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June 20, 2018, 9:05 a.m.
Business Models

Newsonomics: GateHouse’s Mike Reed talks about rolling up America’s news industry

“Content is our number-one priority,” Reed said. But he’s unwilling to publicly commit to any new level of funding or staffing to meet that goal.

The news shocked long-time newspaper observers two months ago: “Tampa Bay Times to be sold to GateHouse Media in $79M deal.”

Had GateHouse devoured yet another storied publisher? No: It was a April Fool’s prank played out to a near-incredulous audience. Mike Reed, the CEO of the New Media Investment Group that runs GateHouse, spent much of his April 1 responding to the confusion among the company’s shareholders and employees.

The news wasn’t real, but it was believable: GateHouse’s acquisition appetite has seemed insatiable. The company now owns more daily titles than any other U.S. publisher, or for that matter, any newspaper publisher anywhere. In total, it owns 146 dailies — more than 10 percent of the U.S. total. That total itself may amaze some, though it well could be doubled, creating the first real national roll-up of U.S. dailies. In fact, with Patrick Soon-Shiong finally closing Monday on his deal to buy the Los Angeles Times and San Diego Union-Tribune from Tronc, the rest of Tronc’s properties could soon hit the market, accelerating more consolidation. Could GateHouse be interested in any of those properties? GateHouse has long eschewed larger metro properties, so the company is highly unlikely to bid for the new Tronc overall. Yet, if Tronc’s Sun-Sentinel in south Florida were to be sold singly, regional efficiencies could drive a GateHouse deal. In fact, GateHouse is one of the very few companies mentioned in any conversation about newspaper buying. The reason is obvious: The pace of GateHouse buys just this year have been head-turning.

Twelve days after April Fool’s Day, in fact, GateHouse announced it was buying another small metro paper, the Akron Beacon-Journal, for $16 million. A couple of weeks before that, GateHouse had outbid both Tronc and Gannett, and at least one local billionaire, to buy the Palm Beach Post from Cox Media for $49.25 million. A few weeks before that, it had acquired the Austin American-Statesman, which Cox had put up for auction in late fall. In that deal, it had emerged as the victor over Texas daily publisher Hearst Newspapers, paying $47.5 million.

Even within the last month, GateHouse has added still another daily: the 150-year-old Pueblo (CO) Chieftain, which had been locally owned.

GateHouse emerged out of bankruptcy just five years ago, but under the leadership of Mike Reed and COO Kirk Davis, it’s rapidly moved up the food chain. Once a seeming hodgepodge of smaller community dailies, it has more recently claimed smaller metro turf — Providence, Columbus, and Worcester, in addition to Austin, Palm Beach, and Akron. And it has no plans to stop buying. In early spring, the company’s board authorized the further sale of $300 million in new shares, to be used to fuel more buying.

In a recent, wide-ranging two-hour interview, I spoke with with Mike Reed, the financial engineer of the company’s growth. Reed, who’s worked in the industry since 1988, has rarely spoken publicly about GateHouse’s stunning growth or the strategy fueling it.

Could GateHouse outrun Gannett, the country’s leading daily publisher by revenue, building from 150 properties to 300 or 400? “It could. It could,” he told me.

In fact, amid all the tumult of a daily newspaper industry gasping for breath, GateHouse seems like a company with confidence and a plan, as its peers struggle mightily.

Gannett is struggling to turn around its image as a fading leader, contending with poor financial results and orchestrating a major shake-up of its business side coast to coast.

Tronc has just halved itself with the sale of California dailies, and is now likely test the market for the rest of the company. Sources say that shopping has quietly begun, with Rupert Murdoch passing on a Tronc buy. Patrick Soon-Shiong, himself still a 25-percent owner of Tronc, has been flexing his Tronc muscles, declaring the silliness of the Tronc name.

Then, there’s much-vilified Digital First Media. DFM remains in limbo, though its comfort level with its status quo may be newly challenged. On Monday, the Colorado Sun, featuring some of the Denver Post’s best talent, announced its digital startup plans and a couple of years of funding. That’s competition for readers that DFM isn’t used to — and competition that could spread to other markets. Two top DFM executives arrived in Denver Tuesday afternoon, at least in part to address the Post staff.

