In its first ever Analysts’ Day last month, Gannett laid out a business Blitzkrieg across its operating units. Confident of winning its secular battles, management detailed bullish consolidated financial expectations for the next four years. Gannett’s battle plan includes:
- Building a more meaningful business out of USA Today Sports Media;
- Creating a group to expand Gannett’s marketing services;
- Managing its printing needs and services;
- And charging newspaper readers for what they consume on the web.
All this translated into long term guidance of 2% to 4% revenue growth per year for four years. Oh, and the Board of Directors boosted the dividend 150% and resumed modest share buybacks.
Equity and credit investors have turned more positive on the company – partly because of the concerted effort to turn the newspapers around, but also because of the buoyancy of the broadcasting business in a phenomenal election year.
I came away thinking most about Gannett enlisting in the charge for the site brigade. Gannett’s battle plan is impressive in its ambition and is sure to get other newspapers thinking about adopting models for charging for their content delivered over the web. In summary, my thoughts are:
- Gannett is raising subscription prices for all subscribers, not just adding a digital tier, I believe.
- Gannett will be better off with the additional subscription revenues, but I expect more push-back from subscribers than suggested by the company’s financial model.
- Online display advertising is small enough at U.S. Community Publishing that the loss of ad revenue is a minor factor.
For updated comments on the overall direction of the company, please see: Credit Directionality. For comments on credit valuation, please see: Valuation.
Within the U.S. Community Publishing business, management presented three lofty goals that are in the table. The actions are supposed to add $100 million of operating income to U.S. Community Publishing in a “steady state.” On an adjusted basis, that would be a 17% step-up in operating income for the newspaper business as a whole from that of 2011, a significant improvement.
My take is that Gannett is using its new content strategy to raise prices on all of its newspaper products. Management does not describe its strategy that way, but I do not think the company can hit its target of a 25% increase in subscription revenues without raising prices for its current subscribers. Unlike Gannett management, though, I think there will be more disruption to subscribers than management expects.
Now, I have been advocating charging for content for several years. To me, charging for content is the right way to go because it can help stem the tide of subscribers to the free sites as long as there are few substitutes. Gannett publishes in many towns where there are few substitutes to get the truly local news.
Investors tend to focus on the national name brand draw of The Times as a reason for paying for web content. I agree that The Times is better known, but for people in Fort Collins, Colorado, The Coloradoan has something that The Times does not, which is hyperlocal coverage of their town, taxes and schools. Gannett’s papers often have much less competition than that found in larger cities where people turn to The Times and multiple local broadcast web sites, bloggers and other sources besides the local newspaper. The competitive moat is eroding for local newspapers, to be sure, as individual bloggers and corporate efforts like AOL’s Patch network expand their coverage. Also, news feeds of Facebook and other social networking sites redefine what counts as local news and how people find it.
But Gannett’s new pricing strategy is very aggressive, I find. First, the company is raising prices on single copies sold at newsstands and boxes by 30% to 100%. I view this as a pricing umbrella that the company is raising because I think the second strand of its strategy is to raise the prices current subscribers are paying as well.
The huge price increase on single copies could produce a 32% lift in single-copy revenue in 2012, I reckon, based on an assumed average 75% price increase. But single-copy would only increase U.S. Community Publishing total circulation revenue about 8% in 2012 – ignoring other moving parts — because single copies are not as important as home delivery. In other words, the single-copy price increase is nowhere near enough to produce the goal of a 25% increase in subscription revenue. Management explicitly included the single-copy hike in the “subscription” revenue target.
Gannett said the mammoth single-copy price hike would have a big impact on the volume of single-copy sales, and I include the Gannett volume guidance in my estimate. I had to make a guess as to when the price increase would be imposed, and I assume the single-copy price increases are part of the overall pricing strategy that will see digital pricing introduced throughout the company in phases through 2012. Because I think single-copy sales volume in 2013 and beyond would also decline in line with overall trends, the single-copy revenue in 2013 would be up 16%, I think and revert in 2014 unless there are more price increases.
Far more important is: how big a price hike do print subscribers face? The company is careful not to characterize the new pricing as a price increase, but it seemed very clear that print subscribers will no longer be able to take just the print version of their local newspaper. Instead, they will have to pay for “all access” – print and digital – or digital only. Nowhere can I find an option for print at the newspapers that converted.
It could be that the company allows subscribers who are under existing print subscription plans to get all access without paying more. But it seems unlikely because they need to increase the price when the subscriber gets an expanded product, not later when their subscription renews. As a consequence, it seems as though print subscribers will have an incentive to hold off on a new subscription until their current subscription expires. Indeed, during the Analysts’ Day, management said there would be a lag between the time the subscription changes take effect and when the “steady-state” $100 million is meant to fall to the bottom line because of the time it takes for existing subscriptions to roll off.
I tried to figure out how big the average price increase would have to be if Gannett is to achieve a 25% step-up in circulation revenue in 2013 from 2011. The answer I came up with was that an average price increase of between 30% and 45% — and closer to 45% — might be needed. The calculation uses the company’s notion that the volume of daily newspapers sold would fall by five to six percentage points faster than trend. For Sunday, I used management’s notion that Sunday circulation volume was flat. One explanation for the answer I get is that management thinks the trend in daily volume is much better than I think it is. As a result, management probably believes a smaller price hike would be needed to hit the battle plan.
