Tuesday, July 23, 2013

Why you shouldn't over-promise and under-deliver: the Q2 report reveals a worrisome digital surprise

Six months ago, CEO Gracia Martore unveiled a rather unambitious goal for a very important campaign to help ensure Gannett's future prosperity. By the end of the year, GCI expected to have 250,000 to 300,000 digital-only newspaper subscribers across nearly 80 U.S. markets. I say it wasn't terribly ambitious because that averaged fewer than 3,900 per market.

Still, it would be a major new vein of revenue to mine. At the low end, it could generate $36 million in new annual circulation revenue at around $12 per subscriber each month. (Admittedly, not a huge sum, when GCI's revenue from all sources was $5.4 billion last year.) Equally important, digital-only subscribers "tend to be younger and therefore, more attractive in some ways to advertisers," Martore told a conference of Wall Street analysts after releasing fourth-quarter financial results.

Plus, these digital-only subs would be separate from the legacy print subscribers, an aging group whose numbers were literally dying every day. And with print advertising revenue falling, circulation revenue was more important than ever.

Martore's projection was noteworthy for several reasons. First, it didn't include any major caveats. Second, at the time she revealed the goal, the company already had sold 46,000 digital-only subs almost entirely by word of mouth as the company rolled out paywalls across the nation.

Even better, early evidence showed that most of the digital-only were new subscribers entirely; they weren't downgrading or giving up print subscriptions entirely.

Signs of trouble emerge
Martore said the company planned to spend "not inconsequential marketing dollars" to focus on "ramping up that level of digital." She didn't provide a timetable for that marketing effort.

Three months later, in the first-quarter earnings conference, GCI disclosed a worrisome figure. The net number of digital-only had increased by just 4,000, to 50,000. Now, however, there was a caveat: Some digital-only subs had converted to print. That had the effect of understating digital-only sales by 4,000. Still, even throwing those into the mix, the company had only sold 8,000 new subs over the previous three months.

Whatever the number, Martore was happy to report to analysts that nearly half the digital subs were under the age of 45 (that's what passes for young in the newspaper business).

"Of course, we obviously had younger people reading our content digitally before the subscription model was launched," she continued, according to Seeking Alpha's conference transcript. "What's different now is that we can count them as subscribers, gain a better understanding of their news consumption habits and use that knowledge to help our advertisers target and engage our readers more effectively. Expanding our digital-only subscriber base will continue to be a strong focus this year, and we are accelerating our marketing efforts."

She held to the projection of 250,000 to 300,000 by year-end.

'What needs to happen?'
Then came yesterday's second-quarter report, and another, more alarming figure: The total number of digital subs had grown to just 65,000 by the end of that quarter. Once more, the gross number of sales was actually higher, Martore said: 11,000 had started as digital-only, then converted to conventional print.

But even adding those, Corporate was conceding it had sold only 76,000 of the projected 250,000 to 300,000. In other words, having started the year with 46,000, it had now sold only 30,000 more in six months -- an average 5,000 per month. To hit even the low end of the 2013 goal, GCI would need to sell another 174,000 digital subs in the second half -- an average 29,000 per month.

William Bird, an analyst with Lazard Capital Markets, pressed the point during yesterday's conference call: "What needs to happen to hit the target?"

Martore then offered one of the more convoluted answers I've heard, according to Seeking Alpha's transcript. "There's a number of things, frankly," she said, "that we're working on in terms of enhancements, additional digital platforms and potentially a fairly exciting add to the consumer experience by blending some assets that Gannett is uniquely positioned to do. I can't say more about that, but that's something, as I alluded to in my remarks, that we're going to be looking at very, very carefully over the next few months and expect to have some news on probably in the late fall."

Then she mentioned the "fabulous" job The New York Times had done over the past two years in selling 700,000 digital subs. But she cautioned against comparing GCI's company-wide digital subs to the NYT's. GCI's print subscribers, who now got digital at no extra charge with their paywall subscriptions (more on that in a bit), had activated 1.3 million digital accounts.

"So the apples-to-apples number with the New York Times' several hundred thousand . . . is 1.3 million for us," she said.

Auditing real numbers
In some distant galaxy, I suppose, that would be an apples-to-apples comparison. But a separate report reveals a different picture. In fact, the NYT claimed 1.1 million in digital circulation as of March 31, when the Alliance for Audited Media published its most recent results.

The AAM (formerly the Audit Bureau of Circulations) defined digital as tablet or smartphone apps, PDF replicas, metered or restricted-access websites, or e-reader editions. The March 31 report of the top-25 dailies didn't include an overall digital number for GCI. Instead, it includes figures for only two of GCI's biggest papers: USA Today (249,900) and The Arizona Republic (7,048).

