U.S. hedge funds behind Postmedia squeezing PNG

The following was published on The Tyee.

Faceless foreign ownership is behind newspaper publisher Postmedia’s push to cut costs at Vancouver’s duopoly dailies, according to the head of the union that represents workers at the Sun and Province. “One of the big problems with Postmedia is it’s controlled by U.S. hedge funds,” said Mike Bocking, president of Unifor Local 2000. The latest move to trim expenses came with last week’s announcement that Postmedia will sell its Surrey printing plant and either contract out printing of the dailies or build a more efficient plant that would cost 70-75 percent less to operate. “The essential promise of hedge funds to their investors is better-than-market returns,” noted Bocking. “Many hedge funds are not really creators of value, but extractors of value.”

Hedge funds that specialize in buying up the debt of distressed companies at pennies on the dollar jumped into the newspaper business in a big way during the recent recession. A pair of American hedge funds are now major owners of the former Southam newspaper chain, which was sold at auction to a group of its creditors in 2010 following the bankruptcy of Canwest Global Communications. The new company’s share structure had to be altered to stay within Canada’s foreign ownership limits by giving the U.S. hedge funds shares with less voting control. Golden Tree Asset Management and Alden Global Capital both have directors on the Postmedia board, but Postmedia’s new head man in Vancouver insists their influence is not what is behind the company’s downsizing. “I don’t take instructions from Golden Tree or Alden,” said Gordon Fisher, president of the Postmedia subsidiary Pacific Newspaper Group. “They are investors. They are in for the long haul.”

Instead, Fisher says the problem at PNG is a cost structure that is out of line with other Postmedia newspapers, along with declining revenues from print advertising. “We have to cut our costs where we can,” he said. “I think our employees understand that reality.” Fisher was sent to Vancouver in January from Postmedia headquarters near Toronto, where he was president of the flagship National Post, with an apparent mandate to cut costs. He should be familiar with the labor situation at the former PacificPress dailies, because he spent some time at the Sun in the 1970s and ’80s, rising to managing editor. Fisher shocked PNG workers shortly after his return to Vancouver with what the HuffingtonPost described as “one of the bluntest newsroom memos ever seen.” Fisher told PNG staff that “if we don't find ways to dramatically reduce costs, the answer is clear. The business is unsustainable.” The alarming memo was quickly leaked and posted online. “We are all fighting not only for the future of the Vancouver Sun and the Province but for the lives and well-being of our families,” it concluded. 

The first result of the cost-cutting program was the departure of about 110 employees through buyouts and early retirement. In June, PNG put two entire floors of the Granville Square office tower it leases up for sublet at below market rates. Then in July, the company announced stiff hikes in subscription rates. Fisher cited “significant declines in advertising revenues” in a full-page letter to readers explaining the increase, yet promised them“we will be investing in and improving all our news platforms.” That appeared at odds with the wholesale departures, including high-profile columnists like David Baines and Jonathan Manthorpe, but Fisher said that only about 15 of the severed staff came from Sun and Province newsrooms. “We didn’t lose a lot of producing, creative, hard-nosed reporters. We had a couple of high-profile columnists who decided to retire. We’ve always had really good people come and then decide it was time to retire. There was nothing we could have done about that anyways.” A paywall erected around Sun and Province online content that was announced at the same time has been a huge success so far, according to Fisher. “We are exceeding our targets significantly,” he said.

According to John Miller, the author of Yesterday's New: Why Canada's Daily Newspapers are Failing Us, Fisher “has a reputation as a corporate hatchet man, having presided over many staff-reduction programs starting with the mass firing he carried out as new publisher of the Kingston Whig-Standard in 1994.” Fisher defended those cuts as necessary, as were subsequent staff reductions he made at the National Post and the recent downsizing at PNG. “The restructuring we have done has taken out of the newsrooms production work,” he said. “It’s not work that journalists do. There’s a digital evolution under way, and we’d be crazy to ignore it.” He insisted that both the Sun and Province will continue to publish in print and added there are no plans to close one newspaper or to merge them into one publication. “I didn’t come here to do that,” he said.