I don’t have a direct way of measuring the actual price increases, so I compared newspapers that have Gannett’s new pricing plans with some other Gannett newspapers that haven’t put up the paywall and still allow print-only subscribers. The smallest price jump from daily print to “daily all access” is 27% and the largest is 47%. In Sunday, the range is even larger. Gannett wants subscribers to continue to take the Sunday print newspaper: in most cases, the Sunday paper plus digital access is the same as digital only.
But think about it: when a print-only subscriber is called on to renew, they could be faced with huge price increases for daily or Sunday-only. The subscriber may not have internet at home; may have narrowband at home; or may hate reading a newspaper on a screen. There seems to be no way around paying for digital access. Our beloved cable companies call this a “buy-through”: to get the value-added channels, you have to take the broadcast channels first. Gannett could face consumer backlash on this issue if it is not handled well.
While I firmly believe there are fewer substitutes to Gannett’s local coverage, huge price hikes will drive readers away, I fear. People who subscribe out of habit would consider cancelling, I’m sure. In markets where local broadcast stations serve the community, more local news would be available from broadcast websites not owned by Gannett. And let’s not forget that more and more people only care about the local news that is in their Facebook or other social network feed.
Gannett’s calculus relies partly on an expansion of its Sunday circulation, I think. The publisher claims it has been successful in increasing Sunday circulation at some newspapers, but the company’s own data shows that Sunday circulation volume was off 1.5% in 2011. Perhaps the reason for the historical Sunday volume decline was single-copy, but it is unclear. Perhaps the hope is that the huge single-copy price hike will corral subscribers to subscribe instead? If that is driving the Sunday circulation expectation, that would be a transient benefit in 2012 and 2013, I think.
The company also anticipates gaining new subscribers to the digital plans. There is sure to be a group of avid readers who currently read the newspaper content for free. But how many are there and can they be converted to paying subscribers?
The number of unique visitors to Gannett’s local newspapers was probably around 17 million in December 2011, I figure, based on the corporate-wide audience that includes USA Today, broadcasting and U.S. Community Publishing. The American Press Institute did a study in 2009 that showed about 10% of the unique visitors to U.S. newspaper sites were hardcore readers and another 15% were “incidental loyalists.” If true for Gannett, there are about 1.7 million hardcore readers and 2.6 million are “incidental loyalists.” The “incidental loyalists” are unlikely to pay, leaving the hardcore readers as the most likely audience. In the case of The New York Times, it seems to me that around 6% of the hardcore, non-print readers converted so far. If none of Gannett’s hardcore readers were also print subscribers, that would work out to a lift of only 3% to the current print subscriber base. I think many already are print subscribers, so the potential lift is smaller. We’ll have to see if Gannett’s hyperlocal online product has greater value to its readers than The New York Times national focus has for Times online readers.
The hardcore audience that converts will help, but not enough to produce long-term subscriber growth in the target range of 1% to 3%, I think. On their own, daily print subscription and single-copy volume likely would continue to shrink at around 4% a year, I believe.
Also, I think the experience of The New York Times shows that the ability to capture meaningful new subscribers is when the paywall first goes up. You can’t count on a lot of growth in that base in subsequent years, I believe.
If Gannett’s pricing does end up guiding daily print subscribers to convert to Sunday-only home delivery, there would be some cost savings. Newsprint is a variable cost, but it would take longer to realize savings in distribution because a daily distribution network would be needed for some time to come. I have not tried to calculate the cost side of the equation.
What of the impact on advertising, you ask? Advertising was an important factor for The New York Times. But after I try to separate how much of Gannett’s online display ads come from USA Today, from other digital assets, from U.K.-based Newsquest and finally from the U.S. Community Publishing, I find U.S. Community Publishing is a very small contributor. The main reason is a disclosure by Gannett that $154 million of revenue related to products of CareerBuilder and Classified Ventures was posted to the publishing segment. For the online display advertising that remains, I assume the vast majority comes from USA Today. Classified ads are not sold by the cost-per-thousand, so classified revenue to U.S. Community Publishing should be protected. Also, I found that classified ads are freely available to non-subscribers.
There are a bunch of reasons management can cite for me being off base. I have had to make estimates of U.S. Community Publishing home delivery and single-copy volumes as well as the U.S. Community Publishing circulation revenues and pricing. I have benchmarked the estimates against available data, but they remain only estimates. I made the estimates using all the data I could find, but these can only be regarded as good faith efforts.
McClatchy has to be thinking about this again. The company just announced that its CEO, Gary Pruitt, is moving on to the Associated Press in July. Pruitt had always erred on the side of maximizing traffic and advertising revenue rather than charging for content. I suspect the new CEO, Pat Talamantes, will follow the same route, but may start more experiments with charging.
More importantly, The New York Times will watch to see if Gannett can get its ask from subscribers. If Gannett does better than I suspect, then The Times is sure to take that as a signal to raise its subscription prices.
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