The story is also about an entrenched board of directors, the opportunity they missed at a fateful moment, and two executives who led the company to a financial precipice -- only to pull it back before it tipped into oblivion.
There's little doubt Gannett has taken major strides toward its goal of becoming a more digital enterprise. Seven years ago, before digital got pushed to the fore, it was only 5% of annual revenue. Since then, it’s grown by $900 million, to last year's $1.3 billion. That came as the company
Gannett has also reduced its reliance on newspapers; their advertising and circulation tumbled to 65% of all company-wide revenue last year vs. 83% in 2006.
The Belo takeover will almost double the number of TV stations to 43, transforming Gannett into a broadcasting company with a side business in newspapers. It will become the nation's fourth-largest owner of big network affiliates, with a bigger footprint in lucrative markets like Texas and the Pacific Northwest. Under the deal, which includes $1.5 billion in cash and assumption of $715 million in debt, broadcasting will eventually account for more than half of earnings, according to the company.
From the depths of the recession, when shares fell below $2 as competitors went bust, Gannett is now trading in the mid-$20s; it closed Friday at $25.55. Year to date,
. To be sure, shares were treading water all year before the Belo deal. And other publishers' stocks also have jumped during what's been a sizzling bull market.
. The company has repaid billions in once-crippling debt. And Martore has
The company remains heavily dependent on its most troubled division, newspapers. Their ad sales have fallen every year since 2006, with no end in sight. That includes digital advertising, too. Indeed, after nearly leveling off the end of 2012, losses have grown in percentage terms during each of the past three quarters.
Paywalls are on track to generate $100 million in new earnings. But that's fueled by the big subscription price increases in 2012 that aren't set to be repeated; Gannett says only that it's now selectively raising prices in some markets. The company's publishing partner in Detroit and elsewhere just announced similar paywall plans, but with little enthusiasm. "Let's be clear,"
. "Paid digital subscriptions are not a long-term strategy. They don't transform anything; they tweak. At best, they are a short-term tactic."
Although Gannett's TV stations contributed mightily to last year's year-over-year revenue increase, that stemmed from record political and summer Olympics ads on the core NBC affiliates. That's a revenue roller coaster only occurring every other year. Meanwhile, broadcasters are just steps behind newspapers in losing ads to rival publishers like Google and Tumblr, says media consultant
"Think about how much digital targeting could take away political broadcast money by 2016,"
he wrote when the Belo deal was announced. At best, "Gannett may have bought itself another three to five years of relative revenue stability."
In any case, it will be well into next year before Belo's operations are fully integrated. And it could then take as long as three years to achieve all the forecast savings by slashing overhead and negotiating more lucrative
retransmission agreements to hit earnings targets, according to Gannett.
Digital weapons in Gannett's arsenal are in jeopardy, or are too new to make meaningful contributions.
The USA Today Sports Media Group underwent a shakeup when its founding president,
Tom Beusse,
resigned unexpectedly in October -- casting doubts on his promise to deliver more than $300 million in new revenue by 2015.
USA Today, the company's most famous brand, has failed to attract a big enough audience willing to pay for digital access. Publisher
Larry Kramer says only that paywalls are being studied.
Gannett is redesigning all its U.S. news websites and digital apps to boost readership and ads. But more than two years in, only
USA Today and a handful of others have made the switch. That's despite a recent forecast they'd be installed in the top 35 markets by year's end. Indeed, at one point, Gannett said all 105 sites would be relaunched as soon as this past February.
The newly christened
G/O Digital marketing services unit, which advises small businesses on using social media, is forecast to generate up to $350 million in new sales, but also not until 2015. Revenue there grew 90% in the second quarter and a smaller 70% in the third. Martore has declined to divulge dollar amounts when pressed by analysts.
To be certain, Martore has made no secret of the fact Gannett's strategy will produce uneven results. "It was never meant to be a quick or immediate fix," she said in July. "Our transformation plan is a complex and multifaceted process, and we do not expect linear growth each quarter."
Gannett's corporate communications department did not respond to my questions for this story.
Barbarians at the gate
Gannett's digital push began in earnest in 2005 when the board of directors was casting about for a new CEO to replace
Doug McCorkindale. An attorney with no journalism background, McCorkindale had been a company executive 34 years.
He was only the fifth CEO since Gannett's start a century before, one in an uninterrupted line of insiders at the core of an insular corporate culture.