As his peers’ missteps have been quite public, Reed has made GateHouse (under the ticker symbol of NEWM) almost has valuable as Gannett. The company passed the billion-dollar market cap milestone last week. GateHouse now standing just about $100 million behind the longtime U.S. local newspaper leader. That’s despite the fact that Gannett remains a far larger company, with revenues more than double those of GateHouse.

Reed told me that he is aiming for his company to be revenue-growth neutral (on the basis of same properties, not counting new acquisitions) in 2019. That would be a major milestone, as newspaper companies (with the recent exception of The New York Times) have seen largely negative revenue numbers for a decade.

Reed cites UpCurve, GateHouse’s small- and medium-sized enterprise services division, as foremost in his growth strategy. UpCurve moves GateHouse beyond its newspaper advertising roots, as it sells financing, HR and IT services. (My talk about it with Reed is broken out as a separate post, here.) He also point to events and digital subscription strategies as the means to get the company to a financial turning point.

Reed knows that GateHouse engenders suspicion among its peers. In 2017, its revenue was down almost six percent compared to 2016. Its earnings report for the first quarter of 2018 showed a decline of 4.5 percent compared to the same time last year. Many in the industry suspect that GateHouse is bent on “buying revenues in big chunks while using the new cash flow to prop up earnings,” one financial source suggested to me recently. Some have put GateHouse in the same bucket as Digital First Media, especially given that it’s managed by a private equity company, Fortress Investment Group, through parent company New Investment Media Group.

It’s a characterization that Reed and other top GateHouse execs decry. For starters, GateHouse isn’t private equity–majority-owned the way Digital First Media is (Alden Global Capital controls it with a 50.1 percent stake). Though Fortress, bought last year by Softbank, manages GateHouse, it only owns about 1 percent of the company. Institutional funds, including pension funds, hold major stakes.

Reed point to a number of executive hires over the last year as evidence that GateHouse — unlike Alden’s DFM — doesn’t have a burn-the-furniture, maximize profit, and turn-off-the-lights strategy. As Alden has become the bête noire of the business, GateHouse aims to convince the industry that it’s not of the same ilk.

“Content is our number-one priority,” Reed told me. But he’s unwilling to publicly commit to any new level of funding or staffing to meet that goal.

GateHouse has also had its share of struggles with the News Guild, which represents more than 30 of its newsrooms, and is organizing efforts to unionize more. Last year, the company agreed to its first “global” contract with the Guild, providing two one-year pay increases. Long-standing issues, though, persist. GateHouse believes it needs more flexible work rules, given the pace of change in the industry and wants to reward higher-achieving employees with pay increases more based on merit, and still finds itself at loggerheads with the Guild on those issues.

The company has made efficiency, and cost-cutting through regional and national synergy, a hallmark — and that’s included major cuts at some of the properties it’s bought. How smartly or bluntly has it wielded that cost-cutting, especially in newsrooms, is a tough question to answer conclusively, but an important one. Clearly, though, the company that began as a roll-up consolidator, and whose corporate staff looked more like a holding company than a strategy-driven operating one, appears to be building structure.

In March, GateHouse hired digital product pioneer Jeff Moriarty as its first digital business head. Last year, it hired Denise Robbins as SVP of consumer marketing, from The New York Times. And last week, GateHouse announced that Robbins would head a new consumer marketing agency that, over time, will focus beyond digital subscriptions on “products and services including apps, podcasts, specialty newsletters, e-editions and other digital products across the entire enterprise.”

Those executives joined Jason Taylor, GateHouse’s president for western U.S. publishing operations and the leader of the company’s events business; Peter Newton, a six-year veteran of the company and CEO of its UpCurve brand; and SVP of news Bill Church, who heads GateHouse’s production facility in Austin. (Church won industry notice and cred when, as editor of GateHouse’s Sarasota Herald-Tribune, he refused to participate in journalistically unethical “investigative work” meant to aid Sheldon Adelson.) And Kirk Davis, CEO of GateHouse Media, has long been Reed’s partner in the reinvention.

I spoke with Mike Reed about it all. Our conversation, edited for length and clarity, is below.

How GateHouse picks markets

Ken Doctor: Did you set out to run the largest newspaper company in the country?

Mike Reed: No, I didn’t.

Doctor: How did it happen?

Reed: We believe in local newspapers, and we understand the importance they play to the communities that they serve. We think they’re not dead. While they’re out of favor with most investor types, and while the industry is painted with one brush, not all papers are metro market newspapers. Those papers tend to be more financially challenged; their content is maybe more commoditized. But it’s an opportunity for us to continue to grow and acquire them and then apply our operational formula to them.