Because USAT doesn't have a paywall, I assume its figures are for replicas and other e-editions.

Digital-only subs are an important barometer of young consumer interest in newspapers. As Martore noted, this attractive demographic got free access for years. Now, they're being asked to pony up.

The company took a different tack with its legacy base of millions of older, traditional print subscribers. Last year, as the paywalls were introduced, the company socked those subscribers with average 25% rate hikes. The carrot: Their access to digital editions -- desktop and mobile -- would be included at no additional charge.

Candor about costs
Except, that's not really what happened. Martore herself conceded yesterday that those 1.3 million who activated their digital accounts were "obviously paying" for them. They just didn't know it. Goosing its digital revenue higher, Corporate had embedded the cost of their digital subs within their new, higher print subs -- then broke that portion out as digital revenue. That contributed to what Corporate says is company-wide digital revenue now accounting for nearly 30% of overall revenue.

Looks good on paper, of course, because GCI and other newspaper companies are racing to rebrand themselves as digital companies in a bid to better sell themselves to advertisers. But it would be more meaningful if the digital subs hadn't been forced on those existing readers.

More than ever through the rest of this year, every dollar counts. In yesterday's earnings release, GCI revealed that declines in newspaper advertising were accelerating while digital revenue growth was narrowing. Print fell 5.3% from last year. Digital rose just 2.9%. This spreadsheet shows the breakdown over the past two years.

To be sure, Wall Street analysts, often a fickle bunch, seemed unfazed. GCI's stock fell less than 2% to $25.87, even though the company missed revenue forecasts by $30 million. Today, GCI's trading for about $26.

Wall Street won't be patient forever. The quarter that began three weeks ago won't have the benefit of last year's outstanding Olympics and political advertising in the broadcast division that saved GCI's bacon last year. And those 25% subscription hikes have now been fully realized.

It's conceivable GCI still hasn't committed major marketing bucks to selling digital-only subs. A full-court press could bring in those 174,000 additional subs to hit the lower 250,000 goal. Plus, there's the pending launch of about 80 new newspaper websites and apps that could help with sales.

Still, GCI's challenge illustrates a time-worn truism in Corporate America: the way to keep investors happy is to under-promise and over-deliver. Better to surprise them with good news, rather than bad.

Earlier: crucial questions for Martore after yesterday's report.


  1. How could we expect anything less substantial from a company that is groping in the dark for a path to relevance? Martore's answer to the question about hitting the digital subscriber target consists of nothing but the corporate gobbledegook that we're all too familiar with in Gannett. The promise of "enhancements, additional digital platforms and potentially a fairly exciting add to the consumer experience'' sounds like the come-on of a stock scam, especially when Martore refused to be specific. Sorry Martore, content is king, and photo slide shows and bad video aren't worth paying for.

    1. Say what you will, but shareholders love what the stock's done the past year.

    2. The stock price stems from the profit, which stems from the cost-cutting, whacking of workers and cutting/freezing their pay. In other words, the stock price gains have come from the backs of the workers, not from any growth in the business.

  2. I love her precious use of the word "frankly."

  3. Whatever follows "frankly" in someone's remark is always worth a close examination. Kind of like, "with all due respect."

    1. This comment has been removed by a blog administrator.

    2. Jim claims to delete the type of comments like 1:24's. Yet here it is, hours later.

  4. Other promises worth tracking:

    * In August 2011, then-CEO Craig Dubow said the company planned to redesign and relaunch all its news websites. Two years later -- a lifetime in Internet years -- that still hasn't happened. And based on remarks yesterday by CFO Victoria Harker, it won't be complete even by the end of this year.

    * In February 2012, Martore said two digital initiatives would generate hundreds of millions of dollars in new annual revenue by 2015. The Sports Media Group would get $300 million, and Digital Marketing Services would get $275-$300 million, also by 2015.

  5. Wonderful reporting you won't find anywhere else. Thanks, Jim.

  6. Jim,
    The only forecast that was correct, was the one made by Saridakis, that digital subscriptions/pay walls, will not work!

    I think we can all agree now, he was correct.

  7. Buesse wont come close to hitting his number unless ther is some very creative accounting. Gracia did pull off a good deal in Belo, though.

  8. The $36 million that digital subs could generate annually would pay wages and benefits for 600 employees paid $60,000 a year.

  9. Add another 35% for benefits Jimbo. It is amazing that a former business reporter wouldn't know that

    1. Not so amazing that this former business reporter doesn't know that.

    2. As I wrote, "wages AND benefits."


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