Barron's not long before had
put McCorkindale on the cover under the headline, "Gannett's Good News." Wall Street's must-read weekly gushed over his empire building. "I'm potentially interested in buying anything in the news, information, advertising and entertainment businesses," he said. "If the Pearson group wanted to sell the
Financial Times, I'd look at it very closely. Dow Jones & Co. is a great franchise, and if it ever came into play, I'd be very interested."
And why not? Gannett had the requisite war chest: Annual revenue was headed for a record $8 billion. Earnings would hit $4.90 a share, just three cents shy of a record. From coast to coast, in Guam, and the U.K., Gannett
employed 53,000 at hundreds of daily and weekly publications, magazines and the several dozen TV stations.
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| Zuckerberg |
But time was running out. Publishers and broadcasters were finally facing real competition from a rising number of new, nimble start-ups. Only one year before, 2004,
Google launched its IPO, and
Mark Zuckerberg started Facebook from a Harvard dorm room.
YouTube was brand new.
In 2006,
Twitter fired off the first tweet; its recent initial public offering values the microblogging service at $24.5 billion vs. Gannett's $5.8 billion.
Instagram would not start until 2010, only to be
bought by Facebook two years later for $1 billion cash. (And it had only 13 employees.)
Against that backdrop, Gannett's board might have ignored precedent and hired an outsider with real digital chops as the sixth chief executive. But under McCorkindale, who also chaired the board, directors played it safe. They promoted
Craig Dubow, 50, from broadcasting president to lead a company still dominated by newspapers. A University of Texas graduate, Dubow had been an employee 24 years, starting at Denver station KUSA.
Years later, after Gannett's battered stock had plunged to less than five bucks a share, an anonymous
Gannett Blog reader
recalled Dubow's ascension memorably:
"A myopic board of directors placed a man, a great, very likable man, with a brilliant broadcasting career, but a man that had not spent a minute of his professional life inside a newspaper, in charge of a company with 100 or so newspapers at the worst time in the history for print newspapers. It is like putting at the helm of Titanic a great producer of wheat from Indiana, who had never been at sea before. He could sink the ship even without icebergs."
But McCorkindale,
announcing Dubow's promotion in spring 2005, thought otherwise: "Craig has all the skills a 21st century media CEO should have, from highly successful management experience and broad-based knowledge of the digital world to the vision and energy of a top-notch leader."
Dubow got a big raise: His first year's pay soared to $2.4 million from $1 million as head of broadcasting, according to SEC documents. Martore, chief financial officer at the time, became Gannett's No. 2 executive. They would work in lockstep when the company entered free fall.
That Wednesday afternoon, Gannett's stock closed at $75 a share.
Charting digital's new course
Dubow immediately set a new strategic plan focused on digital. Newsrooms were now "Information Centers," reorganized to favor websites over print in a bid to ratchet up traffic and ad revenue. Digital ventures would be nurtured within, starting with a "moms" site aimed at female consumers.
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| Dubow in 2006 |
Dubow launched the company's first R&D lab and a Gannett Digital division with this goal, according to
his 2006 annual letter to shareholders:
"To move Gannett from a newspaper and television company with affiliated websites to a digital powerhouse, capable of capturing a growing share of what pundits believe will be a pool of Internet advertising dollars in excess of $20 billion by 2008."
Of course, Dubow hadn't inherited an analog dinosaur. The company already had that $400 million in digital revenue -- 5% of all. He closed his letter with a prediction: "With our employees, our discipline and our plan, I am confident 2007 will be as transformative as 2006."
He was right, although surely not as he'd imagined.
Financial panic erupts
The housing bubble floating the economy burst. Gannett was badly exposed in four states among the first to be hit hard: Arizona, California, Florida and Nevada. Combined, they accounted for 40% of the decline in the company's U.S. ad revenue.
The real estate bust spawned
a global credit crisis and the Great Recession, slamming Gannett. Complicating matters, the company had accumulated $3.8 billion in long-term debt just as the recession deepened, sapping revenue needed to service it. Some of the debt stemmed from $1.8 billion in
Gannett stock buybacks during 2005-2008 at prices averaging $64 a share, according to SEC documents. Most of those buybacks -- $1.3 billion -- were in 2005 alone, the year Dubow took over as CEO and Martore entered her third year as chief financial officer. (Based on Friday's $25.55 closing price, those shares are now worth well less than half as much: $726 million, excluding dividend savings.)