Doctor: 2017 was the biggest year in, I think, a decade for actual newspaper property sales. You seem to be the largest buyer out there.

Reed: With a focus, though, on small- to middle-sized markets. We’re not buying metropolitan products. What we really look for is a middle-sized market that might be considered borderline large or metropolitan. We look at how strong the local newspaper is: What’s its penetration? Does the community view it as its source for comprehensive local news, or are there multiple sources?

For example, Columbus, Ohio, is on the large side for us. Worcester, Providence. These are a stretch for us on the top side. What we loved about those opportunities, though, is that the newspapers are dominant local sources of news and information. They’re also in markets that are fairly vibrant and have, we think, longer-term sustainability as community builders.

Doctor: How do you determine that?

Reed: The Press of Atlantic City is a good example. We passed on that in 2013, when Berkshire Hathaway Media bought it. [The paper announced significant layoffs in March.] It fit the profile from a circulation standpoint, but we did the diligence, and the community was not very local. The workers there were transplants, serving the casino industry and all the businesses that serve the casinos, it was a very transient workforce, a transient community, was very transient, and they didn’t have a lot of affinity for the local newspaper. And the penetration rates were low. That’s an example of how, for us, it’s not circulation based so much — it’s everything else.

Columbus, on the other hand, was a great fit because it’s the state capital. The people in Columbus get the paper. Penetration rates are high, we think, because of Ohio State.

Doctor: For things like community affinity, what kind of discipline do you have for that? Can you put a number on that? Do you score it in some way?

Reed: We don’t. It’s more of getting into the community and looking at penetration rates, seeing where distribution is, where single copy is, and looking at the product itself and making an assessment on whether it’s full of Associated Press and other wire coverage. We’re also looking at how close-knit the community is: Is 100 miles from the north end to the south end, or is it 20? And 20 is better than 100.

Doctor: In terms of physical distribution, what’s a good household penetration number these days?

Reed: Unfortunately, it’s 30-50 percent of households within whatever designated geographic area.

Doctor: How about digital? You can’t figure digital penetration the same way, but how much do you assess a potential property’s digital penetration and engagement?

Reed: We don’t pay a lot of attention to it — not because we don’t care about it, but because it’s something that we’re going to focus on growing, anyway. In a community where the prior owner hasn’t focused a lot on it, it’s a bigger opportunity for us.

Could GateHouse soon own a third of the U.S. press?

Doctor: Let’s talk about the scope of the company right now. How many papers do you own now?

Reed: 146.

Doctor: So, in the next year, how much should we expect GateHouse to acquire?

Reed: Since we took the company public on Valentine’s Day in 2014, we’ve done just under $1 billion in acquisitions. So, we’re averaging about $300 million a year in acquisitions. I would suspect a similar number for the next year.

Doctor: Do you think the target will still be individually owned and family-owned papers, or is the opportunity changing?

Reed: There’s more opportunity buying individual properties from individual owners (which, in a lot of cases, turn out to be families). That’s because it’s harder for individual properties to navigate going forward, and so it gives us a better opportunity to be an acquirer of those types of properties.

There are still more 1,300 daily newspapers in the U.S. Take Digital First, Lee and McClatchy, CNHI, and GateHouse, and you add all those [and other chains] up, you’re only at about 50 percent of those 1,300. So there are still opportunities.

Doctor: Is the goal to make GateHouse a company with truly national scale?

Reed: Yes.

Doctor: What does that look like? Three hundred, 400 titles?

Reed: It could. The thing that we always have to think about and remember is that our first objective is always what’s the best thing for our shareholders, since we’re a public company. If, overnight, the valuations changed and it became a lot more expensive to buy, then we wouldn’t have 300 or 400. So I don’t know what the future looks like.

We have publicly stated valuation metrics that we’re willing to pay for a newspaper. What we’ve stated publicly is 3.5 to 4.5. We’re not going go out and start paying seven or eight times. If anything changed in that regard, or if we didn’t have access to capital that was reasonably priced, then that could change our acquisition strategy. Scale matters, and the more that we have, the better the opportunity becomes for us to execute on our operational strategy — which, in turn, makes all of these individual newspapers better and stronger and able to do more local journalism and investigative journalism.

