McClatchy Says It’s a ‘Digital’ Company, but More Work Still Remains

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McClatchy published its first newspaper 158 years ago in Sacramento during the California Gold Rush. It has 29 dailies today, but it’s corporate leaders stress again and again that it is no longer a “legacy” media company. They prefer to call it a “digital” media company.

It’s true that McClatchy gets 62.4% of its revenue from non-print sources, but not all those sources are digital. A nice, reliable chunk of them are in direct marketing, a fancy name for the old-fashioned flyers that are stuffed in newspapers or delivered to homes on Sunday in their own wrapper or during the week by mail.

There is no doubt that McClatchy is putting an enormous amount of energy and talent into digital — in everything from the design of its platforms to how it sells advertising against content to technology that seeks to unlock the buying psychology of fragmented readers.

Digital advertising revenue is increasing, but, so far, in such small digits that that the steady decline of McClatchy’s legacy products (those 29 newspapers) continues to shape the company’s lackluster financial performance. Digital accounts for 25% of the company’s overall ad revenue — the highest percentage among major legacy publishers — but it’s not enough when print advertising is shrinking so rapidly.

This chart tells the story:

Ads drag down McClatchy revenue, 10-K for 2014

The first quarter of 2015 – during which McClatchy’s digital strategy reached close to full pitch – did not produce any significant boost in the pattern in overall ad revenue over the last five years. It’s this stubborn pattern that has pushed McClatchy’s stock down to near-historic lows – just above a dollar per share. The promise of double-digit increases in digital ad revenue remains stuck somewhere over the horizon, and that’s a tell-tale indicator for stock analysts.

All legacy media companies have been battered in the last decade, but McClatchy has taken a particularly large hit among its peers in the stock market:

McClatchy stock vs. Peer Group, 2014 10-K

The company’s peer group includes A.H. Belo, E.W. Scripps, Gannett, Lee Enterprises and New York Times Co.

In what amounts to recognition of its slow-motion pivot from print to digital, McClatchy has been furiously slashing its debt to cut interest expenses and improve its bottom line.

In the last five years, it has cut its debt from $1.95 billion to $991.2 million. This has reduced annual interest payments by about $44 million. But expensive 9% debt – most of it from McClatchy’s poorly timed purchase of the Knight Ridder legacy chain for $4.4 billion in 2006 — still chews up $82 million annually in expenses. Debt costs are a major reason that McClatchy’s stock price/earnings ratio is so high – 31 compared to a desirable target that would be, on average, 16.

The stakes for McClatchy making a successful transition to digital are vitally important not only for the company’s stockholders, the McClatchy family (which controls voting power) and its 6,200 employees, but also several million readers in 28 communities spread through much of the country. McClatchy papers, which include the Miami Herald, Raleigh News & Observer, Fort Worth Star-Telegram and Sacramento Bee, are widely recognized, along with the chain’s Washington bureau, for producing solid public-service journalism.

Many McClatchy properties are well positioned in mid-size urban and urbanizing metros that are, overall, relatively affluent. But the attractiveness of those markets means that competitors — mainly in the former of  digital “pure plays” — are a continual threat to McClatchy’s dominance. Market nibbling can grow into market gobbling.

To stay on top, McClatchy has put its operational future in the hands of its most digitally immersed executive – Christian Hendricks, who last month was promoted from VP for interactive media to VP of products, marketing and promotion. Hendricks helped launch McClatchy digitally 20 years ago, the Pleistocene age of the Web when signals had to be funneled through slow, 300-baud modems and cranky phone lines.

Besides wearing his new and bigger hat at McClatchy, Hendricks is chair of the Local Media Consortium, which is made up 64 local media companies (mostly legacy newspapers and TV broadcasters, including McClatchy), which are trying to find their future in the digital space for their 1,600 publications.

I recently put these questions to Hendricks about McClatchy’s transition to digital:

Your new responsibilities now include “audience development.” What’s the significance of that?
Our audience is increasingly digital and consumes our content in a variety of ways. Better understanding who these readers are and why and how we fit into their daily lives, regardless of platform, is how we develop strategies to remain important and relevant.

We believe having a dedicated team focused on this challenge will better align our products with our readers needs, improve audience engagement and expand our audience.

McClatchy recently completed a “re-imagining” of how it produces and publishes news. What’s the bottom line as it affects McClatchy’s future as a digitally-centric media company?
We did a bit more than re-imagine our business. We actually reconstructed it as well. First, we completely overhauled our corporate organizational structure to reflect a digital company managing a legacy print business, not the reverse. Second, we rebuilt our print and digital products from the ground up using design-thinking principles to ensure we truly understood our relationship with our readers and advertising customers and reflected it in our products. The bottom line here is we needed to get closer to our audience and customers and build a culture of creativity and flexibility. So rather than talk about it, we did it.

Your design consultant, Mario Garcia, talks about “two tempos” in digital news” — “now” and “lean back.” What’s the significance of this rhythm for enhancing your audiences (via desktop, smartphone, tablet)?
The key here is for us to better understand the context and needs of our audience across multiple channels and deliver news and information based on that understanding. “Now” or on-the-go, for example, may reflect the mobile experience where speed, directness and brevity matter. “Get to the point,” would be a good way to describe it. “Lean back”, on the other hand, may be more reflective of a reader’s need to be immersed in a subject and learn a lot. “Help me understand” is perhaps a good way to describe it. So, it’s understanding what the reader needs at a particular moment and delivering it the way they want it.

Mobile traffic now constitutes more than half of your total digital traffic. Is mobile content written, edited and designed for its faster-paced audience?
Understanding the “rhythm” of our audience’s reading habits is extremely important and requires a different approach to differing consumption contexts.

Our redesign initiative takes this into account and our newsrooms have now begun addressing differing contexts using a variety of new techniques. For example, we’re aggressively using story highlighting techniques when delivering content to our mobile apps and mobile browser audiences. Highlighting provides the speed, directness and brevity our audiences want and need when they’re on-the-go.

Design consultant Garcia says ad banners should be banned. McClatchy still uses them. Do they work?
That’s an area where we don’t share Mario’s view. Display advertising is the largest digital revenue category for us and it’s growing at a double-digit pace. We believe that continuing to provide advertising customers with a high-quality audience in a brand-safe content stream positions us well for long-term display advertising success as long as we also quickly adapt to display advertising technology advances.

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I put a number of other questions to Hendricks about the nitty-gritty of McClatchy’s digital revenue that he chose not to answer — but how McClatchy performs in the next several financial quarters will likely provide the answers that Hendricks didn’t offer for this interview. The answers will tell whether McClatchy has indeed become a digital media company.

Tom GrubisichTom Grubisich (@TomGrubisich) writes “The New News” column for Street Fight. He is editorial director of hyperlocal news network Local America, and is also working on a book about the history, present and future of Charleston, S.C.