Survival Blueprint for Newspapers

by: Diane Mermigas

Peel back the layers of contentious bankruptcy, scandalous management and Sam Zell’s 2007 leveraged buyout gone bad at the Tribune Co. and there is an intriguing story about media survival and the larger reinvention beginning to resonate within the beleaguered publishing industry.

That the Tribune Co. now refers to its self as a media and business services company that happens to publish a few newspapers underscores its shift from print to digital and from conventional news headlines to activist hyper local journalism that positions it for a new owner in 2011.

The new guard could include former Walt Disney (NYSE:DIS) chairman CEO Michael Eisner, who has been buying the private media company’s debt, perhaps to endear himself to angry creditors and be able to step in when Zell walks away post-bankruptcy. “I don’t envision having any role going forward,” Zell said recently. “I'll turn it over to whoever the creditors decide they want to run it.”

Uncertainty was crippling when all of Tribune Co.’s businesses, including the flagship Chicago Tribune, cut about 30 percent cost from their budgets and some 4,200 jobs companywide. In the past 19 months, there have been no layoffs at the Chicago Tribune Media Group (CTMG), which has increased staff 12 percent, adding nearly 60 jobs to its investigative units, and its universal digital media on demand newsroom.

The ubiquitous newsroom manages at least 25 percent of the feature news for the Tribune Co.’s seven other cash flow positive newspapers. The 75 percent of the editing and production mechanics CTMG does for Tribune’s Newport Daily News is the shape of things to come.

Tribune will use its new stature as an inaugural contributing member with Thomson Reuters’ new Reuters America, an AP rival, to market its ready-made news pages and modules. The modules represent a substantial new revenue source for Tribune and a way for newspaper clients to minimize news production costs and dependence upon the pricey AP.

The Media on Demand module production already saves about $10 million in costs annually across the newspaper group. It’s just one example of how CTMG is executing on not just a survival, but a growth plan that is making it less reliant on its core newspapers and traditional advertising revenues. As a result, the Tribune Co. is quietly providing its beleaguered publishing brethren -- from The New York Times Co. and The Washington Post Co. to News Corp.-- a template for digital profitability that requires considerable reinvention.

About 40 percent of the CTMG’s overall revenues are generated by digital, non-print products and services. Although Chicago Tribune readership has declined, the media group’s overall cross-platform Chicago area audience reach has increased to nearly 70 percent from the implementation of more diversified digital products, such as breaking news Web sites for sports and business, foreign language papers like Spanish-speaking Vivelo Hoy and youth skewing papers such as The Redeye.

As a result, CTMG was expected to have cash flow in excess of $100 million in 2010. The Tribune Co.’s consolidated operating cash flow is projected to be $617 million in 2010, up from $492 million last year, according to industry experts. The $120 million consolidated increase is largely attributed to the CTMG’s dramatic reorganization.

“The fact that most people don’t know how profitable we are, and about the growth that is occurring in our audience, and about our innovation and diversification at the company has been lost in some of the noise,” CTMG publisher Tony Hunter said, referring to the Tribune’s high profile on bankruptcy and management scandal. “Diversification of our media group is why we’re still thriving,” Hunter said.

CTMG's total operating cash flow will once again exceed $100 million this year as a result of developing new revenue streams rather than as a result of hefty cost reductions or a gradual improvement in advertising. The Tribune and the CTMG will continue to move toward a 50/50 split of revenue from print and non-print sources that will increasingly involve live events featuring the company’s editorial contributors, premium specialized content, and mobile and online transactions. They prevail irrespective of declining iPad and digital magazine sales, and the loss of consumer data and revenues to hardware makers such as Apple. They are banking on a sizable number of consumers willing to pay for content, as recently indicated by the Pew Internet Project.

Overall, they are hammering out a sustainable new business model for imploding big city newspapers.

The Chicago Tribune Media Group in particular — admittedly still stuck in “Zell hell” — is finding salvation in daily doses of roll up your sleeves investigative journalism and community activism on steroids. The Dec. 9, 2009, “epiphany,” was when the company filed for bankruptcy and Chicago Tribune’s front page was an exclusive about then Illinois Gov. Rod Blagojevich allegedly seeking to “sell” the U.S. senate seat vacated by President-elect Barack Obama. Every day since, the Chicago Tribune’s watchdog journalism has exposed the pay-to-play political culture of Illinois.

"A near-death experience can really motivate you,” says Gerould Kern, whose 27-month tenure as Chicago Tribune editor (“but who’s counting,” he quips) has been devoted to calling out political corruption in a state where two governors are behind bars and a third is appealing his conviction. “The two Dec. 9, 2009, events galvanized us,” Kern said.

Even as The Chicago Tribune’s daily investigations have uncovered state college admission-, nursing home-, pension fund- and other government fraud, the company’s reputation was “shamefully” damaged by the sexist, bawdry bad boy behavior of recently resigned Zell-appointed CEO Randy Michaels, Kern said. He penned one of his now famous open letters to readers about the scandal. In an anticipated move last month, long-time Zell crony Gerry Spector resigned as Tribune COO.