Certainly, other publishers -- the New York Times Co., McClatchy, Lee Enterprises -- had made similar blunders during an industry-wide spending orgy.
In the recession years 2007-2009, Gannett's annual revenue plunged 25%, to $5.6 billion. Dubow and Martore, by now his heir apparent, responded with draconian cost-cutting to stave off creditors: Massive layoffs. Furloughs. Wage cuts. A frozen pension plan. A tattered dividend. With newspaper values collapsing everywhere, Gannett wrote off $8.4 billion worth of its assets in 2008 alone.
To be sure, management took big hits, too. Dubow's annual pay
fell to $4.7 million in 2009 vs. $7.5 million in 2007. Still, infuriating employees, the board of directors continued awarding large cash bonuses. In SEC documents covering those years, they cited a long list of accomplishments that specifically included whacking 11,000 jobs.
Dubow doubled down on his digital plan,
hiring Gannett's first chief digital officer,
Chris Saridakis. Gannett expanded the Moms Like Me network, entertainment site Metromix, and other non-print ventures.
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| Zell |
But perhaps most important, that fall Dubow
wrested razor-thin majority control of employment classifieds site CareerBuilder from Tribune Co.'s pugnacious CEO,
Sam Zell. Dubow had an edge over Zell because Tribune was headed for bankruptcy.
With the $135 million CareerBuilder deal, Gannett made a big change in financial reports to Wall Street. It created a digital-only line consolidating all revenues from CareerBuilder and other standalone businesses.
Significantly, CareerBuilder meant Martore could book 100% of its revenue even though Gannett barely owned 51%.
The very next quarter, the digital-only line surged to $170 million from $24 million a year before. In the years that followed, the accounting shift helped Gannett sell itself as more of a digital company, and less about paper and ink.
But it wasn't enough.
Just as the recession eased, some of the most high-profile digital efforts started fraying. In spring 2010, Saridakis quit as chief digital officer after only two years, complaining about the Dubow team's indecisiveness. In a prescient parting letter,
he ripped paywall plans. Dubow took a full year to
replace him with David Payne.
Payne
shuttered the once-celebrated Moms Like Me consumer network after concluding further investment would be a waste. Entertainment site Metromix slumped. Other digital ventures collapsed. The ad services subsidiary PointRoll started churning through CEOs, threatening its hugely profitable pipeline. More recently, an online coupons site, DealChicken, has been retrenching.
A new Crystal Palace chief
In October 2011, with revenue still falling and plagued by back problems,
Dubow quit. Reviled for the slash-and-burn tactics that ultimately cost 20,000 jobs on his watch, he retired with an estimated
$32 million payout. The board promoted Martore, then 60 years old, to become Gannett's first female CEO.
Like Dubow, she also was an insider, always working at the corporate offices now housed in a glittering complex outside Washington that employees call the Crystal Palace. Martore arrived in 1985 as assistant treasurer, later rising to chief financial officer in 2003. Her bio reads like a classic American bootstrapper story, according to
The Washington Post.
"Granddaughter of Italian immigrants,"
wrote Post correspondent
Paul Farhi. "Father died when she was a kid. Held down three jobs to get through Wellesley College. Learned a skill and worked like the dickens."
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| The much-hated "Blue Ball" sculpture. |
Martore quickly sought a less imperious image before employees traumatized by waves of layoffs. She ended reserved parking for top executives. And she
ditched an executive suite sculpture dubbed the Blue Ball of Death for its role in
the infamous firing of three
USA Today employees in 2001. A big Red Sox fan, Martore soon enlivened dry analyst meetings with sports metaphors and even jokes.
One of her first, most important jobs was shepherding eagerly awaited newspaper paywalls into 2012. With newspaper ad sales still falling, milking circulation was a must. Management forecast those $100 million in additional annual earnings by 2013 with the paywalls and new apps. With relatively little investment in hiring and marketing, it was like found money.
By then, Gannett had been testing paywalls for two years. Dubow had said early data showed "very interesting results," although he was never more specific. Based on how the company eventually marketed them, however, the pilot tests didn't uncover much demand among the company's bread-and-butter customers: predominantly older, less technology-driven print subscribers.
