Wednesday, October 12, 2005

Plotting a Course for Newspapers (Part 1)

In the past few weeks six of the largest newspapers have executed significant cuts in their newsroom staff. Between the San Jose Mercury News, Boston Globe, New York Times, Philadelphia Inquirer, San Francisco Chronicle and Philadelphia Daily News, there have been 352 newsroom jobs cut.

Joe Strupp of Editor & Publisher explains that, with the exception of the Chronicle, all of these newspapers are profitable. So these cuts seem targeted at increasing profit margins not stemming losses.

I have blogged about the dilemma facing newspapers as they confront the impact of the Internet, particularly the cannibalization of classified ads, general advertising, editorials (blogs) and news.

Anyone can point out the problems facing the newspaper industry, which requires no deep insight. The challenge is plotting a course through this changing sea that enables the newspapers to maintain their prominent role.

Before I delve into this topic, I must point out that the newspaper world has been populated by a collection of locally dominant newspapers. With a few exceptions (e.g. Wall Street Journal, USA Today and New York Times) newspapers serve a city or metro area. Of course, some companies such as Tribune, Gannett and Knight Ridder own a few such local papers.

The Internet threatens such local monopolies. More precisely, the largest Internet properties are challenging the need for local newspapers. Instead of relying on the local newspaper to provide the syndicated news, you can get that, and more, instantly online for free.

As a result, I foresee a bifurcation of the newspaper business into a very few serious national/global players and a collection of smaller local portals. The big Internet news outlets will be the Yahoo, Google, MSN and Time Warner/AOLs of the world. I believe that Rupert Murdoch’s News Corp. is attempting to position itself as a player in this space as well.

The big question is whether the pure-play model like Google (all Internet) will dominate this segment or whether “mixed-media” companies like News Corp and Time Warner can exploit those oft referenced “synergies” to provide a better user experience. If the Time Warner/AOl example is any indication, I would bet on the pure-play companies.

Yahoo is using an interesting alternative. They are a pure-play Internet company, but behind Terry Semel, they are attempting to leverage mixed-media synergies through partnerships. Yahoo provides Hollywood with a toehold in the Internet.

News Corp has bought Internet properties like Scout Media, Intermix and IGN and word is that they are attempting to acquire Blinkx. But if they really want to be a player in the Internet business (which will subsume the global/national non-TV news business) then they should consider buying Barry Diller’s Interactive Corp. The synergies would be excellent. Also, given the P/E multiples for Internet properties (YHOO: 31.7, GOOG: 89.69) they could improve News Corp’s current 21.7 P/E and IAC’s “also-ran” P/E of 12.75 by combining and providing a serious alternative to the big Internet companies.

A News Corp/IAC combination makes sense because it would create a credible competitor in the upper echelons of the Internet market. I believe that the combination would garner a higher P/E multiple for both properties; the old 1+1=3 scenario. The combination would probably earn a P/E multiple in the area of 25 or 30.

Independently, I think IAC could easily double their value if they found a home with a larger partner that can make a play at being a top-tier Internet property. While there might be some personal issues between company heads Rupert Murdoch and Barry Diller, this combination looks to me like a winner.

There is also talk of Comcast or Google buying AOL from Time Warner at a supposed valuation of $20 billion. At this price tag, which seems quite high, it is beyond the reach of all but the largest Internet properties and Microsoft.

In the future, you’ll probably get the bulk of your non-TV news from the Internet and there will probably be only 4 real players in this field. The question is who will be left standing after the partnerships dust settles.

Of course, this leaves the local newspapers out in the cold. What can they do to chart a course toward future relevance? I’ll address this in a future post.

Just for fun, my long-term stock picks are:
Interactive Corp. (IACI): $24.98/share with 12.48 P/E
Yahoo (YHOO): $33.93/share with 31.56 P/E