Will Convergence Live Up to the Hype?

By: Mark Fitzgerald and Lucia Moses For the newspaper industry, the time has come at last to put up or shut up about broadcast cross-ownership. Like claim jumpers ahead of a land rush, many chains and independent papers had already declared their strategic intentions in the months, even years, before the bitterly divided Federal Communications Commission (FCC) voted June 2 to eliminate the ban on common ownership of a daily newspaper and TV or radio stations in about 180 of the nation's 210 DMAs (designated market areas).

Some companies have long insisted they would remain newspaper pure-plays, while others went ahead and bought TV stations where they had papers, anticipating the demise of the 28-year-old prohibition. The ban is gone now -- awaiting the outcome of congressional wrangling -- but it remains unclear just how successful, and widespread, convergence with broadcast will prove to be in the newspaper industry, even if the rules go through exactly the way the FCC plans.

"I think this is really going to be fascinating," says Michael Steppe, chief investment officer of Brookfield Investment Partners in the Milwaukee suburb of Brookfield, Wis. "We don't know yet how this is going to play out. I think all of us -- analysts, people in [newspapers and broadcast], everybody -- is struggling to try to figure this out."

Cross-ownership could play out any number of ways. It might fulfill all the promises its proponents make for it, from boosting newspaper circulation and revenues to reversing the sinking state of broadcast news. Some analysts already think it could be so successful as to create a kind of "cross-ownership compulsion" that pressures pure-play newspaper companies to get into broadcast convergence, whether they want to or not.

On the other hand, broadcast success could prove elusive. Cable, satellite, and the Web are already chipping away at the broadcast TV market. New compression technologies could expand the number of channels further, fractionalizing the television audience into ever-smaller niches. Might today's early adapters of cross-ownership become tomorrow's emulators of Lee Enterprises or Pulitzer Inc., chains that sold off all their TV properties -- and put the cash to work buying newspapers?

This uncertainty is perhaps the oddest part of business dynamic loosed by the end of the cross-ownership ban. After all, there are plenty of examples of big newspaper companies operating dailies and broadcast in the same market, either because they were grandfathered in before the ban was imposed in 1975, or because they bought a TV station with plenty of years left before its license was up for renewal.

The media company that Steppe watches closest, Journal Communications, already publishes a daily and operates highly rated radio and television stations in its headquarters city of Milwaukee. Broadcast convergence does not arrive as an unknown, like videotex -- an expensive and failed experiment that burned the few companies that invested heavily in it -- or like the Web, an even more radical technological and business departure that was eventually embraced by virtually every daily paper.

J. Stewart Bryan III, chairman and CEO of Media General, says the company's grandfathered newspaper and TV cross-ownership in Tampa, Fla., proves that convergence leads to better journalism, and hence improved financial performance. "When quality improves, circulation and audience share increase, all of which creates revenue growth," he said in a speech at the annual shareholder's meeting in May.

For them and others already waist-deep in convergence, the ban's end is a non-event. Gil Thelen, acting publisher and senior vice president of The Tampa Tribune, said in late May of the converged newsroom there, "The expected decision will probably affect the News Center less than most other media in Tampa." If there is pressure, he believes, it will be on non-converged media that will find it harder to retain employees who want to learn multimedia.

Among some newspaper companies, however, this familiarity has bred something resembling contempt. Times-Shamrock Communications, for instance, already owns three radio stations spread over six licenses serving Scranton/Wilkes-Barre, Pa., where it publishes the a.m. Tribune and the p.m. Scranton Times. Final details in the FCC rules, which are due next month, may allow the company to buy at least one additional radio station in the market, and perhaps more. So how is co-owner William Lynette reacting to the end of the cross-ownership ban? He's not in a rush.

The company, he says, might buy another Scranton station. It's not yet clear if the FCC rules will permit cross-ownership by the papers Times-Shamrock publishes in such smaller Pennsylvania towns as Towanda and Shamokin, but, again, Lynette says he's not losing sleep over the situation. "We're not planning on it," he says. "Radio economics is very different. I'm not sure how comfortable our publishers would feel" with a radio cross-ownership arrangement, he adds. "They're doing very well as they are."

There are many reasons that cross-ownership fever has not taken hold uniformly across the newspaper industry: Many companies have no broadcast expertise; radio and TV stations sell for multiples that look high compared to newspapers, and the cost of mandatory installation of digital signals to broadcast TV plays havoc with return-on-investment (ROI) calculations.

Perhaps the biggest impediment, however, is the perception that the results grandfathered newspapers are getting from broadcast convergence have so far been, if not a bust, then underwhelming. "People have to see that it will start to work better at the places where there are both newspapers and (radio or TV) to get any sense of confidence that it will work on a bigger scale," Steppe says.

Come together, right now

But newspaper companies already in the cross-ownership game beg to differ. Take Tribune Co., which rolled out a convergence-oriented national ad sales network, Tribune Media Net, not long after it bought the TV and newspapers of the old Times Mirror Co. Some observers faulted Media Net for a slow start, but at Tribune's annual meeting last month, CEO Dennis J. FitzSimons noted sales are accelerating: "Revenues reached more than $60 million (in 2002) ... with about half of that in cross-media sales and the rest in national advertising. That's a big jump over the $34 million of incremental revenue in 2001." Tribune expects Media Net sales to grow to more than $70 million this year.

