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.
- James C. Tyree, Chairman and Chief Executive Officer of Mesirow Capital is leading a group to purchase the company and take it private;
- 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.
- 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.
- What market segment STMG serves, and where it will turn for growth; and
- 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:
- 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.
- 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.