Saturday, October 26, 2013

Another grim year for Postmedia, and what lies ahead

It’s tough to pick the biggest problem for Postmedia, Canada’s largest newspaper company. And it’s just as hard to figure out where the corporation is going.
Postmedia released its quarterly and year-end results Thursday. They were grim, and  things are getting worse, not better. (The corporation's Powerpoint presentation on the results is here.)
Print advertising, about 60 per cent of total revenue, fell 13.4 per cent in the fiscal year ending Aug. 31. That’s worse than the 10.3-per-cent drop in 2012.
For national and retail advertising, about 60 per cent of total print ad revenue, the fourth quarter was the most grisly, meaning losses are continuing to grow.
Stripped of the buzzwords, Postmedia’s strategy appears to be to cut costs, try to find ways to get readers to pay more for products on various platforms and attempt to persuade advertisers to pay more for ads that work better.
The company launched a three-year “Transformation Program” in July 2012 that aimed to cut expenses by 15 to 20 per cent - $102 million to $135 million. It’s achieved $82 million in annualized savings so far, and is on track to reach the goal, management says.
The problem is that, in the last two years, revenue has already fallen by $147 million and Postmedia predicts more revenue losses in 2014. 
The cost-cutting targets sounded ambitious 15 months ago. But the corporation is not even halfway through the exercise and the targets are turning out to be much less than is needed to to offset revenue losses. 
That creates a worrying prospect of endless cuts as revenue losses continue, until there is nothing left. And, in the interim, of more falling revenues caused by cuts that hurt quality and service to readers and advertisers. 
The plans to find new revenue - getting readers to pay more and increasing digital revenues - haven’t worked. 
Since Postmedia took over Canwest’s newspaper assets in 2010, the corporation has been talking about ‘Digital First’ strategies. But three years on, it hasn’t come up with an effective approach. (In fairness, almost no newspaper companies have.)
In the last two years, traditional print advertising and circulation revenues have fallen by $151 million, or 19 per cent
Digital revenues, a priority for the company, have risen by $4.2 million, or 4.8 per cent. They are roughly keeping pace with inflation, despite starting from a small base and the corporation’s big emphasis on “Digital First.” (In a conference call for analysts on the quarterly report, was touted as an example of digital product development. It was launched this month after almost a year or work, the company said. There is some slick customer-targeting work going on behind the scenes, but the site doesn't look particularly innovative.)
The results of paywalls, intended to get money from people to read the newspapers’ websites, aren’t wildly encouraging.
It’s too early to judge, as paywalls were only introduced on a group-wide basis in May. Postmedia says it now has 120,000 people registered as website digital subscribers to its 10 dailies. But that includes print subscribers who registered for their free digital subscriptions, and the company didn’t reveal how many people are actually paying $10 a month to read the websites.
So what’s ahead? Cuts, of course, and well beyond the original “transformation” project launched last year. Real estate sales, which will give Postmedia some money to pay down its $489 million in debt.
And more of the same on the revenue side. 
There are changes offering some promise. The Vancouver Sun has named newsroom “champions” for tablets, mobile, web and print. The notion is apparently that they will work on deciding what content belongs on each platform, and the best way of sharing it. It might be late, and it falls short of La Presse’s $40-million bet on tablets, but it’s good thinking.
But on balance, things don’t look good. If the revenue and expense lines stay on the same track they have been on for the last two years, Postmedia could have trouble coming up with the cash to pay interest on its debt by 2015 or 2106. 
That’s not much time to fix things.
For now, the lenders who financed the papers’ purchase appear to be happy receiving interest and required payments on the principal. About 60 per cent of the debt carries 12.5 per cent interest rates and the rest is at 8.25 per cent.
That could change quickly if the bad news keeps getting worse and those interest payments look to be at risk.
Footnote: I wrote a four-part series of blog posts on newspapers' problems and solutions earlier this year. Find them at Part One, Part Two, Part Three and Part Four.


RossK said...

Print is not the only place that ad revenue is starting to be squeezed.

