When people talk about newspapers, big names like The New York Times and The Wall Street Journal come to mind. Surprisingly, their publishers The New York Times Company and News Corp are much less profitable than smaller counterparts such as McClatchy (NYSE: MNI ) and Gannett (NYSE: GCI ) . Using average operating margins for 2009 to 2012 as a gauge, McClatchy and Gannett have consistently delivered operating margins in the teens, double or triple those of The New York Times Company and News Corp.
Local content rules
To understand the reasons behind the inferior profitability of national newspapers, it is worth taking a closer look at McClatchy, which focuses on local newspapers that serve small communities. McClatchy boasts of being the clear market leader (in terms of circulation) in each of the markets where it operates. Its daily newspapers are the primary newspapers of choice for readers in their respective communities and this intense local focus is reflected in the company's superior financial performance.
Although all newspapers have been unavoidably affected by the rise of digital media and the resulting change in readership trends, McClatchy managed to increase its fiscal 2012 circulation revenue by 0.4% year-over-year. This was achieved as selective price increases on its newspapers were offset by a 5.6% decrease in circulation volume. The ability to increase prices on selected publications in a difficult environment suggests a certain degree of pricing power. It is also noteworthy that certain McClatchy newspapers even increased their circulation volume.
One example of this is The Fresno Bee, McClatchy's local newspaper in Fresno, California, which was founded in 1922. In 2012, The Fresno Bee saw a 2% decline in daily circulation, but it saw a 17% rise in Sunday circulation. Another out-performer was The Island Packet newspaper, a daily morning broadsheet newspaper serving residents in Hilton Head, as both its daily and Sunday circulation increased by 2% in 2012. The localization of content tailored to the needs of the community is a key success factor.
The choice (or the lack of)
If you still have any doubts about the competitive edge that local community newspapers enjoy over their national counterparts, Gannett's latest move may change your mind. Last week, Gannett announced that it will include a local edition of its flagship national newspaper USA TODAY alongside 35 of its local daily publications.
Given a choice of reading a local daily or a national newspaper, most people will likely select the former. Therefore it makes sense that readers pay for the local news (which they care more about and where there is limited alternative coverage) and get selected national news for free. I see the move as a validation of the fact that readers are generally more interested in local news and they are also willing to pay for local coverage that can't be found elsewhere. This includes reporting on hometown high school events, local political news, and other things that the national newspapers simply don't have the space for.
Apart from selling newspapers (circulation revenue), advertising is another key source of revenue for newspaper publishers. In fact, it is telling that three quarters of Gannett's advertising revenue is local in nature. Putting yourself in the shoes of the owner of a small town grocery, putting an advertisement in the leading local community paper will definitely allow you to reach out to a larger segment of your target audience. On the contrary, national brands have lower switching costs, given the diverse range of advertisement options at their disposal.
In a nutshell, both readers and advertisers have little choice when it comes to local content and local audience, respectively. As a result, scarcity ensures that sales of local dailies remain resilient.
The sale of The Washington Post speaks volumes
Graham Holdings (NYSE: GHC ) , formerly known as The Washington Post Company, completed the sale of The Washington Post to Jeffrey Bezos of Amazon in October 2013. However, it has chosen to retain its online current-affairs and culture magazine, Slate. The Washington Post has limited selling points as a general-interest newspaper, compared with competing news providers.
Unlike the general-interest newspaper The Washington Post, Slate has a differentiated value proposition. It publishes shorter articles which are under 2,000 words, which makes perfect sense. This generation of readers growing up on Twitter and Facebook have a limited attention span. Slate's articles are also slanted toward opinion rather than fact. With the proliferation of free news sources such as citizen journalism sites, readers are increasingly turning toward editorial pieces rather than plain reporting of facts.
Running a profitable newspaper is all about reader choice (or the lack of). Readers who are interested in national or international news have no lack of options, ranging from a wide variety of paid newspapers to free online news sites. In contrast, your local high school football game is probably only going to get coverage in your probably one-and-only community newspaper. As a result, I favor local niche newspaper publishers like McClatchy and Gannett over their national newspaper publisher peers such as The New York Times Company and News Corp.
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