Cablevision's Overly Optimistic Vision for Newsday

May.13.08 | About: Cablevision Systems (CVC)

Cablevision’s (NYSE:CVC) bold plan to purchase Newsday will test as never before the concept – and the economics – of the hyper-consolidation of local media by a single company. Don’t count on it succeeding.

By adding the dominant Long Island Daily and the free amNewYork to the largest and most highly concentrated cluster of cable systems in the country, Cablevision has the potential to become nearly all things media to many of the more than 4.5 million households and 600,000 businesses who use its cable services in New York, New Jersey and Connecticut.

In addition to delivering the triple-play services of television, internet and telephone, CableVision now intends to augment its arsenal with Newsday’s circulation of 387.5k daily and 454.2k on Sunday, plus the 310.3k free copies of amNewYork that are distributed weekdays in Manhattan and the neighboring boroughs. This not to mention News 12, the local television news channel fed to Cablevision subscribers in the Tri-State Area, and such legendary venues as Madison Square Garden, Radio City Music Hall and the Clearview Cinemas chain of movie theaters.

The strength of Cablevision’s pre-Newsday strategy is revealed in the 11.3% surge in sales that lifted its revenues to just short of $6.5 billion in 2007. Its operating earnings grew almost 1½ times faster than its revenues, generating more than $2 billion in cash flow, much of which is earmarked for servicing the $11.6 billion in debt that makes Cablevision one of the most highly leveraged companies in the media business.

In contrast to Cablevision, which has been growing briskly despite direct competition from Verizon (NYSE:VZ) for nearly every one of its existing and potential triple-pay customers, business at Newsday, like that of most newspapers, has been deteriorating rapidly and uncontrollably for the last four years.

How rapidly and uncontrollably? Very.

Newsday has lost a fifth of its sales since hitting a modern-day peak of $622 million in 2003, according to filings at the Securities and Exchange Commission. With revenues tumbling every year since 2003, Newsday reported $498 million in sales in 2007. Based on the recent deterioration of the economy and the 11.2% drop revenues collectively suffered by the Tribune Co. newspapers in the first three months of this year, there is no evidence to suggest the situation is turning around.

Although the debt-laden Tribune Co. does not individually report Newsday’s profit, industry sources estimate the paper’s operating earnings were $80 million to $90 million in 2007. Further, they report that the profit margin has been falling more rapidly than the newspaper’s sales, notwithstanding a series of cutbacks that have shrunk the newshole, the distribution footprint and the newsroom.

If the estimates are correct, then Newsday’s 17% operating margin is close to the average in recent years for the newspaper industry. But its profits are only half the size of those that Cablevision is accustomed to extracting from its existing lines of business.

So, why would Cablevision want to buy Newsday and all of its associated challenges?

Cablevision’s vision evidently is to develop a holistic advertising sales program that will enable merchants to buy everything from print to cable to Internet from a single representative offering a comprehensive bundle of integrated and interactive services. The pitch most likely will be sweetened by discounts that enable advertisers to save ever-greater amounts of money by directing ever-greater portions of their budgets to the Cablevision media.

Cablevision can boost News 12 with more and better local content from Newsday and amNewYork. It can use News 12 to put more video on Newsday.Com and steer more traffic to the newspaper’s website by making it the default home for the 2.3 milliom subscribers of its broadband Internet service. It could start a 24/7 video classified channel featuring homes and cars for sale. It might even try to boost sales at Madison Square Garden and its movie theaters by leveraging the newspapers to tout upcoming attractions.

For all the theoretical synergies that could be produced by this transaction, the reality is that Newsday is suffering from the powerful secular declines in readership and advertising that are affecting almost every newspaper in the United States.

Can Cablevision really build sufficient revenues and/or wring enough savings out Newsday to make the consolidation work? Only time will tell.

But the prospects for success seem less clear for Cablevision than they might have been if either News Corp. (NASDAQ:NWS) or the New York Daily News were buying Newsday, instead. Here’s why:

  • The consolidation of Newsday with either the New York Post or the Daily News would have created a single, overwhelming leader in the four-way battle for Sunday dominance in the Tri-State market (the New York Times, of course, is the fourth player). Sunday matters, because it typically generates half of a newspaper’s revenues.
  • As Rupert Murdoch said in advocating the Newsday deal before he abandoned it, the savings associated with the consolidation of the Post and Newsday could have yielded another $100 million in operating profits – or enough to turn the Post from a money-loser to a money-maker. The case would have been roughly the same for the Daily News.

Unless Cablevision goes out and buys a second newspaper in the New York market, it has no opportunity to achieve the revenue gains or cost savings that could have been reaped by Mr. Murdoch or Mortimer Zuckerman, the publisher of the Daily News.

Given the powerful reasons why News Corp. in particular should have purchased Newsday, why did Mr. Murdoch reverse course? Mr. Murdoch most likely concluded that (a) Cablevision is unlikely to pull off a successful quadruple-play with Newsday and (b) there was no need to over-pay for an asset in due course would come back on the market at a lower price.

Rupe might be wrong. But I doubt it.