The Financial Message To Newspapers: Increase Your Digital Investments As Quickly As Possible

Philip M. Stone January 30, 2008

It’s beginning to look like Wall Street thinks there may be some value to owning newspaper shares, not for their print activities but for all the financial advantages of building various web businesses. And the quicker newspaper companies do that, the more that will find favor with the financial people.

You could almost hear the groan of “not again” when news broke that two equity hedge funds had taken a 4.9% stake in the New York Times Company and were recommending four candidates to join the Times Company’s board. After all it was only last October that Morgan Stanley Investment Trust sold its 7.2% stake in the Times Company after fighting the good fight but failing in its efforts to get the controlling Sulzberger family from abolishing the two-tier share ownership system that gives control of the company to the family via nine of 13 board seats.

But the new investors, Firebrand Partners and Harbinger Capital Partners, say they aren’t interested in changing the two-tier share system (they probably are but they know that particular horse has been beaten to death) but rather they want to appoint a slate of candidates to the board to urge the Times to pursue a more aggressive growth policy for the company’s digital assets.

They want to see the newspaper having second-to-none sites in such areas as travel, fashion, and classified advertising and they don’t particularly care if this is done via organic growth or by buying up properties.

The bottom line is that the markets are really undervaluing most publicly traded newspaper companies, including The Times which hit an 11-year low this month. The market doesn’t think much of print opportunities, but newspaper web sites take in around one-third of all web traffic so if the brand is working for that then why not a New York Times travel branded site and the like?

Arthur Sulzberger, chairman of the Times Company, seemed not too impressed by the efforts to name four board members to his board and issued a statement saying, “We have a strong and independent Board, but our Board’s Nominating and Governance Committee will review the nominations and make a recommendation to our shareholders in due course.” Don’t hold your breath for a recommendation for the new slate of four!

The goal of what the two hedge funds want to achieve is applauded by media analyst Peter Appert of Goldman Sachs who said in a note, “We do not see an easy or quick fix to what ails the company (and industry), other than continued investment to drive a migration of revenues and earnings to Internet-based operations.” But in an obvious reference to previous funds hitting their heads on the Sulzberger wall, he added, “It’s not clear to us what Harbinger and Firebrand bring to the table to address this challenge.” So, yes, The Times needs to invest more in its digital operations but good luck in trying to get them to do it!

The Times reports it Q4, 2007 earnings on Thursday and although November showed some strength the feeling is that December was weak because of underperforming movie and luxury goods advertising. John Janedis of Wachovia Capital Markets downgraded the company to “underperform" from "Market Perform," saying that ad pressures will continue through 2008 in such sectors as auto, movies, airlines and classifieds. He believes the company will report a 4.6% drop in 2007 print revenue, growing from an estimated 2.6% decline in 2006.

The hedge funds are probably asking such questions as what is a newspaper company doing owning 17.5% of the Boston Red Sox baseball team -- it could probably get about $125 million for that --  why doesn’t The Times Company just plain admit its $1 billion purchase of the Boston Globe in 1993 didn’t work out and sell it to the Jack Welch consortium or others for around $500 million, and why not sell  its stake in its new New York world headquarters for around $500 million and then lease back the space, and take all of the money that those actions and others  free up and invest in digital operations?

But since Sulzberger has often said, for instance, that the Boston Globe is not for sale no doubt the family would not look forward to a slate of candidates from the hedge funds that urges they do what they don’t want to do.

But all of this does raise the question of whether the future success of newspapers is dependent on the breadth of their digital investments, and how quickly those investments can be made.  Certainly newspapers attract web visitors to their brands – some 38% of all active US online users logged onto a newspaper web site in 2007 – that’s around 60 million unique visitors a month who spend an average of 43 minutes a month on a newspaper site – and many users say they are drawn to those sites precisely because they are newspaper-run, so there’s a built-in trust factor. Newspapers have the web traffic; the real question is can digital make enough money to replace the hemorrhaging on the print side?

For many US newspapers, web activities contribute less than 10% of overall revenue. Forecasts are all over the place but the general feeling is that it will take at least another 10 years for web advertising revenues to be “meaningful” when compared to print.

The letter to The Times from Scott Galloway, Founder and CIO, Firebrand Partners, in asking for a meeting with Sulzberger and the Board summed up in general what Wall Street believes is the right path forward for newspaper companies. “In our meeting, we hope to discuss the optimal capital structure and a path for transforming The New York Times from a low growth company to a robust firm that is both the newspaper of record and the most trusted starting point on the Internet.”

But the odds are they will be part of that transformation merely as shareholders, and not board members. But they did excite Wall Street. Shares in the New York Times Company rose almost 10% on the day the letter was released.