Business Success

What do you do when your industry is changing? What do you do when your innovations are fueling the changes? Those problems have plagued Eastman Kodak Co. for three decades and the company’s experience provides some lessons for those running legacy media businesses.

The decision by News Corp. to dump MySpace once again reveals the risks of over exuberance toward digital companies that do not have a proven business model or long-term customer loyalty.

There are plenty of digital investments that meet those requirements, but a number of the most hyped firms moving toward IPOs and acquisitions do not. They need to be considered with hard headed pragmatism.

MySpace was launched 2003 and rapidly became the toast of the digital world as a social networking site and “the place” for musical stars and fans to connect. By 2005 it was the fifth most visited site on the Internet.

New Corp., which was anxious to benefit from growth in digital media, jumped at the opportunity to acquire the service and paid $580 million in 2005. It was an enormous price for a company with an unclear revenue potential.

Within two years MySpace had grown to be the world’s number one social networking site and was receiving 100 million unique monthly visitors. But it still had revenue problems; its visitors weren't paying customers and advertising wasn't paying its costs.

Despite landing a $900 million ad deal with Google, MySpace reported just one period of profitability. On top of that, it lost its cache with users and its leading position was soon eclipsed by Facebook.

Overall, it is estimated that the MySpace lost at least $1.5 billion under News Corp. and those losses dragged down the News Corp.’s overall earnings. The extent of its losses has never been completely clear because its results were not transparently presented in News Corp. financial reports.

After desperately trying to revive MySpace, News Corp. put it up for sale with an asking price was $100 million. It was sold in June to the online advertising network Specific Media for $35 million (about 6% of what News Corp paid for it), but the company was really just giving it away to get it off its books. As part of the deal, News Corp. took a minority equity stake in Specific Media.

Investing in emerging industries is always more risky than investing in established ones, so it requires a good deal of realism and clear headedness about the opportunities and their potential. It is not good enough merely to throw money on the table in hopes of drawing a winning hand or because the crowd is encouraging you on. A solid business plan that it is already working and producing financial growth and a user model based on more than popularity and status are required unless you investing high-risk capital you can afford to lose, as well as other opportunities it might have funded.

Financial pages are full of developments and changes at newspaper companies and these are being commented upon anxiously by those in the industry. Unpleasant conditions certainly abound, but these development are not indications that the industry is dead or dying in the near future. What they signal is that things which worked in the past are not working now, that newspaper companies are badly in need of restructuring, refocusing, and renewal, and that the boards of the companies and the company managers are taking badly needed action.

The techniques for restructuring are no mystery. First, you need some cash. This can be obtained by attracting new capital through investment or loans. New York Times Co. did this recently by borrowings $250 million from Carlos Slim. Other firms are looking for friendly investors with liquidity.

Another way of raising cash is by turning assets into cash. A classic move made by many types of firms is the sell their building and lease back any space that is needed. Media General and New York Times Co. are currently employing this tactic. Financially troubled companies can also be expected to shed some of their poorest or best performing holdings to raise cash, so it is likely that we will see a number of newspapers companies putting papers up for sale in the near future.

Reducing and restructuring existing debt lessens financial performance pressures on companies. To accomplish it, they use cash that is raised to pay obligations imminently due or to make early partial payments to debt holders in exchange for obtaining better interest rates or lengthening payment terms. Watch for such transactions in the coming months.

As part of restructuring, many newspaper-based companies will seek to refocus on core news and informational activities, divesting non-core activities to raise cash. Baseball teams, holdings in cable systems, advertising service firms, and other types of peripheral companies are being sold or considered for sale.

Few newspaper company executives have experience restructuring and reorganizing their firms to make them leaner and more efficient or strong financial management background. The current environment requires different managerial skills so many newspaper firms will be looking outside the industry for experience. GateHouse Media, for example, has now hired a chief financial officer with a financial management background at companies including PayCheck, NCR , and PriceWaterhouse.

Expect to see multiple actions throughout the industry that are parts of the restructuring of newspaper companies in the coming month. Some will be painful, but will have two effects. First, it will lessen the financial pressures of the debt many companies are carrying. Second, it will force them to rethink their newspapers and the value and quality they are or aren’t providing.

