Chicago’s shifting media landscape

Hey guys, I’m back! I’ve cross-posted this from my blog, Nerdlusus. Enjoy.

With the news that Ariana Huffington plans to take the Huffington Post local by aggregating news around geographic locations, I began to think how her plan to start this effort in Chicago would affect the already tumultuous media climate in the Windy City.

Huffington, who rocks not one but TWO Blackberrys, doesn’t just see her city-specific sites covering politics like her current effort does. Somewhat surprisingly, she intends to mimic the newspaper model, the Guardian reports:

Huffington said the Chicago site would aggregate news, sports, crime, arts and business news from different local sources as well as contributions from bloggers in what will be the first of a series of projects in “dozens of US cities”. The Chicago site will initially be curated by just one editor.

“We are aspiring to be a newspaper in that we want to covering all news, not just the political blogging the way we began,” said Huffington, speaking at Guardian News & Media’s internal Future of Journalism conference.

While I don’t believe the Chicago version of the Huffington Post will spell the end of the Chicago Tribune or the Chicago Sun-Times, I think the decision to target this city in particular shows a shrewd familiarity of the weaknesses of the two daily papers and their online properties. It seems almost paradoxical that at a time when two newspapers face financial turmoil, one of the largest news and political sites decides it’s a good time to move in.

Some people still remember when Chicago used to be a town with four daily newspapers, including the Chicago Today American and the Chicago Daily News. Also gone is the Chicago City News Bureau, which is legendary for the term “if your mother says she loves you, check it out.” And now the city has two papers on the brink of collapse.

The struggling Sun-Times

And now the Sun-Times just went through layoffs and other suburban papers are laying off employees and merging. Even the copy-editing desks are being merged together into one location for the suburban papers.

Frankly, it doesn’t look much better for the Sun-Times as Crain’s Chicago Business reports that more cuts are still ahead:

Raymond Seitz, chairman of the publishing company, blamed a combination of declining advertising revenue and a shift in information gathering habits for contributing to a “difficult year” for the company.

“The Sun-Times itself is the most widely read in Chicago . . . and yet we continue to struggle,” Mr. Seitz said. “We will work hard on these problems in the year ahead.”

Sun-Times CEO Cyrus Freidheim, Jr., said the company has enough “cash to weather the worst storms over the next two to three years,” but you can can’t help but wonder if things really will get better in the 12-18 months he’s expecting the economy to turn around. Newspapers aren’t declining just because of the economy — they’re just declining faster.

Of course, the Sun-Times is looking for a savior, too:

Cyrus Freidheim Jr. said at the annual meeting of Sun-Times Media Group Inc. that it is reviewing offers from potential buyers and would consider a transaction that takes the publicly traded company private. Such a deal could be structured so that some major shareholders retain an ownership stake.

Freidheim noted that the company has some financial advantages compared with other media operations. Sun-Times has no debt except for an unresolved tax liability and has about $120 million in cash.

But getting a buyer probably won’t be easy. After all, buying a newspaper isn’t exactly something everyone’s lining up for these days.

Why ‘hyperlocal’ GateHouse would be a disaster for the Sun-Times

Buying a newspaper company means taking on more debt for an existing company. A potential buyer could be someone like GateHouse Media (GHS), known for buying up bunches of hyperlocal newspaper properties, clustered together geographically. The company’s already picked up a lot of smaller weeklies and shoppers in Illinois, along with mid-size metros in Springfield, Peoria and Rockford. On the surface, they appear to be a logical choice and the Sun-Times clusters of suburban papers are certainly attractive to their business strategy.

However, they’ve got their own debt problems. In fact, their debt problems could be the end of them as 24/7 Wall Street speculates:

At the end of the last quarter, Gatehouse had a little over $10 million in cash. Its long-term debt stands at over $1.2 billion. Goodwill is at just below $700 million.

During the last quarter, GHS lost $29 million on revenue of $170 million. Debt service was $24.4 million. Gatehouse has a huge dividend which it will almost certainly have to eliminate, taking away the sole reason for holding the shares.

Watch for GHS to be broken up before the end of the year or to enter Chapter 11.

And GateHouse has taken a huge hit. The company’s stock keeps hitting 52-week lows, they’re in “junk bond” status and the Motley Fool’s placed them on their list of 5 Deathbed Stocks. While they might have unloaded Copley’s Illinois papers and Gannet’s only Illinois paper, GateHouse probably can’t afford to take on much more debt.

GateHouse wouldn’t be a good solution for the Sun-Times News Group papers. Sure, a buyer is a buyer, but what’s the point of being bought by a company that’s already in fiscal trouble? No point in joining a ship that’s already heavy enough to sink.