Scale matters. I think it’s really hard to do things in onesies and twosies. Our hope is to continue to consolidate the industry, with the focus on the types of deals we’ve been doing in the past — but we can’t do them at all costs.

Austin was on the high end for us, but Austin is a market that presents more growth opportunity from a market perspective than any single market we’re in today.

Doctor: Why?

Reed: The market itself is just growing like crazy. You have Apple looking at expanding there, and you have Whole Foods there. Whole Foods is part of Amazon, and that’s expanding. And Amazon is looking at Austin for its second headquarters. There’s just a tremendous amount of growth in the market itself, and that presents lots of opportunity for the Austin Statesman, as well as our other businesses.

What’s GateHouse? What’s NEWM?

Doctor: How do Fortress, New Media Ventures, and GateHouse Media fit together?

Reed: New Media is a public company. It trades on the New York Stock Exchange. And it’s a holding company, so it really has virtually no assets. And it has no employees, not even me.

GateHouse is an operating company, 100 percent owned by New Media, and so all of our newspaper assets are underneath GateHouse. Fortress has a management agreement in place with New Media to manage the business, and so I’m actually employed at Fortress.

Doctor: Are you the only Fortress employee related to GateHouse and New Media?

Reed: I’m not. Our CFO is here. We have an SVP of new business development, our head of investor relations, a financial analyst, lawyers, and those are all 100 percent New Media–focused employees.

Beyond that, we have access to the whole Fortress network of employees, whether it be legal, HR, analysts for diligence, the folks that help structure financings and equity and stuff like that.

Doctor: What’s been the unusual value of that relationship, compared to the way most newspaper companies operate? Is it Fortress’s financial expertise?

Reed: Financial and legal expertise. That allows us to access capital at better rates at better structures than anybody else is able to in our industry.

In the structure of our credit agreement, for example, for every dollar that we make, a piece goes to the lenders, but we have full discretion to redeploy that dollar. So we can invest in the business, we can do acquisitions, we can pay dividends to shareholders. We have capital.

Most of the money [other companies] make floats back to the lenders. Having the deep structure in place, which we could have never got without Fortress’s brand and leverage, has allowed us to create value for shareholders that none of our peers have been able to do.

Doctor: Let me try to unpack that to understand it. Take a company like McClatchy, for instance: Its ability to operate and allocate money are pretty constrained, given large debt. Some of your peers came out of bankruptcy; some avoided that by doing a major restructuring with lenders. They are so tight financially that they have little flexibility, and you’re saying because of your arrangement you have a lot more.

Reed: Not quite. The problem with McClatchy, for example, is just that it has too much leverage, too much debt. Or take another company, Tronc: It had to cut its dividend two years ago because the credit facility required it to allocate capital for the lenders. It was in a position where it didn’t have full discretion over all the money it made.

Mike Reed’s theory of the case

Doctor: Let’s talk more about the importance of geography.

Reed: One thing that we’ve found over the last 10 years or so is that newspapers on the coasts are a lot harder to run than newspapers toward the middle of the country.

Doctor: Why? What have you figured out about that?

Reed: The communities are a little more transient. There are more second–home owners on the coasts. The categories newspapers don’t own anymore, like the job market, are the bigger categories in those markets. If you look at our acquisitions over the last three years, you’ll see that most of them are actually not on the water on either coast. There are exceptions to the rule that are part of bigger deals, where you get a paper you might not have bought on its own.

And on the coasts, for whatever reason, the communities tend to be a little more digitally savvy and tech savvy. Which is not a favorable trend for newspapers, either.

Doctor:Let’s talk about that and kind of your theory of the case overall. You get a lot of credit from people in the industry; you’ve got a good reputation as someone who is very savvy and disciplined in how you’ve built the company. But the question — and you’ve gotten criticism, as you well know…

Reed: Comes with the territory.

Doctor: When I look at the financials of pretty much like companies, you guys are doing a little better — I think it’s two to three points better, on average, on an operating basis than many of your peers. But given the savage losses in print advertising, you’re clearly not there yet. You’re still not growing same store revenue, year over year, and given the trends, why would you say you can get through to the other side and have a growing and sustainable company?

Reed: We focus on smaller markets where we have the dominant, comprehensible news product. That’s the cornerstone of our thesis for a hundred years to come. Content today, arguably, is more valuable than it ever has been, right? There are so many platforms that allow for distribution today, and that’s made content more accessible and more valuable. But where I think content suffers is when it’s commoditized, and when it’s viewed to be inaccurate or fake. Those two things hurt the value of content and make your audience less valuable to somebody else.

