The Media Industry: Where It's Been & Where It's Going
The newspaper industry has been undergoing an evolution, and the economic challenges that the industry faces have been well-documented over time. Employment in newsrooms has declined by 45% since 2004. BuzzFeed, Huffington Post, and Gannett all let go a percentage of their workforce in late January 2019. Vice Media announced that they are cutting 10% of their workforce on February 1st, and more companies are expected to follow suit. Gannett owns USA Today, among other circulations, and many local newspapers. The local newspapers in particular have been slammed over the past several years, and the most recent round of layoffs were just another slap in the face.
The disruptive nature of the Internet and the changing demographics of a subscriber base are some of the variables that the industry has dealt with, but there are also underlying revenue deficiencies within the newspaper system. The advent of big tech and the power of Facebook and Google has put pressure on publishers. Despite Google and Facebook's $300 million pledge to support journalism, that pressure doesn't look like it's going away any time soon.
Read it in Print: The Golden Age of Newspapers
Newspapers were booming during the early half of the 20th century. People would get two newspapers everyday, one with the morning news, and one with the evening news. The subscriber base began to flatline in the early 70s, but a true contraction in growth didn't show up until the 1990s, where it has steeply declined since then.
The newspaper companies were thriving during the 1990's, despite the contraction in the number of subscribers. Gannett (GCI) and Knight Ridder, the industry leaders, were trading with 20 - 30% profit margins, which by comparison to other industries, is pretty massive. The below chart is from a 1999 Nieman report. It documents clearly "the business strategies put in place at newspapers to emphasize profit over market share" according to the report.
Source: Nieman Reports
The shareholders invested in these companies began to expect these profits, and made that very clear to the papers. The papers shifted their resources into advertising as they continued to grow, taking money away from the newsroom and from payroll. Losing focus on news coverage and employee well-being is never a good sign for an industry.
Source: Nieman Reports
In the late 1990s, the Internet exploded. It would have been an incredible advantage to the papers, but most didn't evolve accordingly. They rode the new tech wave, but they didn't innovate their product for a digital audience, rather, they invested in technology to make the product easier to produce. The inefficiencies clearly show up in Gannett's current stock price, and KRI's sale to the McClatchy Company.
Source: Yahoo Finance
Then blogging came along, and self-publishing put another pin in the newspaper balloon. The chains had massive debt, and a shrinking readership base. The publishers were caught with their hands tied.
Naturally, the groups had to cut to where they could to continue servicing their debt obligations and meet the needs of shareholders. The newspaper quality declined. It was the Phil Meyer Death Spiral. They had focused on the wrong things and did not their dollars to improvement and growth. As Jeremy Littau wrote:
"Newspapers ate their own seed corn during bumper crop days and then had no resources when it got tough."
By early 2000, over 75% of the newspaper's revenue came from advertisements. However, advertisers were paying for access to readers, so when the number of readers began to decline, so did the number of advertisements hitting the papers.
Source: Jeremy Littau
Craig's List, established in 1995, created free classified advertisement opportunities. This put further pressure on the advertisement revenue of newspaper businesses. People did not need to post their "For Sale: 1991 Toyota Celica" in the local newspaper anymore. Newspapers lost about 67% of their revenue over the course of ten years. To compensate, they responded with price hikes that out-price what the average American can or wants to pay.
Source: Iris Chyi
Since then, growth has been declining and numbers have been in the red. For 2017, newspaper circulation was down 11% compared to 2016 numbers, and almost 50% since its peak in the late 1980s.
As the Internet continues to evolve, so do the avenues of news source access. Facebook has become a primary source of news for a large portion of the population. But Facebook news is more about engagement and clicks, the "shareability" of the articles, with the algorithm feeding each user specialized content.
Google and Facebook: The New Sources of the News
Google and Facebook have permanently disrupted some aspects of the media industry. Advertisers are willing to funnel money into the two outlets because they know people will go to those sites. The two platforms now control ~60% of online ad revenue.
However, the market share for both FB and GOOGL is expected to decline in the coming years, with ~55% market share expected for the two in 2020. They are expected to lose share to Amazon in particular, with eMarketer estimating that Amazon has a 4.1% share of the advertisement market, with expectation of 10-12% ad sales growth.
Source: E Marketer
In 2014, Facebook made a goal to be the "perfect personalized newspaper for every person in the world”. They collected data from users and sold it to advertisers. They know how people browse the web, what they will click on, and are able to assign a dollar value to each and every person that logs onto their site.
