Gannett’s Shares May Have Soared But What Editorial Benefit For The Company’s Newspaper Readers?

Philip M. Stone April 21, 2010 Follow on Twitter

The financial markets reacted with glee at Gannett’s Q1 net income that was some 54% higher than a year ago, but when the company’s newspaper readers cut through the financial euphoria the results really say that cutbacks are going to continue and don’t look for much improvement (investment) in the decimated editorial product.

We all know the reasons for the huge cutbacks over the past couple of years and we all know how much the editorial has suffered correspondingly, but there was really nothing in those Q1 results that can give newspaper readers good cheer that their editorial products will improve any time soon.  Gannett had its best results for some time because of increased TV advertising revenue – its NBC affiliated stations did well with the Winter Olympic Games – but apart from that it was the continuing cost savings that brought in the better numbers – Gannett is said by the Gannett Blog (not affiliated with the company) to have cut 826 jobs in Q1 and President Gracia C. Matore told analysts, “We will continue to do a very strong job on the expense front in the second quarter.”

Its US newspaper ad revenue dropped 8.5%. Now remember in Q1 one year ago Gannett ad revenue was down 34% from the year before -- overall for US newspapers it was down 29% in Q1 from the year before -- and in 2008 Q1 US newspaper ad revenue was down 12% from 2007, so the market has reacted with glee that Gannett’s 2010 Q1 newspaper revenue drop this year was only in single percentage figures. But the fact is it is still going down from what was a terrible same period last year which had in turn tumbled from a rotten same period the year before that.

So what we really have is the largest US newspaper publisher announcing continuing dismal newspaper numbers -- advertising revenue off 8.5%, circulation revenue down 5.1% with daily circulation off 9% and Sunday down 5% – and even digital revenue off 1.8%, but because of the employee cost-cutting and major savings in newsprint cost and usage the overall results saw the shares soar because the markets like to look forward and they see signs of even better financials to come. But none of those numbers are likely to persuade the Gannett executive suite to encourage their local publishers to spend more on editorial! Indeed, it could well be the opposite.

The reality of the Gannett figures is that newspaper revenues continue to decline from already rotten levels in all areas – ad, circulation and even digital which was supposed to be the industry’s savior. The further reality is that newspapers have viciously cut operating costs to match the new revenue realities, and anyone who says such cuts don’t adversely affect the editorial product is living in a dream world.

The Gannett numbers continue the trend we first saw in Q3 last year that the ad revenue freefall is abating and there are even financial analysts out there willing to go on record that things should bottom out towards the end of this year. But no one is really predicting that thereafter there will be any great gains in newspaper advertising revenue – maybe 1 or 2% if the industry is lucky. Basically, what is gone is gone and while an improving overall economy should bring advertisers back the real question is how much of that spend will go to newspapers – either in print or their various digital platforms.

The financial people believe the worst is over and they sent the shares higher, but what about the Gannett editorial customer? These results would indicate that today’s editorial product  will pretty much remain constant and the deeper local coverage readers were used to even just two years ago is probably gone forever. There will be additional delivery platforms – there have been more than 175,000 downloads thus far for the free USA Today iPad app -- but don’t look for more feet-on-the-ground reporters covering local beats. That is the financial reality of the new newspaper world we live in.

Gannett got great editorial PR when Mary Chind of The Des Moines Register won a 2010 Pulitzer Prize for Breaking News Photography. She was at the right place at the right time to shoot the picture of a rescuer, dangling in a makeshift harness, saving a woman trapped in the foaming water beneath a dam. The Asbury Park Press was a finalist in a public service category, but Gannett publishes 83 newspapers in the US – where were the rest? Gannett broadcasters can crow about their 44 regional Edward R. Murrow awards but can anyone really say the 6 p.m. news is what it once was just a few years back?

With its higher net income Gannett has lifted a year-long pay freeze and it has reduced its debt this year already by some $260 million and says it plans to continue reducing debt each quarter. It still has some $2 billion of debt maturing over the next two years and thus the company needs to keep that cash flow coming at even higher levels. Last year it paid back some $750 million of debt but to do it there was a pension contribution freeze, furloughs, frozen wages, and job cuts but the remaining debt is still the big priority. Improved cash flow is key and while the company may well be able to renegotiate the maturity dates to ease pressure, that will only mean the need for high cash flow just to service debt will continue for years to come.

And that points out even more why the editorial product we have today probably won’t see much major investment for a long time to come. Sales and marketing will get investment to bring the advertisers back and to get readers to return, but editorial budgets will remain under tight scrutiny  -- editorial, after all, is considered a cost center not a revenue center. And while the financial people might rejoice, for communities that is no good thing.