Feature
New Money Rediscovers Old Media
Michelle Leder
05/01/2007

During the course of a typical weekday, Mark Cuban reads four newspapers. As a member of the general public, that makes him atypical. As a new-media entrepreneur and investor, it might make him one of a kind. Newspapers across the country are losing favor with consumers and investors alike, as readership, revenues and share prices fall. But Cuban and a handful of contrarians believe untapped opportunities remain hidden in old media. "The education I get from a $1 copy of the Dallas Morning News is an incredible value," Cuban says. "But there aren’t a lot of other people who perceive it that way."

(Photograph by Cordero Studios/www.corderostudios.com.)
Cuban—who with partner Todd Wagner sold Internet startup Broadcast.com to Yahoo for $5.7 billion in 1999—admits he is never truly unwired from technology, except perhaps when he is playing basketball. It’s easy to assume he would prefer to obtain his news online. But each day, Cuban, who also owns the NBA’s Dallas Mavericks and HD.net, a high-definition television network perhaps best known for resurrecting the career of news anchor Dan Rather, reads his hometown papers, the Morning News and Fort Worth Star-Telegram, as well as The New York Times and the Wall Street Journal.

Cuban is rumored to be eyeing several media properties, and admits that he would consider buying a newspaper if the right property- perhaps one of his hometown papers—presented itself. Even during an era of crisis for the newspaper industry, he says he understands the lure of owning a civic landmark and a mass-communications platform. "In some respects, it’s probably about vanity," Cuban says. "There’s a certain cachet and wow factor to owning a newspaper that’s not unlike owning a basketball team."

Profit margins, too, remain attractive at some newspaper properties, ranging as high as 20 to 30 percent. Cuban explains that many investors in his demographic would be thrilled with that kind of return, but, in recent years, Wall Street analysts and institutional investors have fled. Share prices of publicly traded publishers such as Gannett, the Tribune Company and McClatchy are down at least 25 percent in the past three and half years.

“Newspapers aren’t dying as much as they have to reinvent themselves.”
Cuban believes that many of today’s newspaper companies and the families behind them are misguided managers focused too narrowly on the intangibles of running a public trust. (Even public publishing enterprises such as Tribune, McClatchy and The New York Times Company count founding family members as controlling shareholders or their largest shareholders.) They desire, Cuban says, to be perceived as the saviors of what Wall Street believes is a moribund industry. Cuban compares the newspaper business to the American automobile industry. With few exceptions, publishers are trying desperately to tap-dance their way back to the halcyon days when newspapers ruled mass media. "The level of arrogance among newspaper executives has amazed me," Cuban adds. "Most of them have said, ‘Well, we’ve seen ups and downs before, but it will all work out in the end.’"

For decades, he notes, outsized characters like William Randolph Hearst and Arthur "Punch" Sulzberger dominated the newspaper industry, and most of the large daily papers (and many of the smaller ones) were controlled solely by wealthy families. But over the past 30 years, as many of these families either took their companies public or sold them to large conglomerates, the patriarchs were supplanted by bean-counters and business school graduates better equipped to cut costs than build brands. Maybe, Cuban muses, the time is ripe for new moguls—people like Warren Buffett, Ron Burkle, David Geffen, Jack Welch and Sam Zell—to seize the opportunity to run the newspaper sector (see "The Next Sulzberger?" at the end).

With the exception of Buffett, whose Berkshire Hathaway owns the Buffalo News in New York and a 20 percent stake in the Washington Post Company, none of these men have any experience in the newspaper industry. (Through their spokespeople, all of them refused requests to be interviewed for this article.) In early February, Welch told New York Magazine that he thought he could return the Globe to profitability, although he did not explain how he would do it.

