The Global Media Weekly for executives and entrepreneurs

How daily newspapers can win after all

The successful reinvention of some of the world’s leading publishers is clarifying the future for the best daily newspapers. Axel Springer may still be best known for Bild, Europe’s largest-selling tabloid which also operates Germany’s second largest news site. But 50% of revenues now come from outside Germany, with profits growing strongly through digital operations in some 20 countries.

Springer’s digital revenue growth is more than compensating for the decline in print, and over 70% of profit comes from digital. But another measure of the ¢3bn German company’s reinvention may be the 75% of 200m unique users who are hooked on its journalism. The dailies Bild and Die Welt have together amassed 394,000 paid digital subscribers, and the news brand Business Insider has a global audience of more than 70m.

This justifies the 70-year-old group’s view of its newspaper heritage: “The soul and spirit of Axel Springer is journalism. We serve our readers with independent and critical information and advice as well as good entertainment. Through our media offerings, we are making a contribution to the strengthening of freedom and democracy.”

The transformation is arguably matched by the Scandinavian news group Schibsted, which has also diversified from its core daily newspapers in Norway and Sweden to become a digital group with 7,000 employees in 30 countries. The 175-year-old Oslo-based company has grown operating profits by 50% through five years of uninterrupted revenue growth. Its newspapers remain strongly profitable but – like Springer – almost 50% of revenue and 70% of profit comes from digital, mostly from online classifieds.

Significantly, both companies had traditionally been dependent on their market-leading domestic newspapers. This narrow legacy, ironically, gave both the golden opportunity to launch digital operations (principally classifieds) in countries where they had no existing operations to defend. These long-established, newspaper-centric companies have, therefore, become the digital insurgents competing with incumbent publishers across the world. They are now digital natives.

Murdoch fights back

Their success has contrasted with that of Rupert Murdoch, whose newspapers have seemed digitally flat-footed for much of the past decade, exacerbated by some woeful US investments. But News Corporation has a global online property business, which may account for as much as one-third of total profits. It is now fighting hard to transform a historic news business where tabloid profits have traditionally subsidised broadsheet losses in the UK and Australia.

In Australia, it has established a JV with the leading jobs site Seek under which newspaper sales teams will bundle Seek employment listings with print ads. And News Corp’s digital properties will also link to Seek. It’s a significant partnership 10 years after Murdoch’s head-to-head daily newspaper rival Fairfax Media lost its long-time classified

revenue dominance – and most of its profit – to a clutch of digital start-ups, notably Seek and CarSales (both originally funded by James Packer) and REA online real estate, in which News Corp is the majority shareholder. This latest deal seems likely to lead eventually to the acquisition of Seek, and to M&A around the world which can fuse digital success with the still considerable market power of daily newspapers.

In the UK, where News Corp last year reported an operating loss of £33m on revenues of £1.2bn, it is spending £220m on the acquisition of  the Wireless Group Plc. The owner of national radio stations talkSPORT, talkRADIO and Virgin Radio, 12 local radio channels and the free distribution weekly magazine Sport had 2015 revenue of £75m and operating profit of £13m.

Ironically, Wireless Group was founded 18 years years ago by Kelvin MacKenzie (former editor of News Corp’s The Sun) and was part-funded by News Corp itself. (That seemingly odd 1998 investment had discouraged MacKenzie from joining with Axel Springer to acquire the rival Daily Mirror tabloid: Vintage Murdoch activism.) But, now, the talk and sports radio stations and Sport magazine could – like a yet newer venture in online betting – be a perfect digital fit for The Sun.

The feisty tabloid is Murdoch’s only profitable UK newspaper and the country’s best-seller, with a print circulation some 10% ahead of the mid-market Daily Mail. But the Mail’s UK digital audience is still five-times that of The Sun, so News Corp’s ambitions to match the 200m global reach of MailOnline or BuzzFeed will have to wait.

The Hearst powerhouse

Meanwhile, Murdoch might cast envious eyes at the 129-year-old, family-owned Hearst Corporation which has built an unrivalled multi-media business, not least by investing widely in long-term partnerships and joint ventures. Last year, Hearst increased its revenue by 6% to almost $11bn in what was the fifth consecutive year of record revenue and profits. Its revenue has grown by 140% since 2006.

That’s not what you expect from a company which claims to be the world’s oldest media company, having been launched by

(William) Randolph Hearst in 1887. That was seven years after his father had acquired the San Francisco Examiner, reportedly in exchange for a poker debt. Hearst Jr (who was immortalised by Orson Welles in the 1941 movie ‘Citizen Kane’) transformed the single newspaper into a media company, with the acquisition of newspapers, magazines and a pioneering movie and newsreel company, Cosmopolitan Productions.

