The 700 layoffs Gannett announced at its community newspapers Tuesday can rightly be read as a vote of no confidence in the future of print by America’s largest newspaper company.
Given the company’s long history of playing to Wall Street, it is no big surprise, though. Gannett probably would say it is just being realistic in recognizing that these 81 newspapers have permanently become much smaller businesses. The market liked the hard-headed cost control move, with Gannett shares up about 4 percent from late Monday to Tuesday’s closing bell.
Here is my take on the factors that went into the decision, drawn from several sources, including the company’s first quarter conference call with analysts.
Revenues were down for the community newspapers in the first quarter — about 7 percent overall and nearly 10 percent in print — from the same period in 2010. The company has said that the ad losses are continuing in the second quarter. So, in a year when most media, except perhaps Yellow Pages and direct mail, are recovering some of the ad base lost in the recession, newspapers are still in economic decline.
Particularly because newsprint prices costs are up sharply this year (20 to 30 percent), Gannett could not easily reduce expenses in tandem with the disappointing ad results in the first half of this year. As a result, publishing operating margins fells four times as fast as revenues — 25.8 percent. Given Gannett’s long record of high operating margins, several analysts in the first quarter earnings conference call asked what was going wrong.
Gannett has been pitching the story to investors for several years that it has become an information company rather than a newspaper company. This winter around Super Bowl time, it launched an expensive new branding campaign with the slogan “It’s all within reach.” Huh? The company said the ads were meant to signal its intent to have all kinds of community information available on all platforms, mobile particularly. Investing less in newsrooms and other print operations fits that strategic direction.
Gannett has several successful digital businesses, its share of CareerBuilder electronic jobs listings especially, and some model newspaper digital operations like those of its largest community paper, the Arizona Republic. But it suffers from the same gap that analyst Frédéric Filloux has diagnosed at The Washington Post and other papers for which the relevant information is broken out in public financial reports. Digital revenues (in actual dollars, not percentage terms) are not yet rising nearly as fast as the print revenues continue to fall away. Gannett buries the exact numbers. But publishing revenues, including some digital growth, fell four times as much as the entire digital segment (including CareerBuilder) grew.
Unlike McClatchy, whose further newsroom cuts this year are driven by the need to make big interest payments and reduce debt, Gannett’s debt picture is relatively sunny. It still allocates a substantial majority of cash earnings to debt reduction, but could easily borrow to make an acquisition or launch a new line of business should it wish.
Don’t look for Gannett to use any of that money to acquire newspapers. Since 2000, it has not bought any and has reduced its holding of community newspapers from 99 to 81.
Conversely, Gannett remains saddled with Newsquest, a substantial chain of British regional newspapers it bought in 1999 for more than 1 billion pounds, thinking it had a Midas touch that was exportable. The British papers have suffered from the same kind of Internet competition and shifting marketing priorities that have dragged down the American industry. Newsquest is having a difficult 2011, with year-to-year revenue declines of more than 12 percent.
Meanwhile, Gannett’s large broadcasting division — in a non-Olympics year, ramping up toward an election — is doing fine and not subject to similar cuts.
Historically, Gannett publishing has operated with relatively lean news staffs and has had a quick trigger on layoffs and furlough programs through the revenue crunch of recent years.
Other papers and chains may be downsizing similarly in the face of 2011 ad results, but not making the same kind of public splash Gannett did Tuesday.
All that said, the Gannett Way is not everyone’s 2011 strategy.
Metro papers like the Boston Globe and Dallas Morning News that have adopted a high price/high quality circulation strategy know readers will not be satisfied with skinny papers that have little worth reading. So those newsrooms are protected and, in a few cases, growing.
Other individual papers or chains, especially those that are debt-free, like Scripps or A.C.Belo, are willing to operate at break even or at a modest loss for now to keep the news core strong and invest in a range of digital startups (as discussed in my most recent post about new ventures of The Washington Post).
In my view, sucking another 15 jobs out of the depleted Cincinnati Enquirer or 26 from the Indianapolis Star as Gannett did Tuesday, risks accelerating losses of print circulation and, in turn, print ad revenues, still significant. But all-in digital enthusiasts will say, so what, that’s not the future.
Read as a hard-headed business judgment, Gannett’s move confirms a clear trend. Newspapers, though still at least modestly profitable, are much smaller businesses than they were five years ago. Probably for good.
And they are much more likely to get smaller still than regain some of their lost bulk in the years immediately ahead as legacy ad budgets get shaved in favor of a wide range of digital marketing.