Over the past few years, scandals and backlash has led Facebook to divert away from being a "personalized newspaper", and back towards its social sharing roots. However, a lot of platforms depended on Facebook referrals to their sites, and when Facebook changed direction, the number of referrals that outside news sources received from the platform declined. Slate experienced an 87% decline in referrals, and Mother Jones experienced a $600,000 loss in advertising.
But Facebook, as a company, is doing fine with their new model. Their Q4 earnings totaled $55 million in advertising revenue in 2018, a 38% increase from 2017. Instagram will be a growth engine for the company, as the social media platform currently accounts for 5% of the digital ad market, and it accounts for almost one-third of Facebook's mobile revenues. Google took in almost $83 billion in ad revenue for the nine months ended September 2018, a 22% increase from 2017.
Clearly, newspapers have a lot of competition for advertising dollars. They are going to have to find an alternate route to obtain revenue, or face extinction. Subscription services are one path that some papers have begun to implement, allowing them to get revenue directly from the readers.
The Pros and Cons of Subscription Services
A subscription, in its best form, offers something that you cannot get anywhere else. Several people pay the HBO subscription, simply to access Game of Thrones. That show is the only thing they pay the fee for, and they are willing to do that because it's the only source of that content.
But people cannot subscribe to everything. Paying out for every paper isn't reasonable. So newspapers have to figure out a way to get past the "subscription-apocalypse" that is coming.
The below graphic details the number of digital subscriptions at newspapers over time. 78% of US newspapers use a digital subscription model. Warren Buffett was an advocate for the digital platform, leading BH Media to purchase 70 newspapers in 2013, stating that:
Charlie [Munger] and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time. - Warren Buffett
Source: American Press Institute
In 2010, only 6 newspapers offered a digital subscription. In 2015, 77 newspapers offered subscriptions, a 12.8x increase over the course of five years. Subscriptions are one of the traditional revenue streams that news firms have relied on over the past several years, and that reliance is continue to grow as advertising funds dry up.
A reader-centric revenue base is more stable than advertisement dollars, as subscriptions usually allow the media groups to focus more on the users of their content, rather than the advertisers. In 2000, circulation revenue represented one-quarter of the New York Times' total revenue. In 2017, print and circulation made up 64% of their overall revenue.
Pivoting to readers might be the best decision the industry has made in a long time. Reliance on advertising revenue requires a "view from nowhere" as the media outlets have to align themselves to not offend anyone, which is difficult to accomplish. Newspapers evolving to engage their readership base past the point of facts, and potentially into the point of debate, might help grow those reader-revenue dollars even more.
Taking a Look Abroad: China
In their media space, China has been able to skip the advertising for revenue step. Their media companies went straight towards a social revenue collection method. Tencent, who owns WeChat, only gets 20% of revenue from ads. The rest comes from payments from users. If WeChat expanded advertisements, their revenue would grow. But it would be short-lived growth, as consumers would go frustrated with the product and the service, which would ultimately result in less revenue down the line.
Source: Connie Chan
A lot of the business models for books, podcasts, and video in China consist of a "sharable experience" where consumers engage with others, and with the product, in a unique fashion. American brands are starting to get on board with that process, such as Snapchat's partnership with Amazon through "Snap purchasing", Instagram shopping, and YouTube's partnership with Eventbrite.
It's a unique way to grow user engagement, and collaboration across platforms. In China, if a reader orders a book, they can access 2/3rds of the book at no cost. They then pay to unlock the ending, if they like the book. They can also pay for "bites" of books, unlocking 1,000 words at once. This allows the author to take reader feedback into consideration as they develop the book, evidenced by the 10,000 chapter book developed in 2014. Finally, there is an opportunity to tip authors $0.15 at the end of each chapter.
These innovative ideas can be applied to the digital newspaper experience. But for the meantime, newspapers are going to have to find a quick fix to their revenue problem. Some media companies have turned to hedge funds and venture capital firms as a source of funding, but that comes with a few caveats.
Selling Off: Venture Capital & Hedge Funds Stepping In
Hedge funds are stepping in to the pick up the pieces of the different news companies, which usually involves selling off the remaining parts of the business. Several of top businessmen have bought up publications. The Washington Post is owned by Jeff Bezos, Marc Benioff owns Time, and Chatchaval Jirarvanon owns Fortune.
Medium, a blogging platform founded by Twitter co-founder Ev Williams, has raised $132 million in VC funding. Google Ventures, Andreesen Horowitz, and Spark Capital are all investors in the platform. The company is valued around $600M.