We believe that local news, in today’s world, is more valuable than it ever has been — if you can provide something that’s unique to a consumer, that they value and want. Then you have something long-term that continues to be sustainable and of value. So the cornerstone of our strategy is to have local media properties that provide a comprehensive objective.

Doctor: You’re really talking about building a unique value and a relationship to a local consumer, and I get that. I know there’s a lot around that, but let’s just stay on the content itself for now. GateHouse — fairly or unfairly — does not have a great reputation in the industry.

When the announcement came across that you were buying the Austin paper, you saw what Texas Monthly said. It was a take on how GateHouse is a downsizing company; you bought the Columbia Tribune, in Missouri, and there’s one reporter left. They cited some other markets that they said you had reduced staffing in. How do we square this? How do we square what seems to be a smart and logical strategy with those kinds of reports? Or what can you say, in terms of numbers of journalists in those markets, or how you have improved papers?

Reed: The first thing I would start with is that for Texas Monthly, and like so many other people who like to be in media, the natural bias right now, for whatever reason, is to be negative and to focus on the negative. And so, much like if you love Donald Trump, you’re probably gonna turn on Fox News, and if you hate Donald Trump you’re gonna turn on CNN — you’re not necessarily getting a clear, unbiased view from somebody like Texas Monthly.

So, to further that, why didn’t that guy that wrote that piece talk about the fact that GateHouse won a Pulitzer Prize two years ago? Was a finalist for the Pulitzer last year. And is a finalist right now for the Scripps Howard local investigative journalism award. Give his audience the full picture of GateHouse, rather than just saying they cut the newsroom over here, therefore they don’t care about journalism. A reader, to make their own independent decision, should have the benefit of both. But they don’t write that.

So, for me, the guy like Texas Monthly, there’s nothing I can do about that, other than continue to keep our heads down and keep our company focused on doing the right things and hopefully doing great investigative journalism work and being recognized with national, state, and local awards in the future.

Doctor: How does staffing play into this? I’ve been in this industry a long time. It is absolutely astounding if you step back from this and you say, “This is an industry that’s lost something like $30 billion of revenue a year, yet almost all the titles are still operating and almost all of them are profitable.” Right? So that tells you something about the structure of what the old industry was like. And I also know, from managing newsrooms, that they weren’t always the greatest places in the world.

I don’t bring that kind of rose-colored view of it. At the same time, the key point you’re making is that it’s all about local content, local identification as a differentiation, if you’re going to have a successful business. So what can you point to in terms of what GateHouse has done to bolster local? Where are you going to be able to really assert that strategy of local content?

Reed: There are a couple parts of our strategy. The design center allows us to take some of the work out of the local market that doesn’t have to be done by the local market. It allows us to have a more educated, more highly paid person doing that work, sitting in Austin and spreading that across a few markets. None of those markets could afford that person on their own, because of revenue trends. We can actually improve the editing and design of the paper, and therefore the quality of the output can be better [from] Austin than it can be locally. So sometimes the jobs that people refer to that get removed from the local newsrooms, are not actually reporters.

Doctor: Right. And that may be an important distinction. I was talking to somebody about the Register-Guard, which you recently bought in Eugene, and heard that you were going to move production jobs to Austin, but that the reporting staff was going to be pretty steady there.

Reed: Yeah, that’s true. Number two is that we’ve taken the approach that, when we go in, we have great newsrooms around the country and we have great leaders in these rooms and our best run newsrooms are run by folks who say a good reporter can put out four stories a week. I’m making that number up, just using it as an example…What we’ve found in newsrooms around the country as we buy our papers is that our story count doesn’t have to go down. It can actually increase if we can take some of the functionality of the newsroom and move it to Austin and allow the newsroom to focus on generating content. And also if we can hold our reporters to a standard that says, “We’re going to do great local journalism here, and you’re going be a part of that, but you got to write four stories a week. You can’t write one every two weeks.” And so, what the misnomer is, is that just because your newsroom staffing is reduced, you’re doing less journalism.

Doctor: There may be confusion and there may be poor reporting. All of that can be true. The critical number, I think, is reporters. And editors, in terms of story editing as opposed to copyediting, and design. Do you look at it that way? Do you say, in a market, that the goal is to bolster the number of content creators?

