This article was originally published on Northwestern University’s Medill Local News Initiative website and is republished here with permission.

Earlier this month, Gannett’s Michael Reed had an opportunity to set a new course for the nation’s biggest newspaper company after disappointing financial results in August.

Instead, he doubled down.

Reed doubled down on cost-cutting, promising to cut $200 million to $240 million from “declining parts” of the business — primarily print. He doubled down on paying off debt, which tops $1.34 billion. Most of all, he doubled down on boosting digital subscriptions, while also promising to expand a unit that specializes not in journalism, but in selling web services to small- and medium-sized businesses.

At a Wall Street conference just weeks after he posted a $53.7 million quarterly loss and warned of a loss for the year, Reed said his long-term strategy remains unchanged. Gannett’s print business will continue to fall, but its smaller digital businesses will grow. In two years, he pledged, digital revenues will grow enough to more than make up for the decline in Gannett’s “legacy” business.

“We cross the inflection point in 2024,” said Reed, the company’s chairman and chief executive officer. “The math is that simple. You see overall stabilization and it starts to grow.”

So far, Wall Street isn’t buying it. Gannett stock plunged 70% to $2.10 on Sept. 20, from a peak of $7 a year earlier, as Reed’s optimistic forecast for 2024 failed to move the share price higher. Also leaving investors unmoved was his decision to invest $1.2 million of his personal fortune in Gannett stock shortly after reporting the second-quarter loss. The stock spiked on the news, then went down again even more.

“I know there’s a lot of skepticism,” Reed said at the Sept. 9 investor conference. “I feel good about our future, and I would say that’s evidenced by the fact that just a couple of weeks ago, I bought 500,000 shares of stock in Gannett because I believe so much in the future.”

A big risk ahead

The big risk is that Gannett keeps doing what it did in the second quarter: The decline in print accelerates, while revenues from digital businesses fail to compensate. The company’s debt load gives it little room for error and, as Jim Friedlich, CEO of the nonprofit Lenfest Institute for Journalism, observed, “Declining earnings are never a good thing for credit ratings of debt-laden companies.”

Still, one of the few Wall Street analysts who follows the stock expects Gannett to come close to hitting Reed’s 2024 digital target, despite an industrywide decline in pageviews at local news websites. Douglas Arthur of Huber Research predicts digital will account for 42% of total revenues in 2024, up from a little over one-third today, but not the 50% or more of revenue as Reed has pledged.

Arthur said his projection comes with a caveat: “I and (the) company have tended to be overly optimistic on the revenue outlook.”

And as Friedlich noted, reaching a tipping point where digital growth outpaces the decline in print is “something of a Pyrrhic victory, since it reflects the fact that print has declined so much that there’s not much left to lose.”

The digital gains that Reed anticipates will likely need to come from a smaller base of newspapers. Industry insiders say Gannett is shopping at least 60 of its nearly 500 publications, after dumping more than 100 since 2020. A spokeswoman did not address specific numbers but said the company has made changes “to better align its portfolio of products with our ongoing digital transformation while remaining committed to local journalism.”

Four Gannett weeklies in Massachusetts and another in New York state were recently snapped up by CherryRoad Media, an acquisitive tech company from New Jersey that has purchased dozens of Gannett newspapers over the past two years.

Jeremy Gulban, CherryRoad’s CEO, said Gannett is playing to its strengths by shedding smaller papers in more isolated markets. “This is a tough time for the newspaper business. They’ve got to play the best hand they can,” he said. “They have a national brand in USA Today and strong regional markets.

“No one disputes that print revenues will continue to decline,” Gulban said. “It has to be replaced with digital revenues and the question is, how much and how fast?”

Progress can’t come soon enough for Gannett. The company has limped along since being acquired by GateHouse Media in a highly leveraged deal that closed in late 2019, shortly before the pandemic. GateHouse took the Gannett name and promised to cut $300 million in annual costs while whittling down its punishing debt, which it has done.

A Gannett spokeswoman said the company will pay down between $100 million and $200 million in debt principal during 2022. “We are firmly committed to debt repayment and believe Gannett has a solid outlook, as we continue delivering and making progress.”