Gannett gave its paywalls an ungainly name,
all-access content subscription model, and sold them in just two flavors: a print subscription including Web and app access for up to around $25 a month. Or digital-only for $12-$15 monthly. Using a "metered" approach, non-subscribers could read a limited number of articles for free before getting prompted to pay.
But the paywalls arrived with an unpleasant surprise: those double-digit subscription price hikes at renewal. Trying to spin the bad news, Gannett said the substantially higher prices included digital access, ignoring the obvious: until then, digital had always been free anyway.
'Free is better than not free'
The roll out revealed a sobering truth. The only way Gannett could really ramp up digital circulation revenue was to force it on three million legacy readers as an embedded cost in their print subscriptions. The vaunted paywalls boiled down to an old-fashioned price increase with a digital veneer. No surprise to Paton, the Digital First CEO, who
wrote early this year: "Most paywalls in the U.S. are simply initiatives in subscription price hikes -- bundling digital with print with no clear path for sustainable growth."
Whatever their future, Gannett's jacked-up subscriptions didn't sit well with readers at papers like
The Des Moines Register.
In June 2012, they groused
during an online chat when Publisher
Laura Hollingsworth tried to justify them. "My team and I are prepared to stand by our value and ask our communities to invest in the best news and information and reporting that can be offered," she said.
One reader's quick comeback: "Actually, free is a better value than not free."
Then another: "While I support the paper's move to a paywall for digital content, I calculated my increase at over 40%. It seems that the paper is punishing its print subscribers. Will the
Register offer a print-only subscription?"
Hollingsworth said no.
To be sure, paywalls created a second, especially attractive revenue stream: digital-only subscribers. They skewed younger, the very market advertisers covet because they spend lots on electronics, dining, entertainment and home furnishings. Plus, digital subscribers were nearly Gannett's only hope to replace those millions of aging print customers.
At first, Gannett relied almost entirely on word-of-mouth sales. Early results were promising. "The good news," said
Bob Dickey, the newspaper division's president, "is our new digital subscribers index younger, male, married with children and more affluent than we first realized, filling an important audience gap for us."
Crawling out on a limb
At the start of this year, Gannett had sold 46,000 digital subscribers across 78 markets. Then in early February, Martore made a strategic mistake: She forecast 250,000 to 300,000 by the end of this year, once Gannett started spending a "not inconsequential" amount on promotion. To be sure, it was a modest goal, averaging fewer than 4,000 per market. Plus, the company already had that running start.
Martore said: "Our focus is to take on new digital-only subscribers, and that's where our focus is going to be in 2013."
The campaign has bombed. By the end of September, the company had netted only 80,000, after some upgraded to print -- leaving Gannett far short of the forecast. All but abandoning the year-end goal, Martore tried moving the goal posts to the number of print readers who had activated digital accounts included with their print subscriptions: 1.5 million, about half of all.
She has called them "paying digital subscribers," comparable to
The New York Times' 730,000 digital-only subscriptions sold after erecting its paywall in 2011. Inexplicably, Martore calls that an "apples-to-apples" comparison. (The number of
Times digital subscribers has yet to plateau, soaring 28%
in this year's third quarter alone.)
Pivoting 180 degrees, Martore dismissed young digital subscribers as barely consequential to measuring paywall success. "Frankly,"
she told the stock analysts Oct. 21, "that's probably one of the least significant and important metrics that we have used."
But analyst
Craig Huber of Huber Research Partners pressed her to confirm Gannett had sold so few. Martore's reply: "If you're just specifically looking at that one small metric, yes, that's exactly what I'm saying."
As these typically deferential meetings go, this was close to taking off the gloves. And it may not be the last time.
Pushing for Gannett's breakup
Wall Street has started nudging Martore to spin off the newspaper business from broadcasting post-Belo. This would create two publicly traded companies, freeing the more nimble TV business plus the CareerBuilder stake and other purely digital businesses from the sluggish publishing division.
USA Today and the
U.K. Newsquest division, with 17 dailies plus hundreds of weeklies, could be sold separately.
Current shareholders would get stock in the new standalone newspaper company, allowing them to better gauge the relative worth of one business over the other. (In the argot of Wall Street, it's called unlocking shareholder value.) In an alternate scenario, Gannett could sell the papers piecemeal, but that would be a more drawn-out process subject to the vagaries of regional and local markets. In any case, the newspapers, unmoored from the financial resources but also the bureaucracy of a larger enterprise, would need to provide for themselves.