He boosted the circulation of his papers with free copies and large, ominous headlines. He invented ‘Yellow Journalism’ and was vilified – decades before Murdoch, Axel Springer and the Daily Mail’s Lord Northcliffe – for emotionalising and scandalising the content of his tabloids. His media revolution was marked by crusading editorials, experimenting with printing technologies, and the expansion into magazines and broadcasting.

Hearst built what was, in the 1920s and 1930s, the world’s largest media group and which – 65 years after his death – has become a post-digital role model for media companies everywhere. It is one of the world’s largest diversified media and information companies with more than 350 businesses and 20,000 employees in 130 countries. Its portfolio principally comprises:

Business information: From being a company once known primarily for its newspapers and glossy magazines, Hearst now makes more profit from business-to-business information, its fastest-growing division – by far. It generates high-value data, analytics

and software for the healthcare, finance and automotive industries and utilities around the world. It includes the 80%-owned Fitch global credit ratings group (which alone made 2015 total operating profits of $425m). Its largest wholly-owned business is the First Databank drugs information services for global health professionals which has reportedly delivered the best return on investment in the company’s history. It started with the $80k acquisition of a B2B magazine for pharmacists and has morphed into a $100m medical data business which – in the US alone – contributes to the healthcare of more than 180m people. Homecare Homebase (a software company for the ‘home health’ industry) is Hearst’s single fastest-growing business.

It’s a world away from what had, just a decade ago, mostly been an old-fashioned collection of books and advertising-supported magazines. Today, it is all about digital delivery, workflow systems and high-value subscriptions.

Last year, the business information division increased its profits by a stunning 33%. Hearst CEO Steve Swartz, a former financial journalist, says: “Our focus is on data and analytics and software used by our customers in their day-to-day operations. These businesses have a very strong growth rate, as there is more and more demand by businesses to use data to make smarter decisions. And we are looking to acquire more.” Hearst’s determination to become a global business information leader was demonstrated by its 2015 decision to increase its Fitch shareholding from 50% to 80% in a deal valued at $2bn.

Television: Hearst still makes far more of its profit from broadcasting than anything else, although that includes substantial earnings from shareholdings in businesses managed by its partners. It has more than 30 television stations such as WCVB in Boston and KCRA in Sacramento, reaching almost 20% of US homes. Its long-established A+E Networks JV with Disney has the cable TV channels A+E, History, Lifetime, Crime & Investigation, Biography, and Vice Media’s new VICELAND. The channels claim a global audience of 330m, 500m digital users, and reach 80% of all American homes.

These highly profitable TV interests are dwarfed, though by Hearst’s 20% share of the Disney-controlled ESPN, the world’s most successful sports cable network. Over the past 25 years, ESPN has thrown off huge amounts of cash for its owners. Some years, it has generated 50% of Hearst’s total profit. ESPN is home to 21 of the top 25 most watched telecasts in US cable TV history and total profits once exceeded $4bn, buoyed by what have been America’s highest subscription prices. Now, that profit may be down to 50% of its peak in the perfect storm created by falling subscription prices in the Netflix era and the rising cost of sports programming rights. But ESPN is still a highly-profitable business.

Magazines: Hearst’s 2011 deal to pay $919m for Hachette’s 100 worldwide magazines including Elle consolidated its position as the world’s largest publisher of monthly magazines, with 40 brands across wholly-owned companies in the US and UK, and almost 300 international editions published in more than 80 countries. Major brands include: Good Housekeeping, Harpers Bazaar, Cosmopolitan, The Oprah Magazine, House Beautiful, Redbook, Popular Mechanics, Marie Claire, Esquire, and Elle. One-time “family” magazine Cosmopolitan had been bought in 1905, and sexualised with dramatic commercial effect by editor-in-chief Helen Gurley

Brown in the 1960s. It became the world’s most successfully-franchised magazine with 61 international editions and 78m readers in

100 countries. But the Elle acquisition became almost the high-water mark for magazines and especially for Hearst’s network of international editions. Magazine licensing had helped indigenous publishers all over the world exploit Hearst’s content and major brands, especially in order to attract international advertising.

In countries large and small, these local editions of global magazines were a great business for 25 years. But they are now in decline. Magazine brands continue, though, to be a major business for Hearst, especially in the US (where 2015 profits from its 20 magazines were up by 21%) and in the UK where the company is a strong leader. The apparent success of the Cosmopolitan TV cable channel in Canada and Spain, the huge Cosmopolitan and Sweet channels on SnapChat, and Hearst’s increasing separation of print from high-growth digital underline a determination to find new ways to exploit its famous brands.

