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A hundred and eight years after Frank Gannett founded a newspaper in Elmira, N.Y., his business plan has been upended, in line with an industry-wide trend. McLean, Va.-based Gannett this week announced a plan to spin off its struggling newspaper publishing division from the company’s more profitable and faster-growing broadcasting and digital business. Gannett’s decision follows similar moves in the past two years by News Corp., Time Warner, Tribune Media and a partnership of E.W. Scripps and Journal Communications.
Following the Gannett announcement, Wharton marketing professor Pinar Yildirim discussed the logic behind the spinoff on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. Yildirim talked about what lies ahead for the newspaper publishing business and how it can find ways to grow along with digital media and return to profitability. (Listen to the podcast at the top of this page.)
According to Yildirim, Gannett’s move to split its business is especially significant because it is the largest U.S. newspaper publisher, based on daily circulation, according to the Alliance for Audited Media, a nonprofit in Arlington Heights, Ill. Gannett publishes 82 daily newspapers including USA Today and 443 non-daily local publications in 30 states and Guam. The company in 2013 earned revenues of $5.2 billion and a net profit of $432 million.
A Discernible Trend
Gannett’s latest financial results clearly show how its publishing business is a drag on the rest of the company. In the second quarter of 2014, Gannett’s revenues from broadcasting grew 88% to $398.3 million compared with the same quarter last year. In the same period, revenues from the publishing business declined 4.1% to $867 million.
The company’s broadcasting business was also significantly more profitable in the latest quarter with operating income soaring 75% to $171 million, while that of the publishing business fell 38% to $53 million. To be fair, though, the broadcasting unit’s 46 television stations include 20 stations that came with Gannett’s purchase last year of Belo Corp. of Dallas, Texas.
“[Gannett] wants to send its stakeholders a signal that it will move in a better, more profitable and higher growth direction Twitter ,” Yildirim said during the interview. The writing has been on the wall for some time now, she noted, pointing out that newspaper publishing industry revenues began declining from 2000. “They have dropped down so significantly that they are like the 1950s in terms of the revenue sources available to the industry.”
Significantly, Gannett’s popular websites Cars.com and CareerBuilder.com will be part of the broadcasting business after the spinoff. “They represent the biggest sections of what newspapers used to be — selling cars and jobs,” said Yildirim of classifieds advertising.
After Gannett formally divides the firm into two publicly held companies next year, shareholders will no longer be saddled with a part of a business they have no interest in. “The stakeholder for the new Gannett would be somebody who is interested in the news business, who believes in the news business and who would not mind investing in the news business,” Yildirim noted. “In fact, they probably have better opportunities to prove themselves. But at the same time, if they make any mistakes, they no longer have the luxury of hiding under the parent company.”
“[Gannett] wants to send its stakeholders a signal that they will move in a better, more profitable and higher growth direction.” –Pinar Yildirim
Even as the publishing industry’s fortunes are on a decline, Yildirim does not see the end of the print newspaper any time soon. “Physical newspapers are still geared toward a certain part of the population,” she said. “This is a slightly older group, and it has higher levels of education and higher levels of income.” Publishers could more sharply target those segments of the population to sell more newspapers, she adds, noting that an estimated 60% of Americans have access to tablets and smartphones, but only a fifth receive their news over social media like Twitter. She sees opportunities for publishers to tap into that gap and gain more online readers.
Yildirim’s optimism for the newspaper business is shared by media baron Rupert Murdoch, even as he split his company last year into News Corp., owner of The Wall Street Journal and other publications, and 21st Century Fox, which owns cable networks, TV networks and satellite TV businesses. That move came after persistent calls from investors, who called the firm’s entertainment business “Good News Corp.” and the publishing entity “Bad News Corp.” But Murdoch has been hopeful that the publishing business will prove more profitable. “People will pay for news,” he said in a conference call announcing the spinoff. “It is the most valuable commodity in the world.”
A year after the split, there are no clear indications that investors have become disenchanted with the publishing business. In that period, the market capitalization of 21st Century Fox has grown from $67 billion to $74 billion, while that of News Corp. grew from about $9 billion to a little above $10 billion.
As for the publishing industry’s fortunes, much will depend on how the spinoffs fare at other companies. Time Warner last November announced plans to split into Time, Inc. — the publishing business with 88 magazines including Time magazine — and Time Warner, the broadcast business that owns HBO, Warner Bros. and CNN, among others. Chicago-based Tribune Media this week completed its spinoff into Tribune Publishing with eight newspapers including the Chicago Tribune and the Los Angeles Times, and Tribune Media, which has broadcast brands including Tribune Broadcasting and WGN America. Last month, Cincinnati, Ohio-based E.W. Scripps and Journal Communications of Milwaukee, Wis., agreed to merge their broadcasting operations and spinoff their newspaper businesses.