The Sun-Times Isn’t Closing – How Does It Stay Open?


October 8, 2009

Despite my doomsday warning a couple months ago, it seems the Sun Times Media Group (STMG) will be granted a reprieve today, in the form of financier James Tyree’s purchase and expected capital injection. But reported
details of Mr. Tyree’s impending purchase agreement do not provide answers for how the Sun-Times plans to stay in business.

STMG has been losing a great deal of money for some time now. Unless Mr. Tyree plans to spend his entire personal fortune on keeping a very expensive butterfly collection, it is clear the he will need to make some major changes to keep his new company in business.

Here I discuss some of the business challenges Mr. Tyree faces and challenge him to take bold action to save his new collection of newspapers.

Because almost every thing that happens with the Sun Times Media Group must go through bankruptcy court, details on the company’s purchase are public.  So far we know:

  • James C. Tyree, Chairman and Chief Executive Officer of Mesirow Capital is leading a group to purchase the company and take it private;
  • Mr. Tyree has offered $5 million in cash and to assume $22 million of outstanding debt;
  • STMG will be broken into two companies, using the same model as General Motors’ recent bankruptcy and reorganization. The “good” company will be the newspaper group we all know and the part Mr. Tyree owns;
  • The “bad” company will exist on paper to mainly carry the $601 million of IRS debt. There’s no word on what happens to this part of the old STMG;
  • It is unclear how much money Mr. Tyree is committing to keep the company going, since it will have about $13 million on hand at the end of this month and it is losing more than $40 million a year; and,
  • The unions serving STMG have agreed to significant concessions, which add up to a continued pay cut, elimination of seniority, and increased rescission payments for six months, give Mr. Tyree ability to keep costs down and remold the company almost any way he wants.

Tyree’s Challenge

Now that he owns the company, he has two very concrete limitations and two deep-seated problems with the company’s current business model. First, the limitations:

  1. The “centerpiece” Sun-Times newspaper seems to be the money loser of the group. Previous analysis conducted in this blog shows that the Sun-Times daily newspaper is shedding readers, and seems to be the big money loser of the STMG properties. There have also been reports that national advertisers have pared back their buys in favor of the Chicago Tribune. This is a limitation because consumers in STMG’s biggest market have demonstrated a lack of interest in the company’s biggest product – it will be hard for the company to just grow itself out its current revenue problems.
  2. STMG does not have many “hidden” assets that can be sold or put into play. Unlike the Tribune Company, which owns the Tribune Tower and the Freedom Center real estate properties as well as (until recently) the Chicago Cubs and many broadcast properties, STMG can’t just sell off a bunch of properties to provide a cash injection for operations or capital improvements to the core business. All improvements will have to paid for by Mr. Tyree or whatever other investors he brings to the table.

For the most part, we assume that Mr. Tyree is already aware of those limitations and he plans to solve them with his wallet. Hopefully Sam Zell’s cautionary tale at the Tribune Company made that clear to him.

STMG’s deep-seated problems are much more interesting. The newspaper business is being dealt a one-two punch. Production costs of a newsprint product are increasingly out of line with much more inexpensive electronic delivery. In addition, news consumers are changing their habits, taking advertisers and revenues with them. Thus Mr. Tyree needs to address:

  1. What market segment STMG serves, and where it will turn for growth; and
  2. The best way to deliver STMG’s content to readers.

The Existing Newspaper Production Model

Like any business, traditional newspapers have two types of costs, marginal and fixed. The marginal cost of an additional unit of output is the cost of the additional inputs needed to produce that output. So, if it costs 10-cents for newsprint and ink for each newspaper, that’s your marginal cost. Fixed costs do not vary depending on production or sales levels, such as rent, reporter salaries, leases and delivery truck maintenance.

For traditional newspapers, the fixed costs are high and marginal costs are relatively low. Therefore, newspapers are a “volume business”, the more newspapers you can sell, the more money you make.

Also, newspapers have a hard time shedding fixed costs, and they are harder still to build back up again when you grow. For instance, it costs a lot to obtain reporters like Fran Spielman and Mark Brown. If the Sun-Times lays these people off, it’s a relatively permanent decision.

