The question really is, will the newer investments and initiatives take hold in time to stem the bleeding? Traditional classifieds advertising, the lifeblood of old line newspaper operations, is quickly disappearing as cheaper online alternatives destroy that business. The Times just released its earnings report and it isn’t pretty. The latest quarter resulted in a $335,000 loss compared to a $23.9 million profit in the quarter a year earlier.

My sense is that Harbinger and Firebrand are getting the Times for a bargain if indeed they can insert their own directors onto the board and fix some strategic errors. The company has agreed to expand the board to 15 seats from 13 but this proposal will need to be approved by shareholders. I expect that disgruntled shareholders will consent.

Here are some notable points or ideas sparked from the earnings release:

• Overall revenue dropped but circulation revenue actually increased 25%. This was made possible by raising prices on newspapers like The Times and The Globe. This to me seems ridiculous. Physical, cellulose-based newspapers are no longer premium products. The short term boost in circulation revenue will quickly fade as customers flee to online news sources. Younger readers are already there and older readers will soon be there. The strategy should be to gently help older readers make the transition from paper to Web. In order to do this, the company should actually be lowering prices on newspapers to increase readership. Content should then be written and presented in such a way as to encourage usage of online properties the company controls.
• The About Group, the company’s Web division, showed healthy gains in revenue and income. Online efforts are working so continued investment in this space is imperative. I’d look seriously at buying news aggregation and crowdsourcing website Digg.com – a company that has been trying to sell itself. It’s one of the Web’s most popular websites and it has been for sale for quite some time. Perhaps the asking price has been lowered.
• Local search and local advertising is the next big thing on the Internet. Venture capitalists are looking for the next generation of startups that will displace first generation local services like CitySearch (IACI) with intelligent application of search engine technology, search engine marketing (SEM), search engine optimization (SEO), and geostamping technology. The best implementations are probably still being stewed over by entrepreneurs, but some existing acquisition candidates include Zillow.com, Local.com, LocalBizNOW, ZipLocal, and Smalltown.

As I have said before, “if creative destruction is going to happen, you might as well do it to yourself.”

Congratulations to Jesse Stay and Jason Alba.

Since my current work is in new media and social networking, I am keenly interested in the turbulence facing the newspaper industry. Clients, ranging from Fortune 2000 companies to small innovative startups, come to my team at SocialOptimize to gain an understanding of the new media landscape and to develop an actionable strategy for building a meaningful presence in social networks. They ask about their traditional marketing budgets and I tell them that we will see the disappearance of many old model newspaper, radio, and television companies as they struggle and fail to adapt to the reality of new media on the Web. Consumers are spending less time watching television, listening to radio, and reading newspapers. Instead, they are spending more and more time on the Internet for their news and entertainment needs. Very few traditional media companies will emerge stronger from this “dislocation” but the opportunity exists for several to transform themselves into new media leaders.

As an investor, I train my eyes on public companies that report the news who are also making headlines themselves. During periods of disruption, large sums of value get destroyed but great opportunities arise at the same time. Thus my ears perked up when I learned that Harbinger Capital, playing the role of activist investor, initiated a proxy fight by nominating four candidates for the New York Times (NYT) board of directors. The New York Times, being one of the leaders and most important assets in traditional media, has been causing great anxiety and nervousness in shareholders. Newspaper subscriptions and newspaper advertising revenue, the old metrics of success, are steadily declining and this has caused a panic in investors. I argue that newspaper subscriptions can no longer be relevant in the evaluation of this company. While advertising revenue of course remains the lifeblood of media companies, revenue from the printed page should diminish in priority. The company needs a dramatic rethinking of what it means to be relevant and influential and how to reconfigure its revenue base. Harbinger seems to be on the same page as it calls for “bold action” in the form of selling off business units and increasing investments in online efforts.

If Harbinger succeeds in placing its nominees on the board, I think it will have its greatest impact by helping the company allocate capital in a more logical manner. The company should start by deemphasizing or changing its editorial makeup. Americans perceive mainstream media outlets like the New York Times as “out of touch” and severely biased in favor of liberal policies and politicians. Whether this bias is true or not matters little, one can only respond to the marketplace with logic and logic dictates that the customer is always right. This presents an opportunity to drastically cut the expensive editorial staff and balance it with editors of more conservative leanings. In no way am I advocating for a government mandated Fairness Doctrine. I’m pushing for a market-mandated, self-regulated, fairness regime that satisfies what consumers and readers are asking for. This will go a long way in maintaining relevance and influence while generating substantial cost savings at the same time.

