McClatchy Takes (Some of) KR

McClatchy won its bid for Knight Ridder. But KR fits into McClatchy’s plans less as a traditional newspaper company, than as part of a long-term transition to direct marketing, with the news playing an increasingly smaller role. The Internet, however, looms ever larger.

The outlines of McClatchy’s plan are just becoming known. The company intends to keep KR’s online verticals, and 20 of its newspapers, while selling off 12 newspapers in slow growing and/or heavily unionized metros. Basically, the company would keepThe Miami Herald, The Fort-Worth Star-Telegram and The Charlotte Observer, plus 17 others, creating a roster of 32 daily papers with a combined daily circulation of 3.2 million.

At the same time, the company will sell off some of the most revered names in the KR stable, including The Philadelphia Inquirer, The Philadelphia Daily News, and Silicon Valley’s San Jose Mercury News. The other papers that McClatchy plans to sell are The Akron Beacon Journal, The Wilkes-Barre Times Leader, The (South Dakota) Aberdeen American News, The (North Dakota) Grand Forks Herald in North Dakota, the Fort Wayne News-Sentinel in Indiana, The Contra-Costa Times and The Monterey Herald, and The Duluth News-Tribune.

An Unsentimental Company

In another era, a newspaper company would build its legacy on such large, fabled papers, just as Gannett did with The Des Moines Register, and Rupert Murdoch’s News Corp. did with The New York Post and The Times of London. But McClatchy’s leadership is secure and unsentimental. It doesn’t place a premium on ‘size for size’ sake. Instead, it hopes to re-impress Wall Street with fast growth across multiple channels, including print, the Web, direct mail –and possibly directories.

As The New York Times noted in its coverage, “the average rate of household growth for the dozen papers that McClatchy plans to divest is 4.8 percent for the next five years; for the 20 papers the company would keep, the growth rate is 11.1 percent. Including the 11.9 percent growth rate of the current 12 McClatchy papers, the new company’s papers will have an average household growth rate of 11.4 percent.”

Typically, more people mean greater reach for advertisers, at least in a direct marketing mode. But it doesn’t necessarily mean higher penetration of newspapers. For one thing, new residents are less inclined to subscribe to the local daily. Another thing: McClatchy is entering several markets that are less demographically compelling, at least for newspapers. In Miami, for instance, the company has the challenge of selling to a population that is increasingly dominated by Spanish-speaking Cubans.

Reaching Beyond Newspaper Readers

Ultimately, it will be McClatchy’s ability to reach beyond its shrinking base of newspaper subscribers that will determine its success. As former Sac Bee executive Jim Bonfield envisions on his Eyeball Farm blog, “Suddenly McClatchy is a one stop shop offering access to (32) markets. That is to say one buy placed with one company for (32) markets worth of direct mail, local Internet and FSI/Inserts. Even newspaper Ads, if people are still buying these buy the time the dust settles. That could do a lot
to help sagging national ad revenues.”

In this regard, McClatchy already has some prototypes running. InSite, for instance, offers multi-channel direct marketing programs. Another example is Sacramento.com, an innovative local search engine/Yellow Pages company that it runs in partnership with SureWest, an independent Yellow Pages company, and Premier Guide.

Will such efforts compensate for structural issues in the newspaper industry that McClatchy has been magically immune from? In the past, McClatchy has successfully relied on tight management and fast growing populations to keep it ahead of the newspaper pack, even as it has suffered from typical industry trends.

Its auto marketplace in Sacramento, for instance, is down 20 percent from last year. It is also looking at lost market share in recruitment, real estate and private party ads. This year, it is also rumored to be losing circulation for the first time –something that has bedeviled the rest of the newspaper for the past four years.

If Anybody Can Do It

The feeling of the investment community, however, is that Knight Ridder might be value-priced “as is.” If anybody can turn KR around, the thought is, it would be McClatchy.

A major role in this will be played by McClatchy Interactive, which was formed out of the acquisition of Cowles Media in 1995, and still largely run by Cowles’ Nando team, including President Christian Hendricks. Last year, McClatchy made $58 million on the Internet, while Knight Ridder Digital made $142 million. With the two companies combined, McClatchy hopes to shave millions of dollars in Internet expenses via lay offs and other savings. Not all the layoffs will have to be on the KR side either. Rumor has it that McClatchy has been steadily laying off its own Internet staff.