This has been done before. Belo itself
split newspapers and TV stations in 2008. News Corp. did the same last July with
The Wall Street Journal and dozens of other papers. Tribune Co., also bulking up on TV,
has similar plans for the
Los Angeles Times and seven others.
Martore isn't sold on the idea. Gannett's U.S. dailies and TV stations occupy a combined 111 markets, offering economies of scale no one else can match, she says. Still, if newspapers become an even bigger drag on growth, analysts will surely push harder for a breakup.
Their next scheduled meeting with Martore's team is Wednesday morning at the annual UBS media conference in New York.
Even as she demurs, Martore leaves herself wiggle room, as she always does when analysts ask about future strategy. She and her fellow board members will never say never, she said in October: "We're always looking at different alternatives. . . . What we're in this business to do is to create additional shareholder value. And that's what we're focused on doing."
This much is certain: Martore now has fewer than three years to see her strategy to fruition; she faces mandatory retirement age when she turns 65 in September 2016. The president of the broadcasting division,
Dave Lougee, is a logical successor. He's 54 and came to Gannett six years ago from Belo after a long TV career, a professional pedigree that doesn't show tremendous interest in newspapers.
Martore's October analyst teleconference ended, the meeting's mood far less ebullient than the one last March when Gannett mounted its spirited push to sell Madison Avenue on the "New Gannett."
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| Marketing chief Banikarim, right, with Kennedy at the "upfront." |
The public relations campaign unfolded in midtown Manhattan with an elaborately orchestrated presentation to ad agencies and marketers during Gannett's first-ever upfront sales meeting. The venue was an auditorium at the AXA Equitable Center where Gannett staged a mock TV talk show it
videotaped before an audience of 400.
The company's chief marketing officer,
Maryam Banikarim, kicked off the meeting, where Gannett introduced itself as a company not just about newspaper brands, but also social media, video and leading-edge "rich media" ad services. At 44 years old, Banikarim is the more youthful face of the refashioned company,
a job she got in 2011 as the first-ever marketing chief. (Martore, scheduled to be there, was home with the flu.)
On stage, the host-for-hire, comedian
Andrew Kennedy, threw one of many scripted softball questions: "I thought Gannett was a newspaper company?"
Banikarim feigned a gasp. "Well," she said, "a lot of people think that. There's lots of interesting things about Gannett people don't know."
The Oracle of Omaha
Soon, she told the audience about
Warren Buffett's
just-published annual letter to Berkshire Hathaway shareholders, where the Nebraska industrialist talked up newspapers in the digital age.
There are good reasons to quote him. As one of the world's top investors, the "Oracle of Omaha" has snapped up more than 65 dailies and weeklies. In his letter, Buffett painted a rosy portrait of the industry's future. (This was before Berkshire
dumped all its Gannett stock five months later.)
"My favorite line," Banikarim told the audience, "is where he says, 'wherever there's a pervasive sense of community, a paper with a viable Internet strategy . . . serves the special informational interests of that community and will be indispensable."
She added: "It's like I wrote it myself."
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| Buffett |
Not quite. Here's a key passage Banikarim left aside:
"We do not believe," Buffett wrote, "that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities -- while it may improve profits in the short term -- seems certain to diminish the papers’ relevance over time."
And: "Our goal is to keep our papers loaded with content of interest to our readers and to be paid appropriately by those who find us useful, whether the product they view is in their hands or on the Internet."
* * *
A postscript
Two months ago, Gannett tore a page from Buffett's playbook, starting a closely watched pilot test of
the Butterfly Project. It has restored hundreds of pages of weekly news drained in recent years from four newspapers in New York, Florida, Indiana and Wisconsin. The test includes a new daily local edition of
USA Today.
Gannett hopes it will shore up advertising and print circulation when digital subscriptions have failed to gain traction. In the months ahead, it appears likely the initiative will extend to about three dozen of the company's biggest U.S. newspapers. Their combined circulation exceeds 2.3 million weekdays and 3.5 million Sundays.
USA Today, still recovering from a steep dive in ads and circulation, could claim an enormous increase in circulation as well.
It is a huge, surprising bet on print, a sharp turn even as Gannett continues its journey to a digital future that's anything but assured.