It is also easy to believe that the influential 130-year-old monthly Good Housekeeping in the US and UK – with its tradition of testing, teaching and consumer advocacy – has substantial non-magazine profit potential in market research, consumer marketing and product development. Could Fitch teach their magazine cousins something about companies’ appetite for data on research, risk and reputation?

Investments: Since its initial stake 21 years ago in the once-dominant Netscape, Hearst Ventures has grown to become one of the most successful corporate venture funds and the model for Axel Springer’s more recent range of investments across Silicon Valley. Hearst has so far invested more than $1bn in media-tech companies including: BuzzFeed, Vice, HootSuite, Complex, AwesomenessTV, Roku, Science Inc, LiveSafe, Stylus, Swirl, and MobiTV. These are investments but they are also relationships with digital entrepreneurs that help connect the world’s oldest media group with new technologies and new thinking. It is now going global with the objective of increasing non-US investments to 50%. And Hearst recently announced the launch – together with the majority-owned Fitch Group – of a new investment fund focusing on early-stage financial information and technology companies.

A big new partnership

As Hearst redoubles its efforts to find fresh businesses that will transform profitability like magazines and cable TV once did, investment policy may shift in the direction of the recent acquisition of Complex Media by a joint venture with the US broadband telco Verizon. Last year, Hearst had invested $21m in the video-focused media company for young male audiences, alongside private equity funds.

Now, Complex (with 50m monthly uniques and 300m monthly video views) is owned by the new Verizon Hearst Media Partners with its content likely to be distributed across Verizon’s AOL and the just-acquired Yahoo. This is a tech-media partnership to watch. Its monthly views in 2015 grew by more than 400%. Could Hearst-Verizon be eventual buyers, for example, of BuzzFeed? The Complex move follows the two companies’ investment in AwesomenessTV — a three-way partnership with DreamWorks – and a declared strategy of building new digital video channels for millennials. That is, of course, the age group which – in an earlier generation – created Hearst magazine fortunes.

Newspapers: Buried somewhere in the glowing testimony of high-growth media is Hearst’s battered newspaper division. Randolph Hearst’s original business now has the lowest profit among the company’s media divisions. But it’s doing much better than most of its peers and last year reported a fourth straight year of profits.With more than 4,000 employees, Hearst publishes 17 dailies and 57 weeklies in cities including Houston, San Francisco, San Antonio and Albany. Its local digital services have also grown by an average of 14% for the last four years and have more than 30m monthly uniques.

The real achievement of this Hearst legacy business, however, is that its Houston Chronicle, has become one of the world’s most profitable daily newspapers. The figures are closely guarded but the 115-year-old daily may be making profits of more than $60m – or over 50% of all the profit made by Hearst’s 70+ newspapers. It’s a great story.

What is the largest newspaper in Texas and the sixth-largest newspaper in the US has successfully developed into a multi-media company producing a portfolio of print and online products serving Houston’s diverse audiences, in English and Spanish.

The Houston Chronicle has successfully built and maintained its market leadership by serving all parts of its community and by building paid-for as well as free distribution businesses, as follows:

  • The paid-for flagship daily complemented by local weeklies and branded editions. Houston Chronicle’s Sunday circulation of 860k makes it the third largest newspaper in the US after USA Today and the New York Times. Its weekday circulation is 275k. It has some 1.5m weekly readers (source: Alliance for Audited Media).
  • A market-leading free web site (Chron) which is distinct from the paid-for site for newspaper subscribers. The Chron has 31m unique visitors and 130m monthly page views, reflecting its appeal well beyond Houston and Texas. It also operates digital coupon services. Chron’s online ‘TV’ is another creative part of the whole ‘free web’ offering. Its three ‘shows’, produced with the collaboration of broadcast partners, are currently:

What You Missed – from TV the night before
What Not To Miss – 30-seond preview of what is on TV tonight
This Forgotten Day In History – Surprising Houston events worth remembering

  • Targeted publications and editions for key Houston area audiences including Hispanics, and professionals in energy and healthcare. These include La Voz de Houston, America’s second best-selling weekly for Hispanics, who comprise almost 40% of the Houston population (the third largest US city for Hispanics).
  • The Houston Chronicle group claims a total weekly audience equivalent to almost 40% of the city’s population.

More than anything else, the two-site strategy is a neat (and obvious when you think about it) way to out-compete the digital-only

competition while building a strong digital presence for subscribers for whom the paid-for web site (with its 1m paying viewers) is a bridge from print to digital. The strategy makes the debate about whether to have a paywall distinctly old-fashioned. Although the daily print circulation is about 50% of its peak, the Sunday newspaper is ahead of where it was 20 years ago.