Debt: an Achilles heel for newspapers

Earlier this year, Alan Mutter wrote about the fall of the Journal Register Co. (JRCO) and it’s a textbook example of what may become of other newspaper companies:

In addition to leaving JRC with some of the leanest-running newspapers in the land, [CEO Robert Jelenic] also left the company with the hefty $628.4 million in debt that now threatens to force it into bankruptcy. Most of the debt results from one bold, but less than successful, acquisition he undertook in 2004 in an effort to keep the company’s sales, profits and stock price growing.

Not only did the transaction prove over time to be a serious miscalculation, but a steep drop in JRC’s sales in the last two years has made it increasingly unlikely that the company can generate enough profits in the future to service its ponderous debt.

Mutter also produced a two-part series of questions and answers about debt and newspapers you can view here and here. While it’s not the most exciting topic in the world, it’s definitely a large part of the problem journalism is facing as an industry.

Mutter is quoted in Editor & Publisher’s special report on debt and the newspaper crisis:

But newspapers didn’t realize they were living in a historical aberration, says Alan D. Mutter, the San Francisco-based newspaper and new media consultant. News- paper profit margins were at historical highs, and credit was readily available.

“There was this impetus during the credit bubble to load up on debt, and amass more assets to somehow get better,” he explains. “It’s happening in other industries, too. Delta is a bad airline, and Northwestern is a bad airline, so lets put them together and somehow we’ll get a good airline.” The high debt wasn’t seen as a problem, Mutter adds, because it “was premised on an extraordinarily high level of profitability that is not sustainable.”

And that’s the crisis in a nutshell. All of this debt with no promising revenues in sight to pay it off. And with no new money comes the pressure to cut.

The troubled Tribune

The Sun-Times might hope they would fare better under private ownership. After all, that was the thinking behind Sam Zell’s purchase of the Tribune. While the Tribune was bailed out by Sam Zell, known for saying “fuck you” to his new employees and providing plenty of colorful quotations, the company is still facing a bevy of problems.

To Zell’s credit, he’s been the opposite of boring. Press releases from the Tribune have offended some, coming off as downright sexist. He’s brought in executives that issue memos with crazy ideas to innovate newspapers with the grace of a mind on too much caffeine (Steve Outing muses if we’re watching a train wreck in the process at Tribune headquarters). And there’s a redesign coming to the Tribune’s metro papers, including the Chicago paper — which already had a front-page tweak and a less-than-impressive overhaul of its Web site.

But the question is how much of this will actually help bring down the Tribune’s mammoth $13 billion debt? Probably none of it.

Back in April, there was already speculation the Tribune will default on its debt in 2009:

Tribune has nearly $4 billion in debt and interest payments due by the end of 2009, according to Gimme Credit analyst Dave Novosel, making it all but certain that the company will be forced to sell more marquee properties and make deeper cost cuts to avoid violating debt covenants.

“Tribune is a big microcosm of issues across the industry, and Sam Zell made an unfortunate bet, if you will, jumping into a business he knew nothing about,” said veteran newspaper analyst Miles Groves.

And now, in June, news breaks that the Tribune’s taken to counting bylines and inches produced by reporters in the printed product and aiming for a smaller newshole while trimming page count. The headlines were dominated with the news:

In discussing the company’s efforts to alter its cost structure in the face of rapidly eroding industry conditions, Michaels said in a conference call that Tribune is “actively pursuing a plan to right-size” the newspaper operation. – Tribune

The editor of the Chicago Tribune issued a memo Thursday to prepare her reporters and editors for drastic changes in content and painful reductions in staff. – Sun-Times

Tribune Company newspapers like The Los Angeles Times and The Chicago Tribune will quickly cut costs — by printing fewer papers and employing fewer journalists — top company executives said on Thursday. – The New York Times

With top man Sam Zell weighing in, cutbacks in staffing and number of pages in the papers were also put loudly on the table.

Michaels said of the changes, “This is going to happen quickly.” Zell added: “I promise you, he’s underestimating the level of aggressiveness with which we are attacking this whole challenge.” – Editor & Publisher

There’s only one thought that came to my mind when I read this: “More with less.” And I think that American Journalism Review’s Rem Rieder put it much better: “Sam Zell wants to destroy the village in order to save it.”

But if all you’re bringing to the table is mindless ax-wielding, why bother? There’s no way drastically weakening your product in a bitterly competitive media landscape is a recipe for success.

In-depth, hard-hitting enterprise efforts are one of the key offerings that differentiate good newspapers and their Web sites from their numerous competitors. They are an important component of the brand.

Indeed, it seems that so far Zell hasn’t been the savior of the Tribune. More than a year ago, Jason Calacanis predicted Zell would lose billions because of a comment Zell made about Google to the Washington Post:

“If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be?” Zell said during the question period after his speech. “Not very.”

