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The glitch in Postmedia's digital switch Add to ...

Paul Godfrey escorted directors of Postmedia Network Canada Corp. on a tour of the Calgary Herald earlier this year to showcase the struggling newspaper company’s digital future.

The Postmedia chief executive officer presented a remodelled newsroom where teams juggled written and visual content for the Herald’s websites, social media platforms such as Twitter and its 128-year old newspaper. The Herald has been so much “quicker off the mark” with digital initiatives, Mr. Godfrey said, that it is now one of the company’s most profitable divisions, and a beacon for change at Canada’s largest newspaper publisher.

“It’s time [newspapers] gave serious consideration to diving into the deep end of digital in order to bring yourself up to date,” Mr. Godfrey said in an interview.

There is hardly a newspaper executive in the world who wouldn’t agree with Mr. Godfrey. The migration of advertising revenue from printed media to online has ignited a race by publishers to launch new digital products and subscription models. When the former CanWest newspapers emerged from a court-supervised restructuring last summer to become Postmedia, the newly-appointed Mr. Godfrey promised to reverse the sleepy company’s fortunes with his ambitious digital revolution.

The trouble with this quest, however, is that Postmedia is trying to reinvent itself at a time when digital profits are still elusive and the company’s traditional newspaper business is sapping its financial strength.

Digital sales have grown quickly at the company, but only account for 8 per cent of total revenue. Meanwhile, print circulation and advertising sales at its 46 major metropolitan and community newspapers, which account for nearly 90 per cent of the company’s revenue, have shrunk faster than management expected. These declines, coupled with the need to pay interest on its heavy debt load, have triggered aggressive cost cutting.

According to people familiar with the matter, Postmedia is exploring the possible sale of a number of its community newspapers in British Columbia and its struggling Victoria-based daily, the Times Colonist. It is understood that Postmedia has been in discussions with a number of interested buyers as part of a broader strategy to pay down the company's debts.

Meanwhile, jobs are disappearing. Since it emerged from bankruptcy court protection in July, 2010, Postmedia has erased 750 jobs, or 14 per cent of its work force, bringing to 1,700 the total number of staff eliminated at the company since 2008. Faced with union resistance at other papers, many of the latest cuts occurred at non-unionized newsrooms such as the Herald, the very paper that has been leading the digital charge.

The cuts limit the resources Postmedia has to create the kind of online content that users have begun to pay for at bigger industry names such as The New York Times, which now charges frequent website users with a so-called metered payment system. Postmedia is testing these types of pay walls for its websites in Montreal and Victoria.

“It’s very easy to talk about digital,” says John Honderich, chairman of competitor Torstar Corp, owner of the Toronto Star. “We’ve all been struggling with that particular question. Putting meat on the bone, is another issue.”

Godfrey at the helm

Paul Godfrey, 72, has made a name for himself backing long shots. During a high-profile career in Toronto municipal politics, the man who calls himself “Mr. Average” went against huge odds to lobby to bring a baseball franchise to Toronto in the 1970s, and later spearheaded fundraising for the Blue Jays stadium. During his first foray as a media executive in the 1990s, he led a management buyout of Sun Media Corp.

In 2008 he was named president of Postmedia’s flagship newspaper, The National Post, a perennial money-loser that Mr. Godfrey said in a recent interview would be in the black soon. (Postmedia reports its fiscal 2011 financial results in October.)

When heavy debts and the global financial crisis pushed CanWest into bankruptcy court protection, Mr. Godfrey won the backing of its new owners, who tapped him to lead the company now called Postmedia. His selling card was a broad network of media connections and a reputation for corporate rejuvenations that generate handsome profits for investors. That’s what happened after he led the management buyout of Sun Media, and presided over its subsequent sale to Quebecor Inc. for the lofty price of $983-million in 1998

But Mr. Godfrey is unlikely to find a buyer willing to pay so dear a price for media assets as he did in the Sun Media days. And to find any buyer at all, Postmedia must reverse its revenue erosion.

Currently the company’s major investors , led by New York-based Golden Tree Asset Management LP, are supportive of the company’s management, according to sources close to the company. But it is understood that Golden Tree, which owns about 28 per cent of the company, and other funds hope to sell their stakes within the next few years.

“They’ve been great investors, they’ve let us run the company the way we want to,” Mr. Godfrey said.

The biggest challenge Mr. Godfrey faced in his first year was attracting new investors. His plan last year to attract new shareholders through an initial public offering of Postmedia stock foundered.

Although Postmedia shed assets and debts while in court protection, it emerged from restructuring saddled with nearly $700-million in debt that was stapled on to the company after bondholders acquired the company. (A sizable proportion of its existing debt is held by Golden Tree, the largest shareholder, and some of it pays high rates of interest.)

While it has been paying off the debt aggressively, it is a burden for a company sprinting to catch up with a growing field of stronger digital competitors.

“I wouldn’t have taken this job if I thought it was what they call a slam dunk,” Mr. Godfrey said. “The thing that keeps me going is challenges, otherwise you lose interest.”

The stalled IPO forced the company to rearrange its share structure so that its majority of U.S.-based hedge fund holders did not run afoul of Canada Revenue Agency rules that impose a tax burden on advertisements placed in foreign-controlled media outlets.

Postmedia solved the ownership issue in June when it listed two new shares classes on the Toronto Stock Exchange. The new shares shifted effective voting control from U.S. bondholders to a small pool of Canadian investors who appear to have little immediate prospect of selling their shares, and the stock rarely trades. (The more numerous class B shares last traded earlier this week at $9.50, down from $13.50 at the listing in June.)

Senator Jerry Grafstein, a long-time friend of Mr. Godfrey’s, credits him with doing “a great job of stabilizing the ship.” But, he adds, choppy waters lie ahead because he has to push Postmedia’s “antique” newspaper business into a borderless online market where it competes with Internet news giants such as The New York Times, The Wall Street Journal and the Huffington Post, a recent Canadian entrant.

“The real race is on now,” Mr. Grafstein said.

The success of Postmedia’s Digital First strategy will be defined to a large extent by the pace at which its traditional newspaper operations shrink or grow. When management made its digital pitch to the board last year, sources say, the plan was based on the assumption that national advertising revenues from big businesses such as auto companies would rebound, buying time to find new digital revenues.

It was a reasonable assumption at the time, given the improving economic outlook and the monopoly status enjoyed by many of its city dailies. A year and a limp recovery later, circulation losses and a faster-than-expected shift by advertisers to online has seen Postmedia’s advertising revenue shrink each quarter of the past year. During the three months ended May 31, advertising revenue had fallen nearly 5 per cent to $172-million. For the nine months, it was down nearly 3 per cent to $528.9-million.

Digital revenue growth has been strong for the nine months ended May 31, but sales of $62-million add up to only 9 per cent of total revenue.

The more newspaper revenues fall, the less Postmedia will have to devote to its online strategy.

“In the context of a company that is cutting and cutting and cutting to stay within its means, the question becomes, can they produce digital content that is distinctive enough to justify people paying for it?” said Christopher Waddell, director of the School of Journalism and Communication at Carleton University.

That’s not the story Mr. Godfrey wants to tell. The eternal optimist has a view that is best illustrated by the redecoration of Postmedia’s Toronto headquarters last year. The building’s lobby now features replicas of old-fashioned newspaper boxes for many of its publications. It is not front pages that are on display in the boxes’ windows. Instead, they feature computer screens that flash the latest news updates from each newspaper’s website.

But does Mr. Godfrey have what so many newspaper companies are searching for – a workable strategy to convince its customers to pay for these digital innovations?

“That is the magic elixir, to find that,” he said.

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