Within local media circles, the dominance of digital is often publicly professed but privately qualified. The traditional businesses — print, radio and TV — have still, for many years, been generating the majority of revenue, leaving some executives to drag their feet. But now, the door for legacy business to exit the market is closing and the conversations about the digital transition have become increasingly existential.
The market for legacy local media companies has waned since its heyday in the late 2000s. Private equity buyers have cooled on print and radio and many investors now will ignore a business with non-digital assets altogether, James Dolan, managing partner at investment firm Cherry Tree Companies, told an audience at Borrell Associates’ Local Online Advertising Conference in New York Monday.
“The market thinks digital has a future [and that] legacy media does not — period, full stop,” said Dolan. “Valuations are heavily skewed in favor of digital, and away from anything in legacy media. Several private equity firms say that they will not look at any company with any print organization.”
The gap in valuations between legacy and digital content businesses has accelerated in recent years, leaving media companies in search of an exit struggling to find a meaningful buyer. According to data presented by Dolan, print newspapers garnered a median valuation of 5.5 times revenue compared to 11.6 times revenue for digital media companies. What’s more, the largest deal for a print newspaper was only marginally higher than the median while the largest revenue multiple for a digital media deal soared to just over 36 times earnings.
“Investor valuations are not depending on legacy media performance,” said Dolan. “If you have the best performing radio in your area they will not care; the best performing print and they won’t care.”
Another part of the problem is generational, says Dolan. A wave of aging baby boomers who own smaller media companies are looking to exit their business, creating a spike in supply and diluting the valuations. After a few years of strong growth, Dolan says he expects to see a “slight downturn” in M&A markets over the next few quarters.
The other option — business transformation — is equally pressing. The legacy revenues, which sustained these businesses, have started to catch up with declining user base, putting local media executives in urgent need of not only a digital strategy, but digital business.
According to data from Borrell Associates, digital revenue accounts for just over 11% of total revenue for local newspapers, a tiny portion given the almost exclusive interest from investors. In a presentation Monday, Clark Gilbert, the outgoing chief executive of Deseret Digital Media and a long-time Harvard Business School professor, offered six benchmarks against which local media companies need to measure to determine whether they will survive the transition.
- The digital third: It’s not just whether [a media company] should create a separate division business to compliment the core business; digital is the core business,” said Gilbert. He argued that legacy local media companies should generate at least a third of their revenue from digital channels today. “At a third of revenue, it’s large enough that you can see a path to the point where it will drive future growth,” he added.
- Don’t be display dependent: A digital banner business isn’t enough. Local media companies need to develop a non-display business that accounts for at least half of its total digital revenue, says Gilbert, including deals, classifieds and other marketplace business. “The top firms in local advertising are not publishers — they’re marketplace companies,” said Gilbert. “It’s been true for over 50 years in the print business.
- Think mobile (revenue) first: Part of what makes transactional products so powerful is that they thrive on mobile. Gilbert said that local media companies should make sure that at least 60% of their revenue is mobile-ready, and will not depreciate as traffic moves to mobile devices.
- A 15% digital baseline: “If you’re not growing the digital business at over 15% each year, than there’s something fundamentally wrong with your business,” said Gilbert. Digital revenue growth has declined in the local newspaper industry in part because companies pushed legacy sales forces to sell digital products as an add-on, said Gilbert. Media companies need to invest in digital initiatives separately while continuing to grow the legacy revenues.
- Zero — just zero: That’s the amount of time Gilbert says a local media companies digital team should think about legacy products.
Steven Jacobs is Street Fight’s deputy editor.