The Houston Chronicle was launched in 1901, the year the city was transformed by the discovery of oil. The long-term success of the newspaper and Houston itself was shaped by Jesse Holman Jones who – when he wasn’t building the city – was credited with saving America. He was President Franklin Roosevelt’s Secretary of Commerce and financial advisor during the Great Depression and the Second World War, as well as being credited with making Houston into an international city. He started banks, arts centres and hotels, and was responsible for deepening the 50-mile ship channel that turned the inland city into a major international port.

In 1908, he earned a half-ownership in the Houston Chronicle by constructing its headquarters building. In 1926, he bought the rest and became the newspaper’s publisher until his death in 1956. Hearst bought the Houston Chronicle in 1987 for $415m – the highest price then paid for an American newspaper.

Head-start monopoly

Eight years later, its direct competitor the Houston Post ceased operations and Hearst purchased most of its assets in a $120m deal which, a Justice Department investigation found, had been agreed before the closure was announced. Twenty-one years ago, the fact that Houston had become the largest US city to be left with only one major daily metropolitan newspaper was front page news across the country.

The slightly murky deal recalls later moves in Hearst’s California birthplace where it acquired the San Francisco Chronicle, rival of the original flagship San Francisco Examiner.

Hearst had long wanted either to sell or close the Examiner and to buy the larger Chronicle instead. By 1999, it had a deal. But an anti-competition inquiry led to a trial and embarrassing revelations that the Examiner publisher had promised the San Francisco Mayor favourable coverage if he supported the Chronicle’s sale to Hearst. It all sounded like something from the swashbuckling days of Randolph Hearst rather than the 21st century corporate role model created by his successors. Hearst was ordered to subsidize local publishers with $66m to sustain the Examiner under independent ownership, effectively raising the Chronicle’s acquisition price by 10%. All these years later, the newspaper’s losses have been eliminated and the San Francisco Chronicle may even be profitable – reportedly after previous annual losses of up to $50m.

But it’s nothing like America’s fourth city Houston, where Hearst’s daily monopoly enabled the Chronicle to get into shape earlier than most of its peers. The city has long benefitted from its proximity to oil and Mexico. Its economic strength was highlighted during the 2007-9 recession when it became the first major US city to regain all the jobs that had been lost in the downturn. More than that, by 2013, it had added more than two jobs for every one it had lost in the recession. That astonishing recovery is attributed to the fact that more than 100 foreign-owned companies relocated or expanded in Houston during 2008-10.

Even in the current slowdown induced by the oil price slump, it is one of America’s fastest-growing cities and a great media market.

But the metropolitan area sprawls across nearly 9,000 square miles with a population of almost 7m people. If Houston were a country, it would have the world’s thirtieth-largest economy, which provides a real challenge to the Houston Chronicle – and a continual threat of media fragmentation by digital-only, hyper-local services. That is the motivation behind Hearst’s acquisition last month of Houston Community Newspapers (HCN), a portfolio of 23 weeklies and one daily newspaper, the Conroe Courier.

The HCN papers, which have a total print distribution of 520,000 and a digital reach of 4m pageviews per month, will consolidate the suburban leadership of the Chronicle (a circulation of 860k and a digital reach of 134m page views).

HCN’s 120-year-old Conroe Courier will become an edition of the Houston Chronicle, while the acquired weeklies are expected to share some staffing, coverage and printing arrangements with existing Hearst papers. The company said the deal would “strengthen our community coverage of the sprawling suburban ring in the outer loop of Houston” – and maximise the share of a highly-profitable local news market while squeezing advertising dollars from competing free newspapers and digital-only operators. Its plans for consolidating the brands, teams and tech will be watched closely by regional publishers around the world for whom Hearst’s best newspaper company is an obvious role model. It is also a picture of how Hearst – with its portfolio of exciting growth opportunities – can succeed in growing profits even in newspapers.

Arguably, Hearst’s success in “new” business and entertainment sectors has taken the pressure and spotlight from its legacy print media (which now account for just 11% of revenue) and is encouraging their reinvention. But last year CEO Steve Swartz reminded executives that, even in Hearst, these businesses must fight to earn future investment: “The challenge is to keep pushing the rest of the organization. We continue to find businesses that are growing faster than anything we’re seeing in traditional media.”