Cuban contends that prior experience working in newspapers should not be a prerequisite for prospective investors, simply because the executives and families who have been controlling the industry for years have lost so many readers (see "Losing the Paper Chase"). One thing that these men do share, however, is a demographic affinity toward print media. Daily newspaper readership is strongest among those 65 and older, and declines sharply as age decreases. Buffett, Broad and Welch are in their 70s. "These old guys not only have the money, but they also have an appetite for newspapers," Cuban says.

TOP VIEW
Newspaper company share prices and valuations are tumbling after years of dwindling readership—and highly coveted younger consumers are turning more often to the Internet to receive their information. But some of America’s most successful contrarians are going bargain-shopping, buying these troubled properties and investing millions in hopes of transforming them into lean, mean, digital moneymaking machines. Driven by ego and profit, these entrepreneurs often find themselves forced to make some of the toughest decisions of their careers.

Youth Movement
Jared Kushner, 26, is an exception to this trend. He spent nearly $10 million last summer to purchase a majority stake in the weekly New York Observer. Like Cuban, Kushner believes that Wall Street and institutional investors have greatly exaggerated the demise of the newspaper industry. "Newspapers aren’t dying as much as they have to reinvent themselves," he says, adding that he’s "not scared off by all the hysteria." In February, about six months after purchasing the salmon-colored newspaper that focuses on Manhattan’s elite, Kushner began the reinvention process. He transformed the paper from a broadsheet to a tabloid format and began replacing the Observer’s 3,000-word features with shorter pieces.

"I wasn’t looking to get into the news business," Kushner admits. "My interest was geared to an interesting opportunity." Kushner, the son of New Jersey real estate developer Charles Kushner, likens his investment in the Observer to buying a building that sits on a great location, but needs major renovations. Published reports peg the Observer’s losses at roughly $2 million per year, though Kushner believes many of the "simple things" that his team has changed will put the paper on the path toward profitability. In early March, Kushner announced that he had purchased the political website PoliticsNJ.com for an undisclosed sum. Although it was not immediately clear what the connection between the website and the Observer will be, the site received a redesign and added two new columns (including one by former governor Christie Whitman) shortly after the announcement.

"We’re adapting the paper to the way people are consuming media now, and we’re going to take the Observer brand to a whole other level," he says. As for signs that his adjustments are working, Kushner said in early February that it was still too early to tell. "We’re looking at a million different options."

“The level of arrogance among newspaper executives has amazed me.”
The Philadelphia Story
Bruce Toll and his partners have also been busy making changes since they acquired the Philadelphia Inquirer and Philadelphia Daily News last year for $562 million. Toll, vice chairman of Toll Brothers, one of the nation’s largest homebuilders, is a partner in Philadelphia Media Holdings, a group of local business leaders who purchased the two papers from McClatchy. The partners put up less than $200 million and borrowed more than $300 million from the Royal Bank of Scotland.

Toll, who grew up in southeast Pennsylvania and says that he began reading the Inquirer when he was 5, "always thought it would be a nice idea to buy a paper. But it never really entered my mind that it would actually happen until McClatchy announced that it was selling the Inquirer. It’s not like I had called Knight-Ridder [which sold to McClatchy in 2006] looking to buy the paper before," he explains. "But the right thing for the paper is to have the paper’s ownership be in the local Pennsylvania area."

Philadelphia Media Holdings hopes to improve the newspapers’ lot by spinning off new products to focus on sports, healthcare, entertainment and neighborhoods. The group is exploring options for a redesign, and Toll has expressed plans to add pages and improve the presentation of the layout. Brian P. Tierney, founder of advertising agency Tierney Communications and chief executive of Philadelphia Media Holdings, has also said that he sees tremendous opportunities for the publications to reach out and connect with a younger demographic.

But as Toll and his partners are discovering, local ownership does not guarantee that the new proprietors will be greeted as rescuers. Soon after Philadelphia Media Holdings acquired the Inquirer, the paper’s highly respected top editor, Amanda Bennett, stepped down amid massive layoffs—nearly 200 since the sale was completed. Not surprisingly, these cuts have sparked reactions in both the local and national press. Toll admits that the new ownership team knew going into the deal that they would be forced to cut costs. "If we fired some janitors, nobody would have batted an eye. But we’ve had to fire writers," he says.