The Outline is another example of a VC-backed company, valued at approximately $20 million. The Outline was meant to focus on fewer topics, and on high advertising quality. It worked for a while, but then The Outline didn't get enough investors for their second round of funding to accomplish all the goals they had. The expectations the paper had didn't match the dollar inflows.
Another VC-backed group, Buzzfeed, missed their revenue targets by 20% for 2018, operating under a $1.7 billion valuation. Vice, valued at $5.7 billion, is also more than likely to miss revenue targets, despite a $450 capital injection from TPG and $400 million from Disney. Mashable sold for $50 million to Ziff Davis, a huge knockdown from their more than $200 million valuation.
Media companies don't grow at the same rate as tech startups, nor do they carry the same return on investment. Buzzfeed generated approximately $280 million in revenue, which is quite low for a $1.7 billion company. An article back in 2014 penned by Adrienne LaFrance stated:
"The shift (in VC funding into media companies) doesn’t simply reflect a renewed confidence in publishing. It’s also a signal that some online media ventures are finally perceived as being sophisticated and agile tech companies, as well."
Over the past five years, it's become more and more evident that media companies operate in a completely different capacity than a tech company. They are not agile companies. Media has to focus on chunks of audience that are willing to pay for their products. VCs have a business need to find companies that have large-scale and exponential growth, and that is a mismatch for some media companies they are investing in.
Final Take: The Importance of Local Journalism
Collaboration across groups will be an important step in the future of journalism. Partnerships across local journalism platforms will aid in protecting them from the problems plaguing the industry. Local news will have to pivot away from covering national stories, since all that information can be accessed across several different platforms, and they have no competitive advantage in production.
Right now, according to the Duke University researchers at News Measures Research Project, only 17% of news stories are truly local. Less than half are original. And just over 50% serve a critical information need. Focus on local news, which most definitely still matters, will be very important to the survival of local papers.
As many national newspapers and magazines reorient themselves in the space, breaking into TV production, kitchen merchandise, and other attempts at gaining revenue, it will become increasingly important for local papers for to deliver the news the best that they can. It matters what happens in our individual microcosms, and it is entirely important that this information is reported on. Local journalism is entirely necessary, and should be given more consideration in terms of funding.
How to Invest in the Media Industry
There are some media companies that should handle the changing environment well. There are some that will not. Gannett is one of the most prominent names in the publishing world, but they are facing a hostile takeover bid from MNG, a company controlled by Alden Global Capital. The bid offers the company $12 / share, an 8.5% premium from GCI's current stock price of $11.07. MNG, also known as Digital First, has a 7.5% stake in the company, and is offering a total of $1.4 billion in the takeover.
Tegna (TNGA), a 2015 spinoff of Gannett, has been doing well. Tegna is a the broadcast television and digital media side of Gannett, whereas new Gannett is the publishing side. In their own history, Tegna spun off Cars.com back in 2016, which now trades on its own under the ticker CARS. Tegna sold off CareerBuilder to an investor group in 2017.
In this space, the New York Times (NYT) will more than likely be stable in the news and information world for years to come. Their revenue is expected to continue increase in the future. Right now they are trading at 14.01x EV / EBITDA. Their PE ratio is 27.26. The company trades more expensively as compared to its peers.
The company has a 62% gross margin, and a 25% debt / equity ratio. Liquidity ratios are strong. However, their cash has been compressed, as well as their profitability growth year-over-year. Compared to their peers in the industry, they carry a stronger return on capital, coming in at 16.23% versus the industry average of 9.05%.
The company is planning to diversify its business and restructure its portfolio. Their subscription growth has been strong, with a 24.4% increase year over year in Q3 2018. They have earnings on February 6th.
Finally, Nexstar Media Group (NXST) has a strong profile as a company that focuses on the acquiring and developing television stations and community websites in medium markets. Their revenue is expected to increase into 2020, with a slight dip in 2019. They currently trade at 9.01x EV / EBITDA and a PE ratio of 12.26.
Their gross margin is 57%, and they have strong liquidity ratios. They've been growing year over year for a long time too, which is a unique aspect in this industry. The company has room for growth, and they are trading pretty inexpensively compared to the broad market.
Tegna is represented by the green line, so that company has severely underperformed the market on a three-year basis, so there is potential ample room to the upside. The New York Times in purple has been the best performer thus far, but trades expensively relative to their growth metrics. Nexstar has weathered the problems plaguing the industry well, and trades at a cheap valuation, returning approximately the same as the New York Times over the past year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.