Menu
Justin Cannon

Tech v Newspaper CEOs

The media often likes to focus on the Super Hero CEO’s of the tech world, we all know the names. I have been an owner & CEO in both a legacy model business with strong headwinds and a technology SaaS business where the winds are behind your back and in my opinion I think there are a group of CEO’s & business leaders who deserve a lot more admiration and they are the newspaper & legacy media executives.

In an Australian media context people like:

Robert Thomson CEO of News Corporation Globally

Michael Miller Chairman & CEO of News Corporation in Australasia

Greg Hywood CEO of Fairfax Media

Ciaran Davis CEO of APN News & Media

Bruce Davidson CEO AAP Newswire 

Damian Trezise of Mc Pherson Media Group & Victorian Country Press Assoc. Chairman

The list could go on…..

I recently wrote a blog post called Is it the Jockey or The Horse where I collated Warren Buffett’s views on the out weighted effect that an underlying industry’s economics has on a CEO’s ability to create positive returns on the capital deployed, let alone focus on the deployment of that capital towards more growth to that business model and new opportunities.

Warren Buffett often recounts what he sees as his most costly mistake being his venture into the textile business and credits that experience with driving his underlying thesis of the types of industries Berkshire Hathaway will invest in.

“When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.”) (2006)

Now what is fascinating is that Oracle of Omaha seemed to ignore his own advice and in what was well documented in 2012, through his holding company, Berkshire Hathaway, Buffett bought most of Media General’s newspapers for $142 million. See Article

His rational at the time was:

“Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town — whether the news is about the mayor or taxes or high school football — there is no substitute for a local newspaper that is doing its job,” Buffett said early on in the investment.

The newspaper industry liked to hear that one of the world’s most famous investors had faith in the value of the newspaper industry. In fact, just this year, David Chavern, Newspaper Association of America president & CEO David Chavern touted Buffett’s investment in newspapers.

“If you want to know who still believes in a future for news media, just turn to some of our most respected businessmen: Warren Buffett. Jeff Bezos. John Henry. Glen Taylor,” Chavern wrote.

Fast forward to 2017 and this is what Warren has to say:

Newspapers are going to go downhill. Most newspapers, the transition to the internet so far hasn’t worked in digital. The revenues don’t come in. There are a couple of exceptions for national newspapers — The Wall Street Journal and The New York Times are in a different category. That doesn’t mean it necessarily works brilliantly for them, but they are a different business than a local newspaper. But local newspapers continue to decline at a very significant rate. And even with the economy improving, circulation goes down, advertising goes down, and it goes down in prosperous cities, it goes down in areas that are having urban troubles, it goes down in small towns – that’s what amazes me. A town of 10 or 20,000, where there’s no local TV station obviously, and really there’s nothing on the internet that tells you what’s going on in a town like that, but the circulation just goes down every month. And when circulation goes down, advertising is gonna go down, and what used to be a virtuous circle turns into a vicious circle. I still love newspapers! You’re talking to the last guy in the world. Someday you’ll come out and interview me, and you’ll see a guy with a landline phone, reading a print newspaper.

I am the same I love newspapers! And that’s why I want to explore from a CEO’s perspective some of the things that make the challenge of running them today so incredibly complex and worthy of admiration.

The true complexity of variables that are at play to manage are beyond my direct experience base but there are some simple fundamentals that I think stand out.

The Headwinds

As Jaron Lanier the Author of Who Owns the Future and all round Genius describes in his interview below, the birth of the internet, something he was directly involved with, he thinks we inadvertently undid the covenant of the creative middle class where their work was well paid for and protected via copyright & secondly the nature of the internet created a star system powered by data gathering siren servers, as he calls them like Google & Facebook where the new media landscape has become even more concentrated which ironically was the opposite effect that young technology idealists like Jaron were hoping for back in the day.

So the level of concentration of power in media seems nearly quaint compared with today’s world where 70% of global digital advertising budgets are going to two players and the government regulatory efforts to deal with it via the cross media ownership laws seem so redundant now.

The underlying themes in Jaron Lanier’s amazing interview give a sense of the serious headwinds that media executives are dealing with.

The Simple Math

There is nothing more challenging than falling revenues and gross margin, it is the worst combination possible for a CEO.