Swartz was appointed CEO of Hearst Corp in 2013, following Frank Bennack who had become President and CEO in 1979, having

started as a classified ads salesman for the San Antonio Light, the Hearst-owned newspaper in his Texas home town. In 35 years at the top, Bennack transformed Hearst from a newspaper and magazine publishing company with three TV stations valued at $700m to a $11bn global multimedia corporation. Some 70% of the company’s revenue now comes from acquisitions made by Bennack. He created or purchased many of Hearst’s businesses: everything from the Houston Chronicle to stakes in the ESPN and Lifetime cable networks. Significantly, he managed to make some $15bn worth of acquisitions – and still retain a balance sheet with little or no net debt.

At a time when many media groups are struggling to stay profitable, Hearst is on fire. Its 2015 revenues were almost five times that in 1998. It is believed pre-tax profits are now more than $1bn.

These are the results of a robust long-term strategy. In 2010, Bennack was making clear that Hearst had far from given up on finding a profitable future for traditional media brands: “Our view is that the old paradigm of 80% of the revenue base coming from advertising, will never again occur. The reader will have to pay a greater proportion of it and we’re finding that possible. It does reduce circulation when you raise prices but our present belief is that a business model which produces more than half the revenue by subscription and circulation revenue plus the web is still a winning and profitable model. And we’re seeing that. We’re moving our papers to that. We’re losing some circulations, but we’re finding that each new increase in pricing has a lesser effect than the one before because we’re down to a loyal core readership. And so what you’re gonna see by and large, in our view, is papers that used to be 200,000 circulation are gonna be 140k or 150k, but a much more devoted readership base and people are willing to pay their share. Advertising will still be there and the trick is having sufficient coverage to continue to attract some advertising but not be so heavily reliant on it. And for the reader to have a greater share in financing.”

The secret sauce

That explains a lot of what has brought success to the Houston Chronicle. And Bennack’s successor knows all about it. Swartz is only the seventh CEO in the company’s history. He had been a star reporter on the Wall Street Journal and then editor of Smart Money, its JV magazine with Hearst, before a 20-year career flew him through the ranks of Hearst’s newspaper business. On his appointment as Hearst Corp CEO in 2013, Swartz recalled his early experience of the company: “I really came to admire the breadth of Hearst. They seemed to be devoid of corporate politics; they seemed to be open to trying things”

In each generation, Hearst has managed to combine media versatility and innovation with the “discovery” of new profits that have turbocharged growth. So it was that, 50 years ago, Cosmopolitan ignited the company’s magazine earnings, first in the US and then around the world. Twenty-five years later, along came the money-spinning stake in ESPN and, now, watch the high-margin profits of Fitch, Homecare Homebase, and First Databank. Nobody would bet against a future Hearst profit explosion from Complex Media, a digital renaissance of Cosmopolitan, or a new media business that has not yet been created.

The sheer scale and longevity of the the company’s success right across the media spectrum defies simple explanation. But perhaps Hearst’s secret sauce is a quiet corporate self-confidence which enables it to:

  • Make long-term, stay-the-course investments in strategically important areas
  • Be a dependable, supportive, unpredatory partner for many companies and entrepreneurs, including competitors. Hearst JV partners include: Disney, BuzzFeed, Rodale, Bauer, Burda, Scripps, Verizon, Condé Nast, Vice, Jamie Oliver, and Oprah Winfrey.
  • Recruit senior management from competitors, although senior people don’t often leave Hearst
  • Be collegiate, confident, trusting but corporately under-stated

The perfect partner

Frank Bennack’s twinkling eyes, unfailing courtesy and quiet energy run through Hearst Corporation. Although the company is unmistakably hard-nosed about financial performance, it is tempting to note that this perfect partner in many joint enterprises is the polar opposite of its bullying founder. But, then, it is easy to feel that the company’s culture in its third century reflects the personality not so much of the founder as of his most distinguished successor.

Like Bennack, Hearst Corp is at ease with itself. This is a company with its ego firmly under control. Perhaps the unwavering long-term focus – and corporate patience – even explains the stunning success of the Houston Chronicle at a time when many other newspaper publishers – especially those, like Hearst, with alternative attractions – have given up on print.

Nobody believes there is a magic bullet that will ensure the survival of daily newspaper brands – but they once did. In the 1990s, publishers everywhere put all their content online for free and – ahead of any digital-only competition – managed to train consumers not to pay for news. It is difficult now to believe that – a decade before the iPad –  newspapers were once captivated by a dream scenario: without the expense of printing and distribution, advertising alone would be enough to support journalism.

Now we can see that the future requires nothing less than a total reinvention of the print-centric business model, to give: low costs; new marketing propositions; media-tech versatility; a relentless commitment to the audience; great journalism; and endless competitive vigilance. That’s all.