As for overhauling its revenue base, I think that the New York Times has taken good steps towards improving its online efforts. Only Rupert Murdoch’s News Corporation (NWS-A) has arguably done a better job at shifting revenue streams online. It doesn’t get a lot of press for its investments in the Internet, but some of the companies it has invested in are very compelling. As with all new businesses, patience is required for a few of these to work out and become substantive revenue generators. Many of these have ambiguous business models to begin with and it will take some time to adjust to the market and settle on a viable strategy. I expect some of these will not gain traction and will fail, but that is the perilous, creative, and destructive nature of our evolving online business environment. Here are some of the company’s more notable recent investments in a portfolio style overview:

Earlier this year, NYT co-invested with a few venture capital funds in San Francisco-based Automattic. Automattic’s primary product is the blogging platform known as WordPress. WordPress software can be downloaded for free and hosted on private servers. WordPress.com is a hosted blogging solution that many major media outlets are turning to as a cost-effective solution for serving blogs and other content. Large media companies such as CNN, Fortune, and Fox are paying for the company’s WordPress.com services to host their blog content. WordPress is one of the leading content serving platforms on the Internet and continues to grow in popularity. I think Automattic will carefully find other ways to monetize the technology including serving advertising.

The Internet is a medium that is conducive to the convergence of different types of media such as text, video, and audio. The clean divisions between newspapers, radio stations, and broadcast television that existed before the rise of the Web no longer apply. In early 2007, the New York Times joined with other media companies such as Time Warner (TWX), GE Global Media & Communications (GE), Hearst Interactive Media, and IAC/InterActiveCorp (IACI) to fund Brightcove, a developer of IP video technology. Brightcove technology hosts and serves content published by professional media businesses. Brightcove has emerged as one of the more successful alternatives to YouTube for consumers of video content.

Just earlier last month, NYT partnered with Sam Zell’s Tribune Company, Gannett (GCI), and Hearst to form a joint venture called quadrantONE. Yet another in a long line of advertising networks, quadrantONE will sell localized online advertisements, primarily display or banner ads. Given that this network will include many regional and national newspaper organizations, it stands a reasonable chance of achieving success. The challenge will be to educate smaller, more localized marketers about this differentiating factor. Many small marketers are still only aware of Google’s (GOOG) advertising platforms. The real opportunity here belongs to the regional and local metro papers. Consumers will return to demanding more quality localized news and content. If the local news agencies can meet that demand, they can create the inventory necessary to make a localized ad network like quadrantONE a viable competitor online.

NYT has also invested in Federated Media, an ad network for blogs. There will always be a place in this world for professionally produced news content. I certainly don’t want an amateur giving me the scoop on a tightly guarded political scandal. Most amateurs don’t write well enough to convey the juiciness of the drama. And if an amateur suddenly stumbles upon a juicy scoop and is capable of writing cogently about it, that person immediately becomes a professional. Such has happened in the world of blogging. The new world certainly has space for an army of amateurs sharing their opinions regarding everything under the sun. This distributed rather than centralized model of content creation opens up opportunities for a talented few to break into the ranks of influential professionals. The good ones generate a relatively large following. Federated Media helps this top tier of bloggers monetize their audience and content. A recent rumor has management at Federated Media rejecting a $100 million buyout offer.

The rise of Craigslist, partially owned by eBay (EBAY) has devastated the classifieds advertising market for newspapers. Job listings revenue, usually the most lucrative segment in classifieds advertising, has fallen way down. The migration of job listings off news pages to online job boards such as Monster (MNST) only worsens the situation. The New York Times hopes its investment in Indeed, a search engine for jobs, will help it recapture some of those lost revenues. Indeed promises to give job hunters access to millions of job listings aggregated from online job boards, corporate websites, and newspapers.

I did not know there was a New York Times Research & Development Group. I hope the boys at Harbinger don’t look at this little skunk works team as a waste of scarce capital. Innovation and breakthrough business models take time and freedom to develop. I already look upon corporate-directed incubators with skepticism but when the parent company accepts that it is in crises mode, there might just be a chance for the mad scientists and geeks to make an impact. Shifd is a new mobile Web application that allows users to share content between their desktop computers and mobile devices. Shifd, pardon the pun, is a paradigm-shifting idea. It makes possible a future in which we don’t have discreet devices separate from each other. All our information lives on the Web and is available to us from any device and custom-configured to our needs. Your cell phone and your desktop computer will have roughly the same utility and functional profile.