I’m trying to figure out how this works. I get the design part of it. As I said, in the abstract, it makes sense to me and I know you’re improving the process, I hear that. But you’ve got to have reporters and good editors in those markets.

Reed: I agree.

Doctor: So, how much of a priority is it, at this point, to build content capacity?

Reed: It’s a huge priority. Phase two of our strategy to grow same-store organic sales, on the backbone of having a strong and desirable news product.

The people in the industry who are making extremely excessive cuts in the newsroom are not only damaging their own products forever, but they’re damaging us, because everybody gets painted with the same brush.

What I would say, though, is we first want to get the production expectations correct. If I acquire Columbus, Ohio, and I have three guys in there that have been in the newsroom for 30 or 40 years and each of them shows up a couple times a week and they produce a story every two or three weeks…

That’s we found that in Columbus. So, what we said is, “Okay. We should take those three jobs, make it one job, and have that person do four stories a week.” We can have a really good reporter do four stories a week, so over the course of three weeks, you get 12 stories, where before, I had three guys coming in, doing one story every two or three weeks.

Doctor: And you’re finding a lot of that as you buy these papers?

Reed: We are, especially in middle-sized markets we’ve moved up into. We don’t find it as much in the small markets.

We really want to increase the expectations for coming into work every day and caring and being passionate about the community and the journalism work. We want it to be more than lip service: We want it to be shown with output. We want our reporters to come in and actually do the work. And so, that’s step one.

Step two is then, yes, we need to increase the resources we have dedicated to our local newsrooms. We can’t raise prices forever. We have to put out more products and we need to have better value in our local products. To me, one of the key cornerstones to that is the investigative work we do, and that’s where I think the local newspapers have failed. That’s where you’ll see our company make investments back into the newsroom.

First we’ve got to get ’em right-sized. The industry was fat, dumb, and happy, and when we were out printing money, you didn’t really care about the reporters that came in and wrote a story every two or three weeks.

It usually takes a year to right-size.

Doctor: So what do you want to say to people in the industry about what they should now expect from GateHouse in terms of that kind of reinvestment in content, in investigative reporting? What should people be looking for now?

Reed: They should be looking for, not lip service, but actual actions. We care about local journalism, but it’s easy to say that. Anybody can say that.

But just look at the business side. If we don’t do a better job and improve and increase the amount of content, and produce products that are appealing to our readers or prospective readers, then the rest of our business will not succeed.

Doctor: Is there any number you could put on it? To say that you hope to — after you do the right-sizing and get rid of, essentially, deadwood — increase staffing by X percent?

Reed: There’s not, at this point, because I don’t know what that answer is. I wish I did, but I don’t. But I do know it starts in the smaller markets first, because that’s where we’re the most under-resourced, and then we work our way up.

Doctor: You guys are smart operators. You’ve got metrics on a lot of stuff. Do you have metrics on what you think the reporting capacity should be: “Well, in this market we should be producing 47, 48 stories a week. Now we’re only producing 30. By our formula we need three or four more people.” I mean, are you approaching it that way?

Reed: Not yet. I do think that math will come into play someday. But I think what we first have to do is make sure we understand what the quality output should look like.

Doctor: How are you going to figure that out?

Reed: By research that we do with our communities and readers — understanding what their desired content is.

The biggest review we’re doing right now is on the kind of investigative journalism we’re doing. We’re trying to understand where we’re not focused on the right things and need either more resources, or the right focus, or both.

Doctor: I understand that in the abstract. Can you point to markets where you’ve been in, where you say we figured that out in this market and we’ve added two people here to do X, Y, and Z?

Reed: I don’t know, Ken. I wouldn’t say that I couldn’t point to that. I can’t personally point to it, ’cause I just don’t know if there are certain markets where we’ve already made the conclusion and added staff. I do know that the focus of our company has turned from reducing costs and jobs in the newsroom to: How do we elevate production and make the newsrooms operate with standards that allow us to produce more content? And then, how do we identify what the right content is we need to produce, and then how do we invest in that?

Doctor: Are you planning to figure that out in 2018?

Reed: Yes. Well, 2018, 2019, and 2020, as far as making the investments. Just finding it out is just one thing. Then you’ve got to actually make the investments.

Reinvestment and growth

Doctor: You face the same pressures as the rest of the industry. So where does the investment come from?

Reed: It’s going to come out of the EBIDTA of the company.