So what will be kept and what will be dropped on the Internet side? The assumption here is that McClatchy will try to inherit Knight Ridder’s share of CareerBuilder, a definite plus with the merger. It is unclear whether partners Tribune and Gannett will allow such a transfer without extracting an additional price. KR, Tribune and Gannett also control ShopLocal and 25 percent of Topix. In addition, McClatchy is already a partner in the Classified Ventures consortia, which controls Cars.com, Apartments.com and HomeGain. Presumably, with 1/3 of the voting shares, it would become a dominant partner.

Whether it will continue developing The Real Cities national advertising network is a big question mark. Although Real Cities has reported significant growth, it is seen in some circles as inefficient and mostly kept alive as a vanity project for Tony Ridder. Our guess is that McClatchy will suspend the big money efforts like this.

Winding up here, there has been a lot of talk that McClatchy has been the favored bidder for Knight Ridder by Wall Street and journalists alike, given its high journalistic standards and adherence to the bottom line. I like several of the McClatchy sites. There has been a lot of innovation. Look at The SacBee’s online movie clubs, and its home furnishings verticals; look at The Star Tribune’s Shop Minnesota. But in the end, this merger won’t be about journalism, so much as it will be about local reach. In that sense, it is a giant, public experiment.

It brings to mind, in fact, the merger that took place between Tribune and Times Mirror five years ago. Like McClatchy/Knight Ridder, the merger was about a spunky company buying another company that was twice its size, and in many ways, more established.

Five years later, it is no secret that The Times Mirror people feel like they’ve been through hell, with little to show in reversing the slide of its newspapers. Will Tribune’s efforts ultimately pan out? It is hard to say. But the same rules apply here.

4 thoughts on “McClatchy Takes (Some of) KR

  1. I’d like to make a mild correction to your numbers for McClatchy’s and Knight Ridder’s online revenues. They were $55.7 million and $164.5 million, respectively, in 2005. We track these numbers very closely because they are extremely important — more than most companies seem to realize — in terms of being a gauge of how well these companies might be positioned to become “flatlined” or to represent good investments. For instance, Knight Ridder generated 5.4% of its gross revenues from its Internet operations, while McClatchy generated about 4.5%. It would seem, then, that KR was doing a better job of “seizing” the opportunity and that McClatchy, for all its Internet brilliance, was comparatively behind.

    There’s an important lesson here. Knight Ridder wound up with a very vulnerable company by owning newspapers — and only newspapers — in very large markets. That’s were all the print erosion has been occurring. Unlike Tribune, which also owns large-market papers, Knight Ridder wasn’t unsulated by broadcasting or other assets. The lesson for the future should be that the new McKnight-Ridder, to survive, should be a company that rapidly grows a layer of insulation around it by becoming more and more aggressive with its online ventures. I am wondering, then, who will lead the effort — the Knight Ridder Digital hierarchy, or the McClatchy hierarchy. We will continue to watch the numbers very closely. If they grow beyond 7% of revenues this year, and perhaps beyond 15% by 2010, we’ll know they chose the right team.

  2. I just read Gordon’s comments regarding percentage of digital operations versus offline operations. Although I don’t necessarily disagree with his assertion that KRD did a better job than McC at driving online revenue, displaying only percentage of offline revenue as a metric doesn’t always give a full and accurate story. With as much “funny money” being thrown around in annual reports from newspaper companies, its virtually impossible to tell how successful or unsuccessful their digital operations are. When upwards of 70% of all online revenue for online newspapers is a charitable “handout” from the print classified department of the newspaper for all classified liners that go online, its impossible to get a good read on how unprofitable these sites may be. Hence, without knowing what “percentage” or “how much per line” KRD is attributing to its online properties versus McC (in which a small offline percentage could greatly influence the overall online percentage), it’s difficult to say, with certainty, that KRD’s web operations are more successful at driving revenue than McC’s.

    If there’s one action that could be taken on the part of the industry, it’s to begin separating the numbers of what was ‘earned’ versus ‘given’ to them. It’s understood that, if the print property didn’t exist, the local sites could never monetize their current online classified sections to the level being reported.

    Hopefully this information will become more transparent soon.

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