Heckfire, according to a report by Claire Cain Miller in the NYT recently (read it on a dead tree tablet) even venerable Google, the killer of newspaper revenue, is itself having a little trouble as people move from browsers to mobile:

...(T)he (quarterly financial) results (from Google) revealed the company’s deep challenges: as its desktop search and advertising businesses mature, along with overall business in the United States, its growth rate is slowing and the amount of money it makes from each ad it sells is falling.

The problem is that mobile ads cost half to two-thirds as much as desktop ads, yet they lead to purchases just a quarter to a third of the frequency that desktop ads do..."

You can get the whole article here (but, remember, you will be poking one more hole in the Grey Lady's leaky paywall that just may drench you at any moment).


Anonymous said...

Paul, I'd be curious to hear your take on Glacier Media's (owner of the dailies in PG, Kamloops and elsewhere) recent decision to ship pre-press jobs to the Philippines. I think that is the last act of a desperate organization. I think it's also reprehensible, but that goes without saying.

paul said...

Anon 4:38:
Way too many complex issues to deal with in a blog comment. Newspaper companies need to cut costs dramatically, and contracting out can deliver big savings. Living in Honduras, I can see the benefits at the other end of the contracting-out chain. (Call centres here, not newspaper production.) But obviously tough on the employees and the community.

Anonymous said...

Thank you for this enlightening blog story, Paul. I was shocked to read Post Media's interest rates on debt. I would like to comment more fully, but it would take far too long and I feel far too sad about this sorry situation.

Newsroom "champions"? Everyone still at a desk - from reporters to the rim to senior management - is a "champion." These are dark days for publishing, and we are all the poorer for it.

Nicole Parton

Marc Edge said...

Postmedia is making lots of money -- $130 million last year. Sure, it's not as much as the year before, when they made $144 million. Yes, ad revenue went down in the past year, but so did labor costs (by $27 million), newsprint costs (by $12 million)and distribution costs (by $16 million).

paul said...

Compensation, newsprint and distribution costs down $82 million in two years.
Print, circulation and digital revenue down $147 million.

Norm Farrell said...

Imagine if the consumers of dead tree newspapers had to pay recycling fees like consumers face for other items that eventually enter the waste stream. For example, my 12.5 gram iPod Shuffle incurred a government imposed Environmental Handling Fee.

During the life span of the electronic device, Black Press and Glacier Media will dump, uninvited, at least 200 kg of newsprint on my doorstep, without being assessed the cost of recycling.

The point behind Mark Edge's comment is that Postmedia is making operating profits, which is before financing and amortization of capital costs.

Having paid far too much for intangible assets and paying much for financing, common shareholder investments are likely doomed, since the revenue trend is steadily downward. I expect Postmedia will soon begin to sell off individual properties.

In Vancouver, that will present an opportunity to an operator like Glacier. If they don't pay too much and have reasonable cost of capital, they'll survive.

There are good people at Sun, Province and Times Colonist but there will be fewer of them and more content will be shared.

paul said...

I hope you're right. That vision for the future only works if revenue stops falling. Otherwise, any owner will be chasing falling revenue with ever-deeper cuts, which could in turn bring more revenue losses. A vicious circle.
That process - along with property sales - also leaves less of value for a new owner to be interested in buying.
The union contracts, signed in a much different era, are also a major deterrent to prospective buyers.
Newspapers are supposed to be covered under the new MMBC stewardship model in BC, and pay for recycling.

Norm Farrell said...

Interesting story about Boston's John Henry, a new style media owner in New England. He may be one of a new type of owner, seeking to exert positive influence on his own community instead of earning financial gains. Others may be Warren Buffett and Jeff Bezos. Are there similar types in Canada?

Four takeaways from new owner John Henry’s message to readers of The Boston Globe

By Dan Kennedy at Nieman Journalism Lab:
"A feisty newspaper owner who fights back in public? Bring it on. That’s certainly an improvement over the gray management style of the Times Company."