A four-man committee now overseeing Tribune Co. last month issued an updated code of conduct to all employees banning the controversial “frat boy” behavior that prevailed since Zell’s highly leveraged buyout of the Tribune Co. The committee includes Hunter, Los Angeles Times publisher Eddie Hartenstein (former DirecTV CEO) and two Zell reorganization appointees.

Potential CEO candidates besides Hunter and Hartenstein included Sirius XM Radio (NASDAQ:SIRI) CEO Mel Karmazin, Comcast (NASDAQ:CMCSA) COO Jeff Snell, former CBS (NYSE:CBS) CFO Freed Reynolds, and former News Corp. (NASDAQ:NWSA) COO Peter Chernin, according to press speculation. A new CEO-COO team could be announced in conjunction with the Tribune Co.’s emergence from bankruptcy early in 2011 and a possible decision to go public again under new owners.

Despite being a 19-year Tribune veteran, Kern has been a lightning rod for the public pain and angst that has scared the company’s besieged legions. Critics complain Kern stood up to Michael’s shenanigans only after the scathing New York Times story about his frat house reign that forced his departure. Kern also was caught in the cross hairs of The Chicago Headline Club’s public outrage over the culture of offensiveness “that has marginalized women” under Michaels and other Zell cronies. Chicago Tribune staffers in particular say they resent the Times’ story and the Headline Club painting the entire company with the same broad brush.

“The episode with Randy Michaels took its toll … all we want to do is the journalism we came here to create,” says Kern, sounding like his stoic heroes (Churchill, Truman and FDR) whose shelved biographies flank his office desk along with a framed copy of the infamous Tribune front page that prematurely and erroneously declared “Dewy Defeats Truman.” A list of the new guiding principles of the Tribune’s bold digital initiatives is posted in the glass wall of his office, facing out for all in the newsroom to see.

The performance of the company as a whole, once you strip away the Randy Michaels saga, “has smartly improved its financial and future position,” Kern said in a recent interview. “The worst time came in April 2009 “when we had to stop the bleeding.”

After spending the previous two years in a corporate Tribune job focused on creating new business models, Kern was tasked to “zero base the newsroom” and reallocate resources over six weeks. He accomplished the reorganization in one day. “Analyzing the economics of the news business, I recognized that there was no way the traditional economic model would work. That meant we had to make do with fewer dollars and fewer people, and that we had to use them differently,” he said.

“No one wanted to cut jobs, but I knew we would be forced to, so it became an issue of what was the smartest way to do things and to refocus it with a new blueprint,” Kern said.

When Tribune market studies showed readers were emotionally unattached to the newspaper, regarding it more as “a utility company,” Kern decided to rebrand the Tribune as a local crusader. “When you pick it up, you know where you are, you know who it is written for and you know what the mission is,” he said.

The Chicago Tribune Media Group’s digital audience is approaching 2 million (of a more than 5 million audience base). Sequential improvement in print advertising revenues is eclipsed by 30 percent increases in digital revenues over last year.

Hunter says the biggest breakthrough has been “the supply chain mentality to news and information across the enterprise represented by The Chicago Tribune’s Media On Demand news module production. The recently launched foray into online transactions, thriving direct mail and the release of targeted verticals (sources say books and groceries are next up) underscore “there is not one big idea — but many ideas — to reinvent media,” Hunter said.

The company also has fortified its subscription-based entertainment and information database services. Tribune Media Services recently acquired CastTV, a leading provider in video search and indexing.

Perhaps the most unique approach the company is taking is revenue-generating live events.

Tribune’s massive Freedom Center production center in downtown Chicago is suddenly playing host to music concerts and Second City satiric news reviews, and had a $300,000 deal to with a holiday Broadway production of Peter Pan.

CTMG also is luring advertisers into the social media world with its new 435 digital agency, offering self-service or supported online networking strategy and monitoring, Web site design and development, search engine optimization, and ad placement.

Tribune has been startled by its own digital catch-up. The Chicago Tribune brand continues to be a powerful draw with its new, and blog network, each generating 15 to 17 million online page views that didn’t exist 18 months ago. “Using our online media as a way to gather target audiences and funnel them toward more transactional channels like and new mobile applications on devices like the iPad is a way to bring the cable television business model to print,” Kern said.

Even after it emerges from bankruptcy and passes to new owners in 2011, there is an outside chance the Tribune Co. could eventually face an asset split to appease contentious creditors who have pummeled the company, some of its former key executives and Zell with lawsuits. Although the bankruptcy proceedings have cost more than $135 million so far, the presiding judge recently approved $40 million in bonuses to top Tribune executives. Zell brought only $315 million in financing to his $8.5 billion acquisition of Tribune Co., ultimately smothering the company with $13 billion in debt.

“I am very optimistic about the future. In the midst of chaos and crisis, there is huge opportunity,” says Kern. “I still believe the best ideas win. Ultimately, owners come and owners go, but the institution — and what it does and what it stands for — is something that lasts,” he said. “People in the journalism world believe in the right things, but they have not been willing to be entrepreneurial, to change, to experiment and try new things. Remaining in the preservation mode hurt all of us.”

This story has been updated since it was originally published last month in OMMA Magazine.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.