve had eliminations, and we have converted what we thought were unnecessary layers of management and then re-staffed reporters, columnists in the newsroom. So our net number over the last three years is actually up in places like Houston and San Francisco; we’ve been adding more resources to our newsrooms. Not declining. We have a qualitative responsibility too; it’s not just the numbers, as you know.

Doctor: Certainly, there’s a dynamic relationship between quality and the numbers. One way I chart that is to look at public company circulation revenue. The New York Times put up its paywall in 2011 and other companies put up paywalls of various kinds, but I’ve seen that a number of companies have essentially hit the wall. A number of companies are down year-over-year in reader revenue. Their volume declines will likely be too great if they push pricing up much further. And the downward cycle worsens with layoffs as these companies continue to cut back on the product itself. How do you balance profit and the product that you are giving readers, if 45 percent of your revenue is consumer-driven?

Aldam: Overall, it’s greater than 40 percent of our total revenue base of the business, and that’s doubled in terms of its contribution over the past 10 years. And it’s grown every year — we’ve not had a year where consumer revenue has declined. And there’s probably a ceiling on the price that a consumer is willing to pay. But we’re asking customers in San Francisco to pay $600 a year for seven-day delivery.

We haven’t been shy about asking the consumer to pay more, and we know we have a smaller number of customers than we had a decade ago. But these are qualified, engaged audiences.

You combine that with our digital customer base that we can now qualify as well, we’re reaching a much bigger part of the population through all of the media channels, live events, podcasts, registration, breaking news websites, premium paid digital subscriptions, and print and weeklies. You aggregate it up, and we’re much bigger than we once were.

Doctor: Lastly, let’s talk about your acquisitiveness, in Connecticut now and around Houston last year. Can we expect more acquisitions within Hearst markets over the next couple years?

Aldam: Well, we think it’s good business to build scale, so we’ll look at every opportunity to do that that makes sense. And you can also expect us to look outside of the markets where we presently have businesses when the right assets are available at a reasonable multiple.

Doctor: Has there been a significant acquisition outside of existing Hearst newspaper markets that you’ve done?

Aldam: No.

Doctor: That seems like a departure from past strategy.

Aldam: We will look and have looked at a number of opportunities, which would I think fall under the heading of expansion, market expansion. And we’ll continue to do that, and at the right multiples with the right opportunity to build scale, we will take a hard look and consider whether those transactions are long-term meaningful to our business. But we’re interested in adding to the total number of markets that we serve with local media.

Photo of Hearst Tower by Shutter Runner used under a Creative Commons license.

POSTED     July 6, 2017, 12:01 p.m.
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