Daylife calls itself a “news site and distribution platform.” It is a different take on the aggregation of related news items and competes against the likes of Digg and Reddit. Instead of relying solely on a community of users to vote news stories up popularity rankings, the company appears to utilize its own search technology and algorithms to organize related news articles. Daylife also offers Web widgets that help other publishers expand their news content. The New York Times invested in this startup in late 2006. If I had to short one of these startups, Daylife would be the one. I love their user interface design; these guys are definitely in tune with the modern aesthetic. However, the competitive landscape for news aggregation is simply too crowded and the company does not offer anything so different and compelling to suggest that it can take users from Digg, Reddit, or even Google News.

WideOrbit provides software systems that automate and manage the sales, traffic, and billing of advertising. It sells its products to radio stations, television broadcasters, cable networks, and data centers. This sounds like a wonderful product as I am sure that relatively few people are putting their minds to solving the billing management needs of content publishers. Most entrepreneurs are focused on the deservedly hyped Web 2.0 space. This may not seem core to the business of the New York Times, but any model that puts the company in the middle of revenue flows will create value. Non-core businesses such as Federated Media and WideOrbit may create value for the company as they are sold off at rich multiples and for handsome returns. But in this uncertain time, who really understands what is core and what is non-core?

Again, Harbinger Capital is spot on with its call for a dramatic rethinking of the New York Times’ business model. Much capital can be allocated away from traditional business activities to online efforts that can significantly change the structure of the company. New profit centers will arise and the company’s recent investments in Web startups give it a good chance to navigate the future. What the New York Times needs right now is a stable of patient investors.

Update 3/17/08 – The New York Times came to a compromise with activist hedge funds Harbinger Capital and Firebrand Partners by expanding board seats by two outside directors. Scott Galloway of Firebrand and James Kohlberg of Kohlberg & Company are the two outside nominees slated to join the board of directors.

Advertising Age is reporting that U.S. media employment fell to a 15-year low in December 2007. The major driver behind this slump is the struggling newspaper industry. This is not surprising because nearly everyone is spending more time getting their news on the Internet and less with broadsheets. Exacerbating the losses is the disappearing classifieds business as online alternatives like craigslist, partially owned by eBay (EBAY) offer cheaper and more immediate classifieds solutions. The New York Times (NYT), also known as the Gray Lady to the cognoscenti, recently announced another 100 job cuts as a result of diminishing revenues and profits.

Suffering to a lesser degree are the broadcast and cable television companies. Still, recent studies show that consumers are spending far less time surfing the boob tube and much more time online for entertainment on websites like YouTube which is owned by Google (GOOG). Employment numbers are falling here too but to a lesser degree than in newspapers.

Rounding out the traditional big three in media is the similarly suffering radio industry. Blame Steve Jobs and his Apple (AAPL) iTunes-powered iPods for the vanishing radio listener. The Billboard Music Charts just don’t have the same clout and influence they used to as music fans take control of their own playlists by getting farther out on the long tail. Who needs a disc jockey to tell you what’s hot when you can discover that perfectly obscure independent band on the Internet?

All is not doom and gloom. While traditional U.S. media is quickly shrinking, the U.S. advertising/marketing services industry is growing at a healthy clip. Advertising agencies, marketing-consulting services, graphic design, public relations agencies, and media-buying agencies are all segments witnessing expanding payrolls. This flies a little in the face of the argument that content is king. At least with job counts, it seems that those who subsidize the creation of content is king. Or perhaps content is still king but influence is moving away from professionally produced content controlled by a handful of conglomerates and towards massive amounts of user-generated content by amateurs and independent bloggers. Top bloggers are making a great living and their “jobs” aren’t being counted.

The growth in advertising/marketing services jobs bodes well for the startup that I am just beginning to build. SocialOptimize, my social media development and consulting agency that I co-founded, was started to answer a huge need in the marketplace. My partner and I found that huge corporations, members of the Fortune 2000, were in dire need of help addressing the burgeoning social networking and social media space. Huge user-generated content sites like Myspace, owned by News Corporation (NWS-A), and Facebook, partially owned by Microsoft (MSFT) are capturing the majority of consumers’ time spent online. Advertising dollars will flow to these platforms as agencies like SocialOptimize steer corporate marketing dollars to where the eyeballs and wallets are congregating.

