How Will Publishing Companies Perform in The New Digital Era?

Gannett, News Corp., and The New York Times are going digital to remain profitable, but how will they generate cash?

Feb 26, 2014 at 1:24PM

As you have probably heard, the newspaper publishing industry remains challenged. Not as many people buy newspapers anymore; instead, they just access a range of free content online. Hence, printed newspaper sales are dropping, and costs are tough to bring down without affecting the quality of the content. However, the companies in this industry are changing, and they look to become part of a broader multi-platform media universe. 

Gannett (NYSE:GCI) holds 82 daily newspapers that include USA TODAY, as well as 40 TV stations. Unfortunately, the fourth quarter of 2013 was not impressive for the company. The bottom line fell 25.8% year-over-year, while the top line declined by 9.9% driven by soft advertising demand. Nonetheless, comparisons with the prior year are tricky, since the fourth quarter of 2012 saw heavy benefits from political advertising. However, despite the results Gannett's digital segment is showing improvements.

Strategy-wise, Gannett is diversifying its business model to add new revenue streams. It has done so by restructuring its portfolio while working on its cost structure to give its balance sheet a boost. Gannett's shift in focus towards a subscription-based and geo-digital services model will help it lose its dependency on traditional advertising revenue. The company knows it has to be present on every platform, and now its portfolio includes the Internet, mobile, tablets, social media networks, and outdoor video advertising.

Following this strategy, Gannett's acquisition of Rovion, which holds a self-service platform for creating HTML5 ads, is increasing and diversifying its ad revenue. In addition, Gannett's buy of Belo for $2.2 billion at the end of 2013 doubled its existing portfolio of TV stations as the company fully enters into media broadcast, which has better margins.

New subscription model
Next up is The New York Times (NYSE:NYT), the well-known diversified media company which has investments in daily newspapers, Internet businesses, and other operations.

The interesting thing about this company's fourth-quarter results is that its top and bottom line beat estimates, which brought attention from investors. For 2013 as a whole operating profit rose to $156.1 million from $103.7 million in 2012. Several factors drove this performance: a demand increase in digital subscription packages, an increase in circulation revenue, and effective cost management. In fact, The New York Times added approximately 33,000 net additional digital subscribers this last quarter.

Just like Gannett, The New York Times is diversifying its business and looking at adding new revenue streams. At the same time, the company is offloading assets that bear no direct relation to its core operations in order to refocus on its core newspapers and their online activities. That's why it sold the New England Media Group, which held The Boston Globe, for $70 million.

Regarding subscription models, the company will launch a lower-priced and a premium subscription-based model in order to target different audiences according to their desires. Plus, it will extend its brand and enhance its online video production, which will remain free. In addition, in order to become less dependent on traditional advertising, The New York Times will introduce new digital consumer products this spring.

Looking ahead, some data is positive about the company, as its circulation revenue is on the rise. In fact, the company expects a jump in the low single-digits for the first quarter of 2014, pushed by digital subscription initiatives and growth in its print home-delivery price.

Transformational journey
Finally, News Corporation (NASDAQ:NWSA) owns newspapers based in the U.S., U.K., and Australia. Its main publishing business in the U.S. is Dow Jones, which owns the Wall Street Journal.

The second quarter brought good results for the company, as a great contribution from non-newspaper assets brought EBITDA up by 9% to $327 million. The consolidation of FOX SPORTS Australia and better performance at its book publishing segment drove the improving results. Plus, the company's REA Group, a dominant player in the online real estate classifieds market in Australia, continues to capture advertising money and its revenue contribution was up 18%.

Strategy-wise, these will be the first six months of a transformational journey to redefine the assets of News Corporation. Management aims to drive the company's media assets to benefit from globalization and the digitization of content. For fiscal 2014, it looks to mitigate the decline in traditional publication revenues through cost-cutting initiatives and growth from its non-newspaper divisions. However, its non-newspaper businesses accounted for 24% of revenue in fiscal 2013. The company will have to work hard to make the rest of its segments (cable network programming, online real estate, and book publishing) account for a significant chunk of revenue this fiscal year.

Final thoughts
Gannett's diversification is interesting, but the company's results were still disappointing. Until the company shows better performance, the stock could remain volatile or even make a correction.

The New York Times seems to be making moves toward the new digital era, which is encouraging. However, some of its initiatives will still require some implementation time before we see the results.

Ongoing performance from the non-newspaper divisions should act as the catalyst for News Corporation to regain growth. However, although these segments are growing, it will take time (and possibly some acquisitions) for them to become the main source of revenue for the company.

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Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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