This is why Warren Buffett’s, The Jockey or the Horse analogy has so much wisdom, all the levers a CEO can pull are constrained by the pool of free cash flows her or he has to run their business, let alone reinvest in it.

A CEO can only cut the amount of resources needed to bring in and serve a dollar of revenue to cover a fixed cost base so much. At some point there is a floor of resources needed (fixed cost base) to produce the necessary product or services to sell, to generate a viable level of revenue.

The point at which a CEO cuts back to the truly essential fixed cost base needed to generate a commercial amount of product/service (content) out the door BUT the combination of revenues and gross margin that can be generated from that output(content) is less than the costs needed to create/sell it, then you are at an inflection point.

You could imagine the incredibly complex task of shrinking very large news organisations incrementally down to smaller fixed cost bases, whilst maintaining their ability to generate the right amount of revenue from an employee base that needs inspiration and hope to produce great work, in a work environment where they are seeing lots of their friends and colleagues having to leave. Layer in the balance sheet dynamics of incredibly large asset write downs of masthead goodwill and you have a needle to thread.

All while trying to use a portion of those diminishing free cashflows to invest in new and emerging revenue lines that have better gross margins, where the cost of picking the winners in new and emerging industries comes with VC type hit and miss ratios and the cost of buying into the qualified siren server winners is exorbitant and unaffordable.

If you were in any doubt of the challenge just scan the next section……

The Crushing Dynamics of Falling Margins & Revenue

Extract from this article by Hedges Company

If you increase your prices, how much can unit sales decrease and maintain the same gross profit dollars?

Price Increase

Current margin, before a price increase +5% +10% +15% +20%

30% gross margin -14% -25% -33% -40%

35% gross margin -13% -22% -30% -36%

40% gross margin -11% -20% -27% -33%

45% gross margin -10% -18% -25% -31%

50% gross margin -9% -17% -23% -29%

If you decrease your prices, how much must unit sales increase to maintain the same gross profit dollars?

Price Decrease

Current margin, before a price decrease -5% -10% -15% -20%

30% gross margin +20% +50% +100% +200%

35% gross margin +17% +40% +75% +133%

40% gross margin +14% +33% +60% +100%

45% gross margin +13% +29% +50% +80%

50% gross margin +11% +25% +43% +67%

As you can see, the free market blesses those with high margin. If you have a thin 30% gross margin and you drop your prices 20%, you must triple your unit sales (i.e., increase 200%) to have the same gross profit dollars.

If you sell higher priced products or services you can physically generate fewer sales and still get the same income. Take a look at the chart below. If you take time to really understand it, you will get very excited.

If your present margin is 20% and you increase your price by 10% you can have a 33% decline in sales and still achieve the same gross profit. If you present margin is 40% and you increase your prices by 10% you can have a 20% decline in sales and still achieve the same Gross Profit.

Raise Your Prices

Raising prices is a terrifying prospect. As entrepreneurs, we assume that customers will abandon us, sales will dry up and our business will collapse into the dust-heap of failure. But like most fears, we tend to grossly overexaggerate the consequences and underestimate the benefits. Especially if you're reselling an existing product in your ecommerce store, a small increase in price can do miracles for your bottom line.

Imagine the following scenario for a popular item in your online store:

  • Item Retail Cost: $100
  • Wholesale Cost: $80
  • Profit: $20
  • Profit Margin: 25% ($20 profit / $80 cost)

Now image that, after being inspired by an article on the Shopify blog, you re-priced this item at $110:

  • Item Retail Cost: $110
  • Wholesale Cost: $80
  • Profit: $30
  • Profit Margin: 37.5% ($30 profit / $80 cost)

Our minor 10% increase in prices resulted in a massive 50% increase in profits and gross margin!

Under the best-case circumstances – assuming you have a strong unique selling proposition and aren't competing on price – your conversion rates won't dive and you'll have achieved an instant 50% increase in your overall profits. Even with a significant 30% drop in conversions, you'd still be making more money than under your old pricing model, but with fewer customer servicing costs to consider.

Tough

Yeap it sounds tortuously tough, so the next time we wondrously extol the skills of the tech titan CEO’s remember the aphorism "a rising tide lifts all boats" used by JFK back in 1963 and spare a thought for the skippers of the boats left when “the tide is going out”.

You may also like ...

Account modal exit cross