Going forward, it will be interesting to see how Advertising Age will count the jobs and advertising dollars associated with social networking web applications and widgets. Software developers are finding ways to serve advertising through their apps and widgets. At SocialOptimize, we have had big marketers propose advertising on our own proprietary widgets because our apps offer marketers much more value than traditional advertising channels like newspapers and radio. This value comes from the ability to target deeper audience segments while offering demographic data and evidence of return-on-investment (ROI) at a more granular level. Well-designed apps are also much more engaging than traditional media, causing consumers to spend enormous amounts of time interacting with the apps and the social networks attached to those web applications and widgets.

The big negative about this report is that I’ll have to compete even harder to attract top talent to SocialOptimize. Good talent is so difficult to find!

Macro

• Economic Indicators site to be shut down by U.S. Department of Commerce: Say goodbye to a very useful online resource due to “budgetary constraints” – lame excuse. The cost of administering a good website has diminished drastically. Enlightened government bureaucrats will still collect the data, but they don’t want to share it with private citizens.

• William Ackman’s statement before Congress – The State of the Bond Insurance Industry: Interesting reading courtesy of fund manager who presciently shorted the real estate industry before the sub-prime meltdown became the crisis du jour.

• Detroit home sales up while hedge fund and owner of Chrysler, Cerberus, urges investors not to panic, yet: Does this signal a bottom in the real estate market or just the quiet before a second storm?

Micro

• Priceline.com (PCLN) earnings reach stratosphere: One of the lone bright spots in a tough market. Will travel remain strong in this challenging economic environment?

• New York Times (NYT) to cut 100 jobs while media firms team up to create new ad network: Can old media build a competitive moat around local ad targeting?

• Calpine’s (CPN) new deal and new lease on life on NYSE: Proposed geothermal power deal, if approved, will boost Pacific Gas and Electric Company’s (PCG) capacity from renewable energy sources.

Technology

• Google (GOOG) to add video ads in search results: Does increasing broadband adoption bode well for Google’s new experiment?

• Amazon.com (AMZN) Web Services unit experiences outage: Amazon’s hidden jewel powers many cutting-edge Web 2.0 startups such as Twitter.

• European Blu-ray sales reach record while Wal-Mart (WMT) ditches HD DVD: The Format Wars 2.0 may be reaching a conclusion.

Science

• Skin cells may be reprogrammed to become embryonic stem cells: This development might make the ethical debates moot.

• Jellyfish hold the secret to making invisible man: See-through skin could improve disease diagnosis.

• Open access to Harvard University’s proprietary content: I love this new movement in academia to share knowledge freely.

Design

• China’s Beijing Olympic Games to feature a “Water Cube”structure: Words cannot describe…

• Air Poo: Can Apple’s design philosophies be applied to the toilet?

• Mental Models: Aligning Design Strategy with Human Behavior: It’s all about the people.

The New York Times (NYT) is reporting that Yahoo’s (YHOO) board plans to reject Microsoft’s (MSFT) $44.6 billion bid, launched about a week ago. This on the heels of an article, titled Yahoo Sale Could be Bad for Minnows, in which the New York Times explored the implications of the potential diminishment of one of the traditional “exit strategies” for entrepreneurial startups. Venture capitalists and startup entrepreneurs have long adhered to a playbook of creating cutting edge technology with the hope of being acquired by the big three of Google (GOOG), Microsoft, Yahoo, and to a lesser degree, AOL (TWX). With the potential of one big shark swallowing another shark, the competition for acquiring innovative startups lessens and entrepreneurs (minnows) have one less avenue for becoming fabulously wealthy.

I am a minnow. As a founder of web technology startups, I too have dreamed of selling my company to one of the juggernauts. How many company founders have sat around in a basement or garage imagining how perfectly their ideas and products fit within the technology portfolio of Google or Yahoo?

“Dude, this idea rocks and Google will buy us out!”
“Hell yeah! We’re gonna be rich!”

We’ve all been guilty of this delusional exchange of wishful thinking. The more disciplined among us indulge a little in this fantasy but focus on the building of actual businesses, executing strategy, creating great products or rendering flawless service, increasing revenue, controlling costs, adjusting to the market, growing a user base, and keeping our customers and employees happy. We know intuitively that building a good business will be rewarding long term in one way or another. Setting out from the beginning to be acquired almost always affects the company and business plan negatively in subtle ways. All the best startups were created by people who set out to fundamentally change the world or at least some small corner of it, not to get bought out.