In this way, traditional newspapers run a business model similar to heavy industries like automobiles: the path to success is volume and market share. The more you produce, the more your fixed costs are distributed and easier it is to devote resources to creating a high quality product. But, lower volume producers have lower margins and fewer resources to deal with market shifts. Under these circumstances, declines in readership can quickly lead to a death spiral that can only be survived with the injection of outside capital.

What Market Do Newspapers Serve And The Starbucks Problem

Daily newspapers are also squeezed by an increasingly segmented market place. This is a two-part conundrum: First, in their heyday, newspapers served a general audience that considered news a scarce commodity. Because distribution costs were high and newspapers controlled distribution, newspapers (and local television news, for that matter) could serve up whatever they wanted, and short of limited reader grousing, consumers bought it. Today, with RSS news feeds, podcasts email newsletters and a dozen other electronic delivery systems, delivery costs are low and consumers are offered and are enjoying a million different content sources.

The second half of newspapers’ marketing problem is now that consumers enjoy a million different content sources, they are considerably more educated and finicky consumers. This is the “Starbucks problem”.

If you’re old enough, you remember the day when you bought morning coffee at either McDonald’s, Dunkin Donuts or the neighborhood greasy spoon for 50-cents. Then came Starbucks. Consumers discovered how much they enjoyed good coffee and the market shifted. For a brief moment, Starbucks enjoyed being the only place to get decent coffee and announced plans to open thousands more stores. Then, ten thousand indie coffee stores opened, McDonald’s and Dunkin Donuts improved their coffee and many greasy spoons improved their coffee – the market shifted again as consumers had more choices and Starbucks had to close stores.

Starbucks has other ways it can respond to the market shift (like sell “Via“), but in terms of the increased options available to consumers and the permanent market changes, blogs equal indie coffee shops. The indie shops aren’t closing and neither are blogs.

What Now Mr. Tyree?

Here’s an obvious statement: The news industry is experiencing unparalleled uncertainty. But because there’s such much uncertainty there are no clear solutions to the problems it faces. So, the potential options are limitless – we’re just not sure which ones make up the path to profitability. These circumstances call for creativity and boldness of action.

The reported circumstances of James Tyree’s pending purchase of the Sun Times Media Group provides some breathing room for the company. But still does not answer the “What next?” question.

As discussed above, Mr. Tyree needs to answer the following questions:

  1. How will you deliver your content? The paper medium is far from dead, but it has much less dominance. We should expect the transition to be more 1950’s radio to 2010 radio than like CDs to iTunes.
  2. What market segment will the Sun-Times serve? This needs to be clear enough for potential readers and advertisers alike.

These are big questions with earthquake-like potential outcomes for STMG. So far the publications that have worked the hardest to address these questions have either been small start-ups (Texas Tribune, Chi-Town Daily News) or daily newspapers facing liquidation (The Seattle Post Intelligencer, Detroit Free Press). These trailblazers should offer instruction for Mr. Tyree.

The results reported so far for daily newspapers that converted to electronic-only have not been pretty. But in most of these cases the efforts have been thinly veiled attempts to move the same content from one medium to another without determining the target market. It seems that because consumers can find newspapers in lots of places (news racks, their doorstep, on the bus), this signals important content. Electronic content from newspapers come from the same highly disposable place as blogs – so they have to do more work to demonstrate value and to retain readership.

Information about the success of smaller start-ups is harder to come by (probably because they have fewer disgruntled former employees to tell us about poor business practices). But former employees from the recently shuttered Chi-Town Daily News seem to be complaining about a lack of business focus at the publication and outside observation of the publication begs the question: Who was the target consumer? Who were advertisers supposed to be selling to?

The Electronic Delivery Question

It is clear to everyone that electronic delivery is where it’s at (after all, you are reading this in a blog, not in a paper publication!) but it isn’t clear what goes and the web and what stays on paper. Making the problem more complex for the Sun-Times is that there is some unquantified value of being able to read content in the paper edition – and the paper edition only. But how much value?