Doctor: And does that mean taking less of a profit margin, given the nature of the industry?

Reed: It does.

Doctor: And you think you can maneuver through that, even as a public company and what you’ve been able to do for shareholders?

Reed: Yes, I do. I don’t focus on margin, Ken, because I think that you can margin yourself to zero.

If you said to me, “Mike, you can have a 10-percent margin business with its top line growing 4 percent a year, or you can have a 25-percent margin business with its top line declining eight percent a year,” I’m going to take the 10-percent margin business that’s growing. Frankly, we’ve made that sacrifice for years now and our investors are obviously supportive, because our share price has grown. We’ve invested $65 million in our UpCurve and ThriveHive businesses over the last four years or so. That’s a real number. There’s not a lot of folks in our industry that are putting that kind of capital to work right out of EBIDTA, to actually figure out and solve the top-line growth. I think that’s why our numbers are better. I mean, it’s a mixture of having smaller markets, combined with our investment in where the future growth is going to come from.

Creating that future growth is going to allow us to invest back into our content creation. Now that we’ve made the investments in our UpCurve business and that’s growing, I can also start to shift some of that investment over to content creation. I’m not really worried about it, and I actually don’t think our margins will suffer.

Doctor: What are those margins today?

Reed: I think we’re about 12.5 percent.

Doctor: Let’s talk about reader revenue a little. You made the point earlier that you can’t continue to price as a lot of companies are doing, with a product that’s declining or maybe even one that’s just stable. When I look at circulation revenue overall in the industry, I see that we’ve had continued pricing, and in general, we’ve had continued deterioration of products.

Three years ago, that formula still sort of worked. We’d see small circulation revenue growth, one- to four-percent growth overall. But in the last two years or so, circulation revenue in many companies has turned negative.

My sense is that the combination of more aggressive pricing and deteriorating products means that companies have kind of hit a wall on circulation revenue or reader revenue, on the print end of things.

And then on the digital reader revenue end, to find growth, companies need to execute at a high level — not just operate the paywall, but do everything right behind it in terms of data analytics, messaging, and marketing.

Given all that, I want to understand what you’re able to do on circulation revenue and then digital reader revenue.

Reed: In smaller markets, our price is $30 to $40 a month, on average. In the bigger markets, it can range up to maybe $50 a month.

I do think [raising prices] was a big mistake that our industry. We’ve chosen not to do it, and boy, did we face criticism a couple years ago when we cited the numbers you just cited. We had peers that were going out raising prices 20, 30, 40, 50 percent.

I don’t think it’s the right thing to do. I think that you have to raise prices in a very managed way, and you have to provide value with your content — you can’t just go in and raise the prices.

We’ve taken a much more methodical approach to price increases, and therefore we’ve had the ability to have smaller volume declines, which has helped us keep circulation revenue stable because we can offset small volume declines with small price increases.

Doctor: What’s the range of the volume declines, the last year or two?

Reed: Probably five, six, seven percent. Which is still a lot.

Doctor: Where did you end up on circulation revenue, same store, for last year?

Reed: We were up half a percent.

I don’t think we can endlessly raise prices. The thing is, if you raise prices on somebody by 30 or 40 percent, you can’t then come back next year and raise prices again. I just don’t understand the logic of a 30- or 40-percent price increase, because then you can’t go back to that customer for maybe three or four years. If your volumes are going to decline because of those price increases by 15 percent and you can’t go back and raise prices, it’s so short-sighted. It’s operation out of panic in the near term, versus sound business decisionmaking for the long term.

Doctor: I’ve often talked about the Star Tribune model, which, among other things, balances circulation price increases with improved products. You were on the board that hired [Star Tribune Publisher] Mike Klingensmith.

Reed: He’s great. We learned so much from him on my time on the board. In fact, I sent Kirk and several members of our team on the circulation side to meet with Mike’s team on the circulation side.

Doctor: Is the Star Tribune one of the guideposts for what you hope to do with your company?

Reed: It absolutely is. I think the one advantage the Star Tribune and The New York Times have, that small papers don’t have, is that 50 to 70 percent of their revenue comes from subscription income. Our reader revenue is 35 percent of total revenue.

The math on crossover

Doctor: I’ve heard that your goal, by the end of 2019, is that your revenues would be flat to a little up, growing revenue year over year. Is that true?

