Clearly, there is a migration of advertising dollars from the offline world to the online space. We see that every day, and by virtue of operating online, we benefit from that. But that being said, we also think that changes are a part of business, and some companies realize that early on and make tweaks to their business plan, while others seek to hold onto the past.
Magazines, newspapers, radio and TV are all facing onslaughts from the Web, but kid yourself not, the Web is still relatively small. In fact, the truth is that the Web in itself is not small, but because of offline companies’ slowness to embrace, the revenue and income from digital operations is somewhat small. Consider this simple fact: print and internet advertising are roughly the same size, but while newspaper and magazines companies make the lion’s share of the print ad revenue and Internet portal and search giants make the lion’s share of Web revenues, traditional print companies have only now began to take the Web seriously. Some are totally repositioning themselves for the Web, while others are reluctantly admitting they have to.
But a deeper examination shows that perhaps the man most blames for newspapers’ woes (Craig Newmark) is right after all: newspapers are doing fine, it’s the sentiment around them that has changed. Not content to simply regurgitate what is found on other blogs, we decided to run some numbers.
Compare column 3 with column 6, which lists the respective market valuations of the leading newspaper companies as at December 31, 2003 with their market capitalizations today.
You clearly see a steep drop in values, but incidentally, when you compare Column 2 to Column 5, in other words, the sales figures they generated (we got these by simply dividing market cap by price to sales figures, using Yahoo! Finance), you will see that most newspaper companies are making more revenue than they were three years ago. Three years ago is an important cutoff time, because that is when the online advertising market took off, that is also when the second coming of Pol Pot, Craig Newmark (if you ask newspaper executives, that is), saw his Craigslist.org take off.
Incidentally, we valued Craigslist’s business here. And while revenues for the peer group rose by a mere $2B in the examined period, the value dropped some $28B. We valued Craigslist.org - assuming it monetized its site optimally - at $20B. Hmm… coincidence? We think not.
While a $2B rise in sales is not impressive, and a $28B drop in value is horrible, the bottom line is that newspaper firms are struggling, but need not die. What has changed, for the worst, is the sentiment the market has for them.
If trees could talk, they’d say Karma is a bitch.
For example, the malaise found amongst newspaper empires is due to the change in Columns 4 and 7, the ratio that investors will bid on every dollar newspapers generate.
On 12/31/2003: investors paid 2.21 for every dollar of sales,
today: investors pay 1.5 times for every dollar of sales.
Of course, it should be noted that investors ultimately bid on earnings, growth and to a lesser extent, sales, but the fact remains, with all of this money, resources, employees, newspapers should, could, would be better off if they had embraced change instead of feel threatened from it.
Bottom line: if Craig Newmark would have knocked on the door of every newspaper executive’s door on December 12, 2003 and offered a partnership, he would not have been well greeted.
In fact, Column 9 of this next table shows that even though sales has risen (though slowly) across the board, value has fallen across the board, in Column 10. Column 11, 12 and 13 project the would-be value of these firms if the market viewed them as favorably as it did back in 2003. Of course, that is Alice in Wonderland talk, the value of an asset is what the market will pay for it at a given time, but then again, it was precisely in 2003 that most digital assets were undervalued and ripe for the picking. Newspapers sat idle, largely, though a few did make moves. We outlined a few in our Top 10 Best M&A Web Deals of All Time.
Of course, what should be highlighted, is that companies who have most embraced the Web have fared best: EW Scripps, Washington Post being two prime examples. McLatchy’s rise comes by virtue of buying Knight Ridder, then the third largest newspaper group in the US.
To conclude, newspapers have a problem in terms of publishing (business model) and printing (distribution), but the quality of their content remains miles ahead than the repetitive and hollow content found on 80% of the sites/blogs calling for their demise. Sure, a lot of the magazines and newspapers will go under because they were slow to adapt, but what the tables above show is that the intrinsic value of these businesses is stronger than ever; if the owners thereof feel they are being shortchanged, well, it’s a matter of timing and psychology, so they better see what tweaks they need to make to their companies so that when the markets shift - and trust me, they always do - they will be able to better reflect the true value of their businesses.
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March 25th, 2007 at 2:39 pm
The reason market cap has taken such an enormous hit is because the market can see an imminent end to the current revenue model. Readers are dying off and the next generation isn’t interested in paper. No one is saying this will happen tomorrow. But it’s not rational to think that with increasing competition across geography and format, a deluge of competitive content from users, competitive alternatives for historically lucrative forms of revenue, expectations of free content and crappy ad rates online that the newspapers will continue to generate reliable cash flow.
The fat lasy has sung and the smart money is moving on. This doesn’t mean there aren’t opportunities. It just means there are many more elsewhere.
IMO.
March 25th, 2007 at 2:52 pm
All good points, but I think the revenue model of advertising + subscription + classifieds is fine, it’s mainly the offline distribution and printing overhead that are broken.
If tomorrow, all newspaper companies took their content and put it all (including the billions of pages of archives) on the Web in a free ad-supported model, would newspaper companies be really a bad business to own? I’d say no, not at all, there would be massive upside.
Of course, newspapers have been around for over 100 years and have suffered from wage inflation. Why on earth should a journalist make $150K per year to knock out one article per week (for example)? But the quality of that piece is head and shoulders above much of the drivel we find online masquerading as citizen journalism or some nonsense… in other words, the model needs a massive rude awakening, but I don’t think it’s dead entirely.
Newspaper companies would win locally, and we’re all reading and saying that local is the next massive growth spurt in search. The problem is with management and ownership groups, not with the business per se.
My two cents.
March 26th, 2007 at 12:34 am
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