            

While hard times have definitely visited the newspaper business with the advent of the Internet and the recent recession, there’s only one small problem with Postmedia pleading poverty. It is actually making very healthy profits. Its latest quarterly report shows that it made $32.8 million in its third quarter on $191.8 million in revenues, for a tidy profit margin of 17 percent. It’s right there on page 2. That’s an enviable rate of return, given that the average profit margin of a Fortune 500 company is 4.7 percent. But it’s not quite as good as Postmedia did last year, when its return on revenue was 17.3 percent, and not nearly as good as in 2011, when it raked in profits at a rate of 19.7 percent. Postmedia reported that it suffered an operating loss of $95 million last quarter, but that figure is only arrived at by subtracting from its earnings some extraordinary and even imaginary expenses. Restructuring costs of $16.8 million included severance packages incurred in jettisoning staff, which will save the company money in the long term.  Most of Postmedia’s supposed operating loss, however, comes from a $93.9 million “impairment” charge that resulted from a reduced valuation of the company’s worth. Far from bleeding red ink, the company turns out to be well into the black, just not farenough for some. 

That could prove problematic in convincing Sun and Province press operators to make the kinds of concessions PNG is apparently looking for. The company has given Unifor, the new union created by the recent merger of the Communication, Energy and Paperworkers Union and the Canadian Auto Workers, until November 18 to come up with agreement that would see construction of a new, more efficient printing plant that reduces costs by up to three quarters. The company has already entered into a contract with an outside company to print the Sun and Province starting in early 2015, but it will not go into effect if the company and union reach a deal.

Press operators once had one of the most militant of the unions at the dailies, which were shut down by strikes and lockouts seven times between 1967 and 1994. Restrictive manning clauses often required staffing levels on the presses that were well above what were required by advances in printing technology. The multitude of powerful unions at the Sun and Province were consolidated into one as the result of a company initiative in 1996. Work stoppages have been infrequent ever since, perhaps because a large, diverse union tends to be less militant than a small one with greater solidarity. It looks like Unifor might get its first big test fighting for the jobs of its 260 press operators at PNG.

Paywalls paying off

The following was published on The Tyee.

Shannon Rupp and I are usually of a mind on most things media, which is why I was surprised by her latest offering, “Paywall Woes.” By most reports, the paywall introduced by the New York Times two years ago has been a huge success and has provided hope for many newspapers that have been flailing about for years in search of an online strategy. Whether that hope is justified or not is another matter. Just because readers will buck up to read the digital edition of the esteemed Times doesn’t necessarily mean they will part with hard-earned coin to read just any old rag online.

But according to the just-released State of the News Media report, which is published annually by the Pew Research Center, digital pay plans for online  access have “caught fire” in the past year. The largest U.S. newspaper chain, Gannett, followed the Times’ lead and erected paywalls at almost all of its dailies in 2012. Together with print price increases, noted the report, Gannett recently told investors it expected the changes to generate $100 million in additional earnings annually starting this year.

When Gannett reported in early 2013 that its digital revenue projections were on track, it seemed to signal that such initiatives could work at papers of varying sizes, not just The New York Times. Other chains also have embraced digital pay: Lee’s 47 papers, beginning in the second half of 2011; McClatchy’s 30 in 2012, and E.W. Scripps’ 14 early this year.

In Canada, paywalls are also going up at dailies across the country. The Globe and Mail started charging for its digital content in October and has 80,000 subscribers already, although many may be on discounted trials or enjoy free access as print subscribers. Sun Media and Postmedia newspapers have been disappearing behind paywalls for more than a year, and the Toronto Star plans one for this fall.    

Print price increases are the other strategy newspapers are relying on to help make up the deficit they are suffering in advertising revenues, which in the U.S. have fallen by more than half since 2007. (The decrease has only been about 25 percent in Canada due to our healthier economy.) Advertisers contributed much more to newspaper revenues in North America than in other countries until recently. At one count a few years ago, it was a whopping 87 percent in the U.S., while Canada was next at 77 percent. In Europe, the split is closer to 50/50. In Japan, advertising accounts for only about 35 percent of newspaper revenues.  Media economists have long noted the “inelasticity” of demand for newspapers, which means that readers will pay more for them. Publishers here wanted to keep their circulation numbers up as high as possible to inflate advertising rates, however, so they kept cover prices artificially low. Now that ads are dwindling, readers are finding they have to pay closer to their fair share. I was gobsmacked last Friday when I had to fork out $1.75 for a copy of the Vancouver Sun.

