Ziff's Last Stand
Can a tech publisher revive its business?
A spat about the relevance of PC Magazine erupted in mid-April when a top public-relations executive dissed the print version of the venerable Ziff Davis Media title.
Steve Rubell, a senior vice president at Edelman Public Relations, and prominent columnist and blogger, posted a comment on the social-networking site Twitter (comments are known as "tweets" in the jargon of this year-old site). The post was brief. It said, "PC Mag is another. I have a free sub but it goes in the trash."
The post created a ruckus. Jim Louderback, the editor of PC Magazine, responded with an open letter on the PR blog Strumpette, where he said, "When I saw the post, a torrent of thoughts flashed through my head. The first, of course, was to ring up the guys in the basement and cancel his free subscription.
But then I started thinking about what this means for our relationship with Edelman. One of the company's top execs had stated, in a public forum, that my magazine (and by extension, my audience) was useless to him. He wasn't even interested in seeing whether we'd covered one of his clients. Did the rest of Edelman think like Steve? Were we no better than fishwrap to the entire company?"
Rubell quickly apologized, saying on his blog that he does engage with PC Magazine and other Ziff products, but online.
Two things about this episode are remarkable: A senior executive of a giant PR firm says he doesn't even read what is arguably the largest and best-known tech-oriented print magazine in the country. And second, the whole thingâ€”from initial insult to response to apology;occurred on a Web site and two blogsâ€”entirely online, even though it was about a big, well-established print magazine. Combined, these elements say an awful lot about the current condition of Ziff Davis Media, and indeed, all of the three major tech-publishing companies; if not the magazine-industry overall.
In short, their print products still generate significant revenue, but they're decliningâ€”in revenue and, apparently for some, in relevance. Meanwhile, their e-businesses are exploding, but they're seemingly a step behind many online-only communities in mindshare. As John Battelle, founder of Wired, said on his blog when InfoWorld shut the doors of its print publication: "IT ad spending is clearly moving online, and it's hard to justify a weekly trade covering a space that lives online. I really hope the publication thrives online, but its owner, IDG, will have to take painful measures to make it relevant in a world where coverage is owned by online pubs and blogs already deep in the flow."
Of the big three tech publishers (CMP Technology and IDG are the others), Ziff Davis Media has had by far the most interesting story and in some ways, the most startling success. During the six-year tenure of CEO Robert Callahan (he joined in October 2001) it has had a two-sided challenge: Stanching the decline of print while building out an e-media business. It hasn't been easy. The company barely skirted bankruptcy in 2002, carries a crushing debt load, and unlike its two peers, had essentially no resources for growth. There's no question that the Callahan years have been the most challenging in the history of this storied company.
It's in that context that an evaluation of Ziff in the last five years is so interesting. It's ironic that Ziff has transformed and in many ways now possesses the attributes and attitudes of a prototypical magazine-based media company of the future, because Ziff is probably not going to exist by the end of the year;almost certainly not in its current form.
Ziff owner Willis Stein & Partners, which acquired the old Ziff Davis' magazine division in 2000 for $780 million, is in the process of trying to recoup some part of that investment by splitting the company and selling in parts. So far, it has not been an easy process. The company last July retained Evercore Partners and Lehman Brothers to explore buyer interest. Through the fall there were reports that a sale was near for the Ziff Enterprise Group, but nothing materialized.
And now, the prospects are challenging. "The easiest transaction in a carve-out would be to sell to a strategic buyer that already has an infrastructure and a position in that market," says one publishing finance and transaction expert who spoke on the condition that he not be identified. "But there are a limited number of those buyers;and chances are those companies are not particularly interested in taking on more vertical print titles in the IT space." (Other than CMP and IDG, these companies would theoretically include TechTarget and perhaps 1105 Media.)
"They would probably all like to have the online assets," the source added. "Ziff has done a terrific job of building their online business, but they still have a major position in big print magazines and they are all still continuing to struggle;the opposite of economies of scale are diseconomies. You have to figure out what your standalone expenses are."
As for private-equity firms, which have been buying into the magazine industry in extraordinary numbers during this decade, the source says Willis Stein's experience may scare them off. "If you were a PE investor and you looked at the history of that business, and saw what happened to Willis Stein and that IT market, how aggressive would you be in spending for big chunks of these businesses?"
Bids for all three groups were due last month, and at presstime, one knowledgeble source said that bids for the Consumer/Small Business and Game groups had come in lower than the expected range, and that at least two bidders were in the mix for the Enterprise Group.