In addition, as I’ve discussed earlier, newspapers like the Sun-Times are attempting to provide two very different types of contents with different value propositions: Commodity news that is highly time sensitive and news analysis that has a longer shelf life and more long-term value.

Commodity news, like sports scores, how City Council voted and crime reports have a freshness date and are well suited for electronic delivery. News analysis, which takes time and experienced reporters can be consumed a day, a week or a month after the event happens (some reporters like Matt Bai for the New York Times Magazine specialize in this kind of work). This kind of content could be delivered either electronically or on paper.

What Is Being Sold And Who’s The Market?

I’m not party to any market research the Sun-Times (or anyone else) has conducted, but for years the Sun-Times has positioned itself variously as the paper for city-dwellers, blue-c
ollars, African-Americans and liberals. Because of the newspaper’s steady readership decline, we can assume that either the newspaper’s has been unable to deliver these segments, advertisers find these segments too broad, advertisers find these segments unappealing or a mixture of all these problems.

Hopefully STMG executives or Mr. Tyree has conducted market research to determine what parts of the Sun-Times these market segments and others find most appealing. If their market research has been done well, STMG leaders probably know which parts of the Sun-Times is making them money and which parts are being subsidized.

This is an old story at newspapers – it’s why you can’t find book reviews any more.  But the big change at the Sun-Times is that it does not have to put all the content it produces into a print product. Like the Tribune Company, it could create print products for different psychographic segments (i.e. Red Eye) or produce completely different online products from what it puts into print – sports scores and other time-sensitive content in a thin commuter daily and more analysis content in a Sunday paper or a publication delivered to businesses only – or a series of different businesses.

Segmentation is the name of the game – for both consumers and advertisers. The Sun-Times needs to respond to this new market environment and make a bold business decision – because it’s clear that partial measures will not keep the Sun-Times or any major daily newspaper in the black.

Think Big Mr. Tyree

The traditional newspaper model is no longer working. I am sure there are many experienced newspaper executives that will argue with me on this point but from an outsider perspective, rapidly declining market share and an increasingly fragmented market space says more than enough.

So when you can no longer do the same thing, you need to do something different. As the new Sun Times Media Group moves forward, I would urge Mr. Tyree and his team to consider the following questions:

Who you intend to serve? What is your market? This is the core question the Sun-Times needs to answer. And it needs to be better than “the smart readers of Chicago”. Really. Give us some demographics and psychographics. And don’t be afraid to tell everybody. There are some people you just can’t serve well. Admit it and move on to serving a smaller group of people well, and profitably.

Does Chicago really need two “newspapers of record”? Stop playing the Chicago Tribune‘s game. They want to be “Mother Tribune” and the final arbiter on every issue. Smart business people know they can’t, but the Tribune hasn’t figured that out yet, so just let them be and serve the readers you’re going to serve.

How many ways and mediums can the Sun-Times deliver content to targeted consumers? This gets to the content delivery question. Use them all – podcasts, video, blogs, whatever you’re going to get your hands on. You’ll cannibalize your own readership for a while, but apply some intense market research to the experiment and you’ll learn how people really want to read you. Then do that and charge for it.

Can you sell many small news products profitably as well as one big product? You need to be entrepreneurial. By nature, a big expensive daily print product is not going to be entrepreneurial. So make lots of smaller products focusing on small market segments. Some great examples are RogerEbert.com and TheWashingtonReport.org. Do more of this – and then bring back Red Streak, with a different name and a more targeted demo/psycho. Like maybe Metra Electric riders.

Are you willing to cannibalize your existing products? The best companies don’t wait for their product lives to end, they create new products that cannibalize the old ones. Create a skunk works to promote entrepreneurial activity. Create new products around assets and columnists your market research says have potential and limit capitalization to $200k. Give your reporters equity in these new products. If they fail, you don’t lose much money. If they succeed, you have new products and a
diversified business line.

There’s so much potential in the Sun Times Media Group. Hopefully James Tyree and his team are willing to risk the money they put in to create a new kind of media company and keep the Sun-Times from dying a prolonged, agonizing death of more-of-the-same.