It’s been a long time since the newspaper industry did that. I wrote a column, God, five years ago, called the “Newsonomics of zero,” saying how important it was for newspaper companies to just get flat — which isn’t really flat, given inflation, but just zero. [Most newspapers] have gotten nowhere close; The New York Times is kind of an amazement, in that it finished up 5.9 percent in 2017.

How would you get from, essentially 5.5 percent to 6 percent down to zero-plus, in a little more than a year and a half?

Reed: Print advertising is what’s declining. Three years ago, print advertising was 56 percent of our revenues. In 2017, it was 44 percent. That’s a combination of print continuing to go down and the rest of our business growing. If you fast forward another two years, to the end of 2019, then print advertising, instead of 44 percent, is probably going to be 34 percent, right?

If it continues to be a smaller piece of the pie, and the stuff that’s growing continues to be a bigger piece of the pie, we think that sometime by the end of 2019, those two lines will cross and we’ll be able to grow.

That means the rest of our business that’s growing is 66 percent. As an example, just take $100. If 34 percent of that is declining at 10 percent, that’s $3.40. How much does the 66 percent have to grow to match that $3.40. The answer’s about 45 percent. Our UpCurve and events businesses, you know from our public files, are growing at anywhere from 30 to 50 percent. So, when you combine flat circulation in with those growth categories, that 66 percent, we think, will continue to grow at 45 percent. So that’s just the simple math of it.

GateHouse’s new executive ranks

Doctor: You’ve hired a number of well-regarded executives in the last year to two years.

Reed: It’s not that we didn’t have those types of jobs and positions before, but as we’ve grown, we can attract a more high-quality, more talented person, and our company needs it.

Kirk is definitely more of the day-to-day operator and is building this great team. I spend a lot more time with shareholders, and a lot more time on earnings and that kind of stuff. I guess you would say, more of building the broader company. And I focus a lot of my time on UpCurve as well, making those investments and figuring out whether we have the right strategy. How do we build distribution sales channels that are outside of our markets?

Kirk and I work great together. We’ve been working together for 12 years now and we talk multiple times a day. We kind of know what each other’s strengths and weaknesses are and we play off of those. It’s been a great partnership.

We’re not DFM

Doctor: Some people have put you in the same boat with Digital First Media. I’m wondering how you see yourself compared to that company.

Reed: I don’t know what goes on in their board rooms. I think there are a lot of unfair things said about me and about our company. So, the same thing could be happening, there could be a lot of unfair things said about them. It’s hard for me to take the public criticism and say that it’s fair and that we’re better than them because we’re doing all these things — because they may be doing some of the same stuff, and I’m not aware of it.

What I would say is that we’ve made a substantial and serious investment in a business strategy that’s different than Digital First’s or any other company in the newspaper industry in our services business. We’ve made a substantial investment in the content side of our business, starting with the design center in Austin, which is designed to improve the quality of all of our products across the country. And we’re building out the high-quality senior management team.

I don’t think those are things Digital First is doing…I think that company is maybe going the other way.

The Adelson affair

Doctor: Lastly, let’s go back a couple of years. The first time we talked wasn’t the best time. It was when you were going through selling Las Vegas. I asked you for reflections on that sale, about maximizing profit versus community mission. I want to ask, in retrospect, how you’d like people to think of that Las Vegas sale decision.

Reed: I think that it was 100 percent the right thing to do. We bought it for $80 million. Nine months later, we sold it for $140 million. That was such a big number.

Our company back then wasn’t as big as it is now. [$140 million] was just so large of a number that I would have violated my fiduciary responsibilities to public shareholders if I didn’t do it. It was just too big. What I would say also, though, if I could do it over again: I probably would have pushed harder to not have the kind of fiasco that happened for a few days there, where the guys buying it didn’t want anybody to know who they were.

Doctor: Right, and the circus around the stuff with the judges, and supposedly using staff reporters to aid the buyer, Sheldon Adelson.

Reed: Yeah. I don’t know everything that was going on there. I think it was their call. But it was kind of crazy to not say who the buyer of the newspaper was. Sheldon set up a company, that was the buyer, and then he named this guy as the sole kind of executive.

Doctor: Yeah, it’s amazing.

Reed: The guy wasn’t really the buyer; he was the face of the company. But, you know, the truth of the matter is, I never actually met that guy.

Photo by Kelsey Knight on Unsplash

POSTED     June 20, 2018, 9:05 a.m.
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