So the question becomes how Shannon could have got it so wrong, and therein lies a tale. Being as media savvy as she is, you would think that she would be more skeptical of online information.  But she saw the Forbes logo – “business advice for the rich and richer,” as she put it – and figured it had to be reliable. Instead it turns out that Forbes is a tad promiscuous online. More than a tad, actually. Not only does it allow advertisers into its bed, it’ll have almost anybody. Greg Satell may be a “contributor” to the Forbes website, but he’s never written a word for the magazine, from what I can tell. He is instead part of the Forbes legion of bloggers . . . er, contributors who post their online ramblings on the magazine’s website. He is a media consultant who calls his own blog Digital Tonto after the Lone Ranger joke that ends: “What do you mean ‘we,’ white man?” Satell commits numerous crimes against logic in railing against “Print Media’s Digital Malpractice,” on his blog, and before you know it he’s “reporting” for Forbes. He starts by conflating newspapers and magazines, which operate in quite different markets, then he lapses into the kind of media consultantspeak we heard at the height of misguided enthusiasm for convergence a dozen years ago.

The strength of a business isn’t determined by how you hit internal targets, but how you compete in the marketplace. While print publishers have chosen to focus on signing up subscribers, digital media is booming, creating transformative business models and new media lifestyles.  Incumbent media businesses, as a whole, are falling behind.  To survive, they will need to shift paradigms.

There’s only one small problem with his analysis. There seems to still be plenty of money in signing up subscribers, while there is little to none in digital . . . er, booming. There’s even still lots of money in newspaper advertising, as I keep trying to tell people. There was almost $20 billion in the U.S. last year, and more than $2 billion in Canada. That’s hardly chump change, which is exactly what you can charge for online advertising nowadays. Newspaper revenues from online advertising have flat-lined over the past few years as rates have fallen through the floor. Publishers now talk of print dollars versus “digital dimes.” It is slowly dawning on people that the business model for online media (infinite supply) isn’t quite as lucrative as it is for newspapers (monopoly). Under the first law of economics – supply and demand – prices keep going down in the first case, but they stay strong in the second. The “subscription trap” that Satell warns publishers they are walking into is instead their overdue realization that, if there’s no money in online advertising, they might as well start charging readers for online access. His “golden rule” – marketers will pay more for consumers than consumers will pay for content – has long since been repealed by the fact that marketers can find scads of eyeballs online for a pittance. Advertisers who want to reach an engaged and contemplative audience that is wealthy enough (and wise enough) to pay for a newspaper subscription online, however, will have access to a prized demographic. But Satell keeps singing the same song that media consultants have been chanting since the 1970s, when they kept saying newspapers had to become more like their new media competition – television.

Instead of fretting about lost distribution revenues that were never really there, publishers should attack the TV market.  Online video is a promising business that is growing like wildfire and fits nicely with existing print brands (magazines especially). 

Media consultants always urge, in essence, that newspapers should try to become more like the new medium that is disrupting their industry instead of playing to their own strengths and allowing the new medium to discover its limitations the hard way. In the 1970s and ’80s that gave us fluffy “disco” journalism and USA Today. Now it’s all about Tweeting and Facebooking at the speed of light and giving it away for free online. By the end of Satell’s screed, the old newspaper person in me wants to scream loudly enough to drown out the sound of fingernails on chalk board that is his digital zeal.

At the root of the problem is that many publishers seem confused about what business they’re in.  After all, the function of media is not to build a subscriber base, but to spread ideas. In that sense, there is no digital threat, only enormous opportunity.

Some ideas, it turns out, are worth more than others. Which brings us to the problem of how we got here in the first place. How did Greg Satell, media consultant, get a platform on Forbes.com to spread his ill-conceived ramblings about media business models? In their haste to open their bottomless webpages to unpaid content from “citizen” journalists, media consultants, and even advertisers, publishers like Forbes have sullied their brands by lending their names to content that would never pass muster with their editors. After all, editors prefer to check facts before they publish them, not to mention correct annoying grammatical errors such as Satell continually commits. This is the downside of the online revolution, where even Conrad Black can be a columnist for the Huffington Post. As long as he’s prepared to do so for free, of course.

There is an old saying to the effect that you get what you pay for. It seems to apply here.