Will Local Media Consortium Save Lee From Knife’s Edge?

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14158leejpg150The eight-year-old Local Media Consortium has pumped “hundreds of millions of dollars in digital ad revenue” to the bottom line of newspaper publishers, LMC Executive Director Rusty Coats told me. But it’s not yet clear whether the consortium, even with its recent expansion and new features, will be the salvation of the “legacies” — print and broadcast TV companies — in a publishing world that’s increasingly digital and often hotly competitive.

A case in point is Lee Enterprises, which owns the St. Louis Post-Dispatch and close to 50 other print and digital dailies in the Midwest and many other regions extending to both the East and West Coasts, as well as weekly suburban and other special publications.

In a massively mis-timed decision in January 2005, Lee bought the Post-Dispatch and 13 other Pulitzer Inc. daily newspapers for $1.46 billion. Today, those papers are worth a small fraction of the purchase price. The acquisition forced Lee to seek shelter in Chapter 11 bankruptcy in 2012 that left it saddled with more than $800 million in debt. Fortunately for Lee, it has been able to win long-term extension on repaying that debt. But with its dominant print revenues continuing to decline, Lee’s “terrific acquisition” of Pulitzer — CEO Mary Junck’s words back in 2005 — keeps the company balanced on a knife’s edge.

Lee, rightly, can point to a 13% increase in digital revenue (mostly ads plus marketing services) for the third quarter of 2014, but that revenue amounted to only 17.7% of total ad revenue (digital and print).

More worrisome is what impact pay walls will have on Lee’s digital products, especially when huge staffing cuts across all newsrooms  limit how much premium content can be offered for the new digital subscriptions. The Post-Dispatch — the company’s paper with the biggest reach — recently instituted a partial pay wall. One user complained that the P-D’s “stlEXTRA!” content for digital subscribers included a “doughnut recipe.”

If Lee can’t increase digital ad revenue at a rate fast enough to offset shrinking print ad revenue, will it be able to meet its still-hefty, double-track debt payments, which will continue to 2017 and 2022?

I made repeated requests to multiple Lee corporate executives this week for their assessment of the company performance, especially how successful it’s been in using the Local Media Consortium to grow digital revenue. But none returned my calls.

I’m not suggesting that Lee is about to go into free fall. It is meeting its Chapter 11 debt obligations, recently stretched out debt payments at lower interest, and has cut expenses by $285 million — albeit at cost to editorial quality at the local and community levels. Plus, Lee’s stock price has risen from a low of 34 cents in 2008 to the $3.60 range currently. (At the time of the company’s purchase of the St. Louis Post-Dispatch, the price was just under $50.). But with the company mostly likely having done much of the cost cutting available, the pressure is on to keep increasing digital ad revenues.

That will be a stiff challenge for three reasons:

1. Print ad and subscription revenues will almost certainly keep declining as the audiences of Lee’s print products continue to shrink.

2. Partial pay walls – now in place or scheduled for all Lee properties – may hamper the company’s efforts to increase digital audiences in the big St. Louis and the 49 other markets. The P-D has seen a decline in page views from 2010, most likely because of its recently introduced partial pay wall, although unique visitors — which wouldn’t be affected as directly — are up.

3. Local digital “pure plays” will keep competitive heat on Lee’s sites, which have to make do with much fewer editorial resources after successive rounds of company cost cutting.

It’s true that all local print publishers face the same challenges as Lee. But Lee’s “peer group” — A. H. Belo, Gannett, McClatchy, New York Times, E.W. Scripps and the Washington Post — has seen a far greater composite return on investment during the period from 2008 to 2013. With 2008 measured at a baseline of 100.00, the peer group’s return rose to 144.26 in 2013 while Lee’s fell to 75.43. During the same period, the Standard & Poor’s 500 return rose to 161.17.

There are no certain answers about who will be the winners in local digital publishing. Perhaps the Local Media Consortium will be the instrument with which Lee — a founding member — can leverage its digital ad revenues to ever-new heights. LMC doesn’t publish or release hard numbers, so it’s hard to know how successful its members have been in capitalizing on features the consortium offers from partners Yahoo (ad platforms and related services) and Google’s DoubleClick (technology for programmatic advertising).

I went to Ken Doctor, who knows the changing media business better than just about anybody, and he said:

“Lee’s woes are emblematic of the rest of the industry. In its favor: other than St. Louis, its markets are mainly smaller, less-competitive ones, and those are clearly faring better this year and over time. The Lee strategy is akin to Warren Buffett’s, as he bought smaller Media General properties. Given the print/digital math, the challenge is growing digital ad revenue at a rate at least twice as high as the decline in print — and adding ad products that fetch more than display pricing. That means the local agency business, and that business will determine whether Lee can beat the clock on its debt.”

Lee is not quite “growing digital ad revenue at a rate at least twice as high as the decline in print” — its digital ad revenue is up 13% for the first 39 weeks of 2014 vs. print ad revenue’s decline of 6.8%. So, at least for now, the company remains balanced on a knife’s edge.

Time will tell. And for Lee, time will tell sooner rather than later.

Tom GrubisichTom Grubisich (@TomGrubisich) writes “The New News” column for Street Fight. He is editorial director of the in-development hyperlocal news network Local America that rates communities on their performance across a broad spectrum of livability — Local America Charleston launched earlier this year.