That's not a huge amount for a company that generated $5.4 billion in operating revenues last year, but cross-ownership boosters point out that it is still serious money. "Seventy million is not small change," says MediaNews Group Inc. CEO William Dean Singleton, "and Gannett, I believe, is talking about $8 million incremental revenue in Phoenix alone. And that's with just a very few markets." Singleton spent much of his just-ended chairmanship of the Newspaper Association of America lobbying for an end to the FCC ban. (Gannett Co. Inc. got into cross-ownership in Phoenix in 2001 when it bought Central Newspapers Inc., joining The Arizona Republic to its already-owned NBC affiliate, KPNX.)

In effect, Tribune achieved those results with one hand tied behind its back, argues Scott A. Stawski, client executive with the media practice of Jersey City, N.J.-based Inforte: "They have not been able to do (convergence) in a true national footprint because of the FCC rules." With the opportunity to expand to new cities and, especially, create TV duopolies in big cities, he says, success is sure to come for those companies that are bullish on cross-ownership.

In fact, Stawski says, the increases in overall and incremental revenue that big newspaper companies will achieve will force other chains to jump into broadcast: "Those chains that have publicly stated they are not going into (broadcast) are going to have a hard time justifying that stance to their stockholders." In this view, the circulation and household penetration declines endemic to metro dailies will increase the pressure on newspaper pure-play companies. "Not to have a strategy of (operating) more media outlets and packaging (cross-media advertising) is going to be hard to justify in the future," Stawski says.

Frank S. Gristina, a media analyst with Nashville, Tenn.-based investment bank Avondale Partners, noted companies may feel pressure, if only from within, to diversify to grow their local ad share. And over time, if owning multimedia fulfills its potential by growing incremental revenue and audience share -resulting in profit margin and share price growth -- those companies may become more attractive to investors than pure-play newspaper companies, he says.

Frank Kalil, president of broadcast brokerage Kalil & Co. Inc. in Tucson, Ariz., says pure-plays may eventually reconsider their strategy as they see what their peers are doing. "I think it's inevitable there'll be imitators, over time," he says.

For the most part, chains that adopted business strategies that exclude broadcast have been content to let the pro-cross-ownership forces enjoy their victory over the FCC. Do they think they'll someday feel pressure to get back into TV?

Pulitzer President and CEO Robert C. Woodworth pleaded the press of business in declining to comment for this story, and Lee Enterprises spokesman Daniel K. Hayes similarly would not be drawn out on the subject: "We're on record saying we're focused on newspapers ... and I don't think we want to venture too much into ... just speculation."

Knight Ridder, the nation's second-largest newspaper chain, is the biggest company taking a pass on cross-ownership. "We stick to our knitting. And we're very good at it," Steve Rossi, the president of Knight Ridder's newspaper division, told its annual shareholder's meeting this spring. Knight Ridder dominates its local market very effectively with print, he argues, and soaks up fully "23.5% of all local advertising dollars, more than all other print sources combined and more than the aggregate of any other medium, including all broadcast TV, and all radio."

Indeed, Knight Ridder has grown its profit margin nicely over the years, says James C. Goss, senior analyst with Barrington Research Associates Inc. in Chicago. Cross-ownership, he says, is "not the only way to play the game."

Measuring profit potential

If newspaper companies remain skeptical, it's also because few meaningful yardsticks exist to demonstrate the benefits of cross-ownership.

The most straightforward way to measure cross-ownership's success is to count the new ad dollars that a company wouldn't get, if not for its ability to sell across media. Companies also like to measure the dollar value of promotional time and space donated to tout their same-market print and broadcast outlets. But companies are still at the dawn of being able to link audience growth back to increased promotions.

For the time being, the end of the cross-ownership ban will further divide the newspaper universe into two camps: Those that do cross-ownership, and those that won't.

At Lee, for instance, "I think their decision's been made," says John Miller, a senior vice president at Ariel Capital Management in Chicago, a Lee shareholder. "I would be shocked if Lee returned to the broadcast business. The reason they got out was, they're such a small player."

Over the long-term, though, don't be surprised if today's cross-ownership skeptics look at it quite differently. A little history is instructive. Remember that once upon a time, Gannett was a pioneer in radio; not so long ago, it also was in cable and outdoor advertising. In fact, Chairman, President and CEO Douglas H. McCorkindale hasn't ruled out a return to those businesses. The forerunner of Pulitzer Inc. was a broadcaster until 1998, when it sold its nine TV stations and five radio properties to Hearst-Argyle Television Inc.

Says Singleton: "I think shareholders and analysts appreciate that management knows best, and it's going to be up to management. Some believe there's an upside (to broadcast convergence) and some don't ... It comes down to the bet you want to make."

After much of the newspaper industry worked to overturn the cross-ownership ban, their prayers were answered early this month.

But as St. Teresa of Avila said in the 16th century, "More tears are shed over answered prayers than unanswered ones."
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