An Era of Transformation
Still, as the source points out, there is no question that Ziff Davis Media has dramatically transformed;it's gotten much smaller, but also much less print dependent. Consider:
- In the fiscal year ended March 31, 2001, Ziff reported revenue of $430 million. (It produced $535 million in 1999.)
- And then revenue fell off a cliff. In 2002, Ziff Davis Media produced $209 million, with 99 percent of its revenue from print. It had nine magazines and about 25 percent of the tech-space ad share. PC Magazine and eWEEK were the number one and number-three ranked technology magazines, respectively, that year. Its 10K report for that year described the unwinding of its awkward relationship with CNet, and outlined traffic for five magazine-oriented Web sites.
- In 2006, the company produced revenue of $181 million and EBITDA of $27.1 million, up significantly from the $17 million in 2005. (It also reported an operating loss in 2006 of $6.8 million and a net loss of $133.7 million, after interest payments were factored in.) Ziff derived 57 percent of its revenue from print publications last year, with 43 percent from digital media and events. It had six magazines and 32 Web sites. It had a 14.8 percent share of advertising pages in the technology magazine-space. PC Magazine remained the number-one technology magazine in 2006, according to Publishers Information Bureau, but was down by 10.9 percent from the prior year. The magazine's ratebase was 700,000, down from 1.2 million in 2001.
The good news, according to Callahan, who met with FOLIO: for this report, is that the revenue growth in e-media is outpacing the decline in print for all three of the company's divisions. As all this change continues, the management has a compellingly clear view of the future. In recent interviews with several members of the Ziff senior team, every one of them indicated, in very similar language, that even with their print heritage and big print magazines, their focus is online. Consider:
Jason Young, president of the $62.3 million Consumer/Small Business Group, which includes PC Magazine: "We embraced long ago that the center of gravity of our business would be digital. The growth is much steeper. It's straight up. Print is harder to predict."
Sloan Seymour, president of the $79.6 million Enterprise Group, which consists of eWEEK, CIO Insight and Baseline as well as 17 Internet sites and 45 e-newsletters: "We're still in the second inning on the Internet side. There are opportunities for us in every digital channel."
Scott McCarthy, president of the $39.1 million Game Group: "Print is still a very healthy business for us. We have EGM, the big publication in the business. And that's all well and good, but the fact of the matter is more and more of consumers' time and dollars are going online."
The proof of that sentiment is in the details. "We've launched dozens and dozens of new products over the last five years, and the vast majority have been in digital, and will continue to be," Callahan says. "When we see opportunities in print, we will seize them."
A lot of the credit for the rethinking of the business goes to Callahan, though he has a self-effacing manner that precludes acknowledgment. A media veteran with experience in print and broadcast, Callahan spent twenty years at Cap Cities/ABC/The Walt Disney Company prior to Ziff, and worked in print publishing at Fairchild Publications. Tom Kemp, a former CEO of Penton Media and now managing director at Veronis Suhler Stevenson, describes Callahan as highly capable. "I think of Bob Callahan as a top-level CEO and leader in the media industry," he says. "He took on a job that turned out to be harder than he or anyone else expected;print advertising continued to decline rather than stabilize. The management task was hugely challenged by Ziff Davis' balance sheet, the trends in the IT business, and the secular trends in the magazine business."
For his part, Callahan credits his team. "Necessity was the mother of invention here," he says. "Be smart, hard charging, close to your customers and we'll win with new products that serve our customers well and drive ROI for our advertisers."
Ziff Groups Respond
In the Enterprise Group, for example, Ziff launched perennial Neal Award winner Baseline and CIO Insight in 2001, but the Web Buyers Guide might be the most significant recent driver in the group's transformation from being about 85 percent dependent on print in 2002 to about 38 percent today. The guideâ€”launched in January 2005 after its predecessor was acquired from Connexus Mediaâ€”is a searchable online directory of technology products, vendors and white papers. It tripled in revenue from 2005 to 2006, and has 17,000 companies listed along with 43,000 products and 3,000 white papers. It also has 300,000 registered users, says Seymour, who is a 20-year veteran of Ziff.
Similarly, the group produced 28 events in 2002, when the two magazines were launched, but today produces about 700 annual events;half of them online and the majority short seminars. And the group is doing a lot with online trade shows, producing 20 in 2006. Seymour adds, though, that print remains an extraordinarily valuable organic-growth tool. "It has been the foundation of building our database, which is our secret weapon in launching new products."