After McClatchy acquired the two Philadelphia newspapers (along with 30 additional titles from Knight-Ridder), it immediately moved to sell the underperforming properties. McClatchy’s consultants tabbed the Philadelphia papers as the most financially challenged ones. Toll recalls that McClatchy was, therefore, a highly motivated seller that streamlined the acquisition process. The two sides closed the deal in two months.

Toll and his partners are not the only investors being lured into this market by fire-sale prices for what they perceive as undervalued brands. Last December, McClatchy sold the Minneapolis Star-Tribune to New York–based private equity firm Avista Capital Partners for $530 million, or less than half of what McClatchy paid for the newspaper eight years earlier. In January, The New York Times Company announced that it was taking an $814 million write-down on its New England media group, whose assets include the Boston Globe that Welch considered buying. Fourteen years earlier, The Times had paid $1.4 billion for the newspapers.

Revenue Rescue
Investors are also enticed by the opportunity to move these businesses into private hands and away from the pressures of the quarterly Wall Street earnings dance. Some industry veterans suggest that this strategy may offer some of these newspapers enough breathing room to begin transforming themselves. Serial entrepreneur Steve Brill, who runs Verified Identity Pass, has invested millions of dollars in print media, founding two magazines, American Lawyer and Brill’s Content. He contends that the best move for newspaper investors is "to get out from under the idiot stock analysts. If it’s a private company, and it doesn’t have to deal with the quarter-to-quarter numbers, it can start charging for online content," he explains. "It will lose ad revenue because of the lower eyeballs, but in the end, it should help its business."

Brill admits that he sometimes considers reentering the media business, especially when he sees the attractive sale prices right now. But he’s having too much fun with what he’s doing—creating a private firm that prescreens travelers to pass through airport security lines. Moreover, the challenges of squeezing digital revenue out of traditional print properties remain daunting. Only one newspaper—the Wall Street Journal—has built what most analysts agree is a successful online subscription model. But, Brill notes, many Journal readers simply consider an online subscription a business expense. Traditional local newspapers, even in huge cities such as Los Angeles and Houston, cannot count on this type of captive audience.

Most media analysts agree that the future of newspapers is largely rooted in a digital medium. Investors entering this fray must be prepared to expend millions of dollars to extend these brands online. The Los Angeles Times recently announced a strategy to staff its online news desk 24 hours a day to, as executives explained, break news on the Web and expand and analyze it in print. Print journalists will be expected to also write for Latimes.com. But are moves like this too little, too late to catch up with well-established Web portals such as MSN.com and Yahoo?

For most newspapers, online revenue from both subscription services and advertising has been anemic at best. But for entrepreneurs like Cuban, all is far from lost. While newspapers were late to recognize and respond to the demand for both online content and advertising, most of them retain a niche that some investors find hard to resist. Cuban advises that newspapers should focus on what they do best: covering their local markets like a blanket. Whatever happens, they will continue to hold one advantage over staring at a flickering computer monitor or a pint-size BlackBerry device. "Here’s their new marketing campaign," Cuban offers. "If you don’t want to go blind, read a newspaper."

The Next Sulzberger?

Within the past 12 months, many successful individual investors have been linked to potential newspaper deals. A few of them include:

Warren Buffett, investments: The New York Times.
Eli Broad, real estate development: Tribune Company.
Ron Burkle, supermarkets: Tribune Company.
David Geffen, entertainment: Los Angeles Times.
Jack Welch, business executive: Boston Globe.
Sam Zell, real estate development: Tribune Company.

Michelle Leder runs the blog Footnoted.org and is the author of Financial Fineprint: Uncovering a Company’s True Value.

Additional Information
Losing the Paper Chase