The bankruptcy filings of the Minneapolis Star-Tribune and Tribune Co. are cast by many as a sign of the continuing decline of the newspaper market. However, it is noteworthy that neither firm is owned by a company with a newspaper heritage, but by firms in the newspaper business primarily for financial gain. The Tribune’s owner is from the real estate business and the Star Trib’s is from private equity.

There is no doubt that the newspaper business is facing a difficult time now, but the business origins of the owners are important because their perceptions of bankruptcy, how the community will react, and how the company will be seen afterwards are colored by the norms and mores of those business fields.

Newspaper companies have long played special roles in communities, exercising social and political influence, and promoting corporate responsibility, accountability, and community standards. Publishers and editors have typically sat with the other civic leaders on boards and committees of chambers of commerce, community development organizations, foundations, and local offices of the United Way and the Better Business Bureau.

The roles and influence of newspaper executives were founded on their standing in the community and of perceptions of their respectability, community interest, and fiscal dependability. Newspaper publishers and editors would loathe any hint of financial instability or impropriety that would mar those views. The reputation of the newspaper and its brand were inextricably linked.

Newspaper companies have survived depressions, recessions, war, and all kinds of economic uncertainty in the past. They did so because they were financially solid companies with equity structures and balance sheets that allowed them survive very uncomfortable financial circumstances. Companies like the Tribune Co. and Star-Tribune are based on weaker foundations and come from cultures in which bankruptcy to reduce debts or abrogate contracts—hurting local businesses and their own employees--is just another business tool.

As I have previously discussed in this blog, there are a number of companies with long newspaper histories that are carrying significant debt or struggling with investors. It will be interesting to see how they handle their economic crises and the efforts they make avoid the stigma of bankruptcy. I suspect most will find other ways of dealing with their financial predicaments--unless they feel that the Star-Tribune and Tribune Co. choices have changed the norms for the entire industry.

Voices in and around the newspaper industry would have us believe the industry is falling apart and taking its last gaps. Investors are fleeing newspaper companies, publishers are decrying the lack of newspaper advertising growth, debt challenges are plaguing many companies, and there are layoffs and buyouts everywhere.

If one rationally looks at the industry, however, one sees that it is fundamentally sound, but that a unique, financially golden period in its history is ending. It is that change which is creating the bulk of the turmoil in the industry, but the biggest problem is that those working in the industry have short memories about the newspaper business and don't remember it any other way.

The generation leading newspapers and newspaper companies today has only experienced a period in which extraordinary growth of advertising increased newspaper revenue across the nation. That growth, combined with the development of local monopolies, created a period that enriched papers highly. This, of course, created great interest in investors and produced capital that allowed public companies to grow and acquire papers, driving up newspaper prices and the value of newspaper assets.

Today, the conditions that drove the growth of the past 3 decades are ending, wealth is being stripped from the industry, investors are losing interest, and publishers are struggling with negative and low growth.

Things are terrible, right? They are worse than every before, aren’t they?

Those views are only true if one takes a limited historical perspective and conceives the industry as a way to riches, something few newspaper owners did in generations past. With the exception of a few major cities, one could not get rich being a newspaper owner. Publishers nationwide could make a living in newspaper, but much of their reward came from being socially influential in the community. Before the extraordinary profitability of the last quarter of the 20th century, newspapers were relatively unprofitable and breaking even was the primary financial goal of most publishers.

Contemporary developments are taking us back toward that situation, but even with the u-turn in the business, we need to recognize that newspaper revenue today is better than it was in 1950s, 1960s, 1970s, 1980s, and 1990s. In fact, adjusted for inflation, newspapers in 2007 had two and a half times the advertising income that they had in 1950. In terms of employment, there are still twenty percent more journalists working in newspapers than in the highly profitable years that fueled the growth of corporate newspapering.

Those working in the newspaper industry need to be realistic and understand what the effects of contemporary changes mean. They don’t mean disaster, but they mean changes in the business of newspapers, the way the industry has operated for the past three decades, and how they need to perceive the industry.