In the Game Group, the challenge has been responding to a slow start. "Competitively, the situation we were in was our print brands were very strong in this space, but we were late to the online world," says John Davison, senior vice president and editorial director of the group. "We once had Game Spot, which was sold to CNet. And the other big online game site was IGN. They're both huge and keep getting bigger. I think IGN is about 20 million monthly visitors and Game Sport is close to that." Ziff's response? Create a network of game sites that eventually became the 1UP Network. Part of the creation of that network was a rare Ziff acquisition: In November 2005 it acquired FileFront.com, which has helped expand the size and reach of the 1UP Network to over 13 million monthly unique visitors and 97 million page views.
And in the Consumer/Small Business Group, the challenge has been building a digital business around the PC Magazine name from a standing start. From the 2001 relaunch of that domain, the CSB Group has produced an audience of 7 million unique visitors, says Young, with 5 million coming from pcmag.com.
There has been innovation at Ziff, something outside observers are happy to acknowledge. "I hear they are doing well online, and that they have built a pretty good e-media culture over the past couple of years," says David Nussbaum, a former CEO of Penton Media and current head of a new company seeking media acquisitions. "My view is that they are doing reasonably well right now but have a number of challenges. Companies like CMP, IDG, TechTarget, are strong, tough companies and that doesn't make the Ziff job any easier. And they still have a large percentage of their revenues in print. In technology, selling print has become increasingly difficult."
And Mark Edmiston, managing director of AdMedia Partners, says Ziff's ultimate disposition is, "A little b-to-b, a little consumer, serious tech, games, events and print, not a cohesive whole and is worth more broken up."
Debt Changes Everything
Ziff's debt situation makes the need for a transaction vitally important. In addition to the company's $369 million in long-term debt, in February it issued notes for $20 million in new senior-secured debt to be used for additional working capital. It had $15 million in cash on hand at year's end. And now, because of cash-pay obligations for some of its debt and perhaps several million on capital expenditures and restructuring charges, Ziff's cash needs for 2007 will be over $50 million, up from about $30 million last year.
The question becomes how much EBITDA the company will be able to produce this year. If it's the same as last year, $27 million, the cash burn for 2007 will be $23 million to $25 million, and again, it has about $35 million available in cash. Hence the distinct focus in its recent year-end 2006 earnings report on the growth in e-media EBITDA. The 57 percent increase was primarily due to earnings from the company's digital businesses more than doubling, the company reported.
Meanwhile, Willis Stein needs to make at least $400 million in a transaction or a series of transactions before it starts to recoup any of its investmentâ€”it needs to cover its debt, which now is closing in on $400 million. And Callahan is heavily incented to get a deal done as well: Under the terms of his employment agreement, he gets a bonus of $5 million if the company is sold, subject to payment of debt first.
In the end, the company or companies that Ziff becomes will be strikingly different from the consumer-enthusiast magazine company of the seventies or the computer-publishing giant of the eighties and nineties. It (or they) will be smaller, leaner, more e-media focused and, perhaps, a model for others.
Callahan says print "can and will" live on at Ziff, provided it remains valuable to the customer and profitable for the company. But you can tell he has another agenda: "The way I see Ziff Davis Media is as a company with a fantastic heritage that has always specialized in niche markets. Today we are a majority digital company and will continue to evolve that way swiftly."
Voices Of Ziff Davis Media
First-person accounts from a company caught in the act of evolution.
Jason Young, president of the Consumer/Small Business Group, described Ziff's current e-media posture:
"Success in e-media starts with the notion that search is the essential mechanism of the Web. The best Web businesses are designed from the ground up to be found in search. We are VERY focused on that;on helping people find our discreet information.
The user's entrance into our online products is NOT through the front door. So for each and every one of our pages to be its own home page, built around a contextual topic, is incredibly, incredibly important.
And if we are doing RSS, microsites, podcasts, product reviews, e-newsletters, broadband video, Webcasts, then we need to make sure with our tagging program that all of those pages surface in a search.
Let's make the user's ability to navigate around a decided interest really, really easy and seamless to use.
And the most important thing in doing all this is tagging your site. Correctly."
Mike Vizard, SVP and editorial director of Ziff's Enterprise Group, on the role of editors in e-media:
"From a journalism perspective, there was a new imperative to rationalize: Grow traffic. Our editors are always keeping an eye on the site traffic and if a story is hot, they'll understand and have five followups. From a news perspective, there are several things we require:
- Drive the news.
- We need stories that are original. We get 90 percent of our traffic on stories that can't be replicated.
- We want our opinion people and bloggers to start debates, not join them.
- Art must be intimately involved in the industry and understand Web display. Do a slide show, don't just post photos. This is driving about 20 percent of our traffic these days.
- Every 30 days or so, we sit down and develop big-idea stories that are going to drive traffic, such as the Top 100 People in IT."