As Calacanis points out, Zell has no idea how Google works and how it actually benefits the Tribune’s papers to have Google’s bots index their sites.

And while Zell might stand to lose billions in his latest venture, Chicago stands to lose a lot more.

‘Will newspapers survive?’

Even Chicago’s own journalists aren’t exactly optimists. On June 12, the Chicago Headline Club and the Northern Illinois Newspaper Association met and Chicago Reader’s Mike Miner described them going through the stages of dying.

You can see video of the discussions here and here. To be quite honest, the tone seems somber — at least for newspapers. The most excited the panelists seem to get about the printed product is the trashy, free commuter rag, RedEye, as being a consumer success. Not exactly the most encouraging thing for hard-news, shoeleather journalists to hear in a city filled with endless stories about politics, corruption, crime and public affairs. It’s like knocking over Royko’s tombstone to hear that RedEye is the city’s fastest growing publication.

But the problem’s not just the quality of the content in newspapers. It’s also a business problem.

TechCrunch reports that the top 100 advertisers shifted more than $1 billion away from TV and newspapers to online, which can only accelerate the decline of the daily in Chicago.

While that shift wouldn’t be so bad for newspapers if the revenues went directly from print properties to online properties of newspapers, that’s simply not the case. Online advertising opportunities are more abundant with more sites clamoring for advertising dollars. And with total advertising dollars remaining somewhat level, that means the more advertising money shifted online means more of it is distributed across a larger number of properties. In other words, newspapers get less because the Internet is more competitive for advertising sales.

And this is an industry-wide fear, as reported by The New York Times, when advertising revenue slips in greater numbers than ever before. As the audience shifts online, the money follows the audience. With an online marketplace, however, the choices are greater and the revenues are harder to get for companies in this intensely competitive environment. Frankly, newspapers aren’t suited to do battle with the Internet giants that understood from the beginning how to make money online. And newspaper companies mostly don’t have the financial resources to invest in themselves to be even remotely competitive.

To answer the question, if newspapers will survive, the answer seems to be a vague answer of “no.” But in Chicago, I’m willing to bet that there’s a distinct possibility that neither the Sun-Times or the Tribune will survive the next decade.

This isn’t to say these dailies don’t produce good content, or that the journalists working there are somehow subpar. In fact, I don’t believe that’s the case at all. There’s obviously talent there. But talent alone can’t turn around the financial situations of these institutions, nor can it change the advertising climate the Internet’s created.

If the Tribune can’t make its debt payments, they’re screwed. If the Sun-Times can’t find a willing buyer, they’re screwed. And in general, they’re all screwed because they’re both tied too deeply to advertising revenues. The numbers don’t add up in their favor.

The shifting media landscape

The Huffington Post local site will probably work. With one employee solely dedicated to merely aggregation, it’s hard to not be profitable with that low of an overhead. Obviously, there will be the inevitable cries from both the Tribune and Sun-Times that the Huffington Post site is merely piggybacking off of the hard work of journalists at their papers. And that’s a legitimate criticism, but it ignores the larger question: Why hasn’t either paper started up their own news aggregation site?

What Ariana Huffington is proposing isn’t anything particularly special or complicated. She’s just put money behind an idea that’s potentially lucrative because no one’s bothered to do it before. And here’s the reason why her site will do it better than the Sun-Times or Tribune ever will: Hyperlinks.

Rarely does the Tribune or Sun-Times link outside of their Web site to local bloggers or other Chicago-media sites (i.e.: EveryBlock, Chicagoist, Gapers Block, Chi Town Daily News). Nor do they embed YouTube videos, make use of Flickr, be active on Twitter or actually understand the concept of creating a community on their Web sites through commenters. And we haven’t even talked social networking yet.

Instead, they build walled gardens, which defeats the philosophy of the Internet. Making things worse is that most of their new media content, such as videos, cannot be embedded to a reader’s blog or shared easily. And the Tribune removes its articles from the public view after little more than a week, meaning that search engines can’t index it and send them more page views and more revenue.

I’ve got a gut feeling there’s a whole lot of room to exploit Chicago’s weak online media scene. There’s plenty of room for niche blogs where a handful of writers can make a living covering just a narrow set of interests. This is how Gawker Media has been able to be successful (along with a good sales staff). Once others wise up to what Ariana’s doing, I think you’ll see more single-topic properties pop up in Chicago. It just takes an investor, a workhorse writer and some simple marketing to get it to work.

Some ideas I see becoming popular quickly would be professional sports, improv theater, music and food. If a writer could be financed for a year to completely own one of those topics and had a decent sales/marketing staff behind him/her, then I think you’d start to see this shift away from the daily papers.

The question is who will pony up the money and take the plunge?