Cost-cutting a calling card

Cost-cutting has been Reed’s calling card since the acquisition. The two companies had about 25,000 employees when they combined, a spokeswoman told The Associated Press at the time. By the end of 2021, the ranks had dwindled to 13,800 in the U.S. and 2,500 abroad, according to Gannett’s government filings.

This year, layoffs are multiplying. Poynter reported that Gannett laid off 400 employees in August and shut down an additional 400 open positions. Reed told investors he is seeking to accommodate the talent drain by increasing automation and outsourcing customer service, accounting and other basic corporate functions.

And while dozens of journalists were among those cut in August, Reed said Gannett is “not focused” on newsroom cuts. “We understand content is a big part of our growth strategy,” he told investors. “We’ve had to do some work in this area given this environment, but it is a small part of the overall cost reduction program … very small.”

The cuts were necessary because of a rapid and severe degradation in the business between March and April, Reed said. Digital advertising revenues were hammered in part by changes that Google made to enhance data privacy, which hurt programmed ad placements. Under pressure from inflation, consumers cut back spending on discretionary items like newspaper subscriptions. The costs of fuel and newsprint were sky high. And, most impactful, a tight job market left the company without carriers to deliver print newspapers, interrupting service and sparking cancellations.

Reed said he’s making the investment needed to hire and retain carriers but expects to continue cutting costs in 2023. “A natural question would be, are we cutting too much, are we cutting into the bone? The answer is no,” he told investors. “We are pulling forward cost actions that we would have taken in future years that are associated with the declining parts of our business.”

Green shoots

All is not bleak. Gannett has a stable commercial printing and distribution arm, for instance, and its paid obituaries and legal notices continue to perform well, Reed said. The company is using data analysis to deliver more personalized, sought-after content. Some new products such as a crossword app have worked out, and the number of website users who are registered, as opposed to remaining anonymous, now tops 10 million. That gives the company millions of likely targets to convert into paid users.

The brightest spot is Gannett’s Digital Marketing Solutions unit, which helps businesses such as plumbers, dentists and restaurateurs increase their local digital presence, maximize their advertising reach and convert leads into paying customers. It’s growing and profitable, and Reed said it could be worth as much as $2 billion if it were a standalone company.

So, is a spinoff in the offing? Lenfest’s Friedlich notes the long history of newspaper companies separating stronger businesses from declining newspaper operations — including the 2015 separation of broadcaster Tegna Inc. from Gannett’s legacy publishing business.

“Sadly, this leaves the newspaper business without a growth engine and the remaining company in need of further cost reduction,” he said. “Investors win and news readers lose.”

Analyst Arthur of Huber Research doubts the marketing unit would grow as fast if it were a standalone company, without “so many long-term local relationships from its newspaper legacy business,” he said. Arthur pegs its value at $700 million, far less than Reed’s estimate, but still more than double Gannett’s $318 million market value as of Sept. 20.

Asked if the company is planning a spinoff, a spokeswoman said, “Our Digital Marketing Solutions segment is an important element of Gannett’s business strategy.”

At Northwestern University’s Medill School of Journalism, Media, Integrated Marketing Communications, senior associate dean Tim Franklin sees Gannett in “a race against the clock,” he said.

“The question is whether Gannett can grow digital subscriptions and marketing services fast enough to offset the accelerating print declines — and do it in the face of headwinds like decades-high inflation and an economic slowdown,” said Franklin, who serves Medill as a professor, John M. Mutz Chair in Local News and director of the Medill Local News Initiative. “They’ll need to make this transformation work at the same time they have the pressures of servicing a huge debt load. And they’ll need to pull this off while not cutting their newsrooms too deeply. Because ultimately, consumers aren’t going to hand over their credit cards for digital subscriptions unless there’s a compelling value in the news coverage they’re getting.”

Even as Gannett races to meet its digital goals at a pace comparable to “dog years,” Franklin said, “None of this important corporate reengineering will